Reverse Charge Mechanism Explained: When and How It Applies

The Reverse Charge Mechanism (RCM) is a crucial concept in indirect taxation, especially under India’s Goods and Services Tax (GST) framework. While traditionally the supplier of goods or services is responsible for collecting and depositing GST, RCM reverses this responsibility — shifting the onus to the recipient. This article explores what the Reverse Charge Mechanism is, when it applies, how it works, and its implications for businesses.

What is the Reverse Charge Mechanism?

In a conventional GST transaction, the supplier charges GST and remits it to the government. However, under RCM, the recipient of goods or services is liable to pay the tax directly to the government. The mechanism is primarily introduced to bring unorganized sectors under tax compliance, increase tax transparency, and prevent revenue leakage.

Legal Basis for RCM in India

Under the GST law, RCM is governed by:

• Section 9(3) of the Central Goods and Services Tax (CGST) Act, 2017

• Section 9(4) of the CGST Act (and respective sections under SGST/UTGST and IGST)

• Notifications issued by the CBIC specifying goods/services and conditions

Types of Reverse Charge Mechanism

RCM can be broadly categorized into two types:

1. RCM on Notified Goods and Services (Section 9(3))

The government notifies specific goods and services on which tax must be paid under reverse charge. These include:

• Goods: e.g., Cashew nuts, bidi wrapper leaves, silk yarn, used vehicles (from unregistered dealers)

• Services:

  • Services provided by a Goods Transport Agency (GTA)

  • Services by an Advocate or Legal Firm

  • Services by a Director to the company

  • Services by a Government to business entities

In these cases, even if the supplier is registered, the recipient pays the GST directly.

2. RCM on Purchases from Unregistered Dealers (Section 9(4))

Earlier, this provision applied broadly to all supplies received from unregistered suppliers. However, due to compliance burdens, it was amended and now applies only to specific sectors:

• Applicable to promoters and builders for certain construction-related supplies.

• Only notified classes of registered persons need to comply.

When Does RCM Apply? Key Scenarios

Here are common instances where RCM becomes applicable:

Scenario	Reverse Charge Applicable?	Remarks
Services by a GTA to a registered person	✅ Yes	Recipient pays GST under RCM
Legal services from an advocate	✅ Yes	Applicable on B2B transactions
Purchase from unregistered supplier (general)	❌ No	Not applicable post amendment, except in notified cases
Import of services	✅ Yes	Importer pays GST under RCM
Renting of motor vehicle by an unregistered supplier to a body corporate	✅ Yes	Recipient liable under RCM
Services by a director to the company	✅ Yes	Company pays GST under RCM

How Does Reverse Charge Work in Practice?

Here’s a step-by-step example to understand how RCM is implemented:

Scenario:

A registered company avails legal consultancy services from an independent advocate.

Steps:

1. Supplier (advocate) issues a bill without GST.

2. Recipient (company) calculates GST @ 18% (for legal services).

3. The company pays the GST directly to the government using Form GST PMT-06.

4. The company then claims Input Tax Credit (ITC) in their monthly return (GSTR-3B).

   
   

Read Also: Understanding GST Return Forms in India

Important:

• The recipient must self-invoice if the supplier is unregistered.

• GST paid under RCM is eligible for ITC, provided goods/services are used in the course of business.

Compliance Requirements Under RCM

Businesses dealing with RCM need to fulfill the following compliance requirements:

1. GST Registration

• Even if a business is under the threshold limit, RCM liability can mandate registration.

• RCM recipients must be registered under GST to discharge liability.

2. Invoice and Self-Invoice

• When receiving supplies from an unregistered person, the recipient must issue a self-invoice.

• Maintain payment vouchers and RCM ledgers for audit purposes.

3. Timely Payment of Tax

• GST under RCM must be paid in cash (not through ITC).

• This tax must be deposited to the government within the due date of GSTR-3B filing.

4. Filing Returns

• RCM transactions must be accurately reported in:

  • GSTR-1 (if applicable)

  • GSTR-3B under the Reverse Charge section

  • Books of accounts

Input Tax Credit (ITC) on RCM

A major advantage of RCM is that tax paid can be claimed as ITC, subject to the following conditions:

• Goods or services must be used for business purposes.

• ITC can be claimed in the same month the tax is paid.

• Must comply with Section 16 of CGST Act.

Example:

• A company pays ₹5,000 GST under RCM on legal services.

• It can claim the same ₹5,000 as ITC in GSTR-3B, thereby neutralizing the outflow.

Implications of RCM for Businesses

• Increased Compliance: Businesses need to be vigilant about invoices, tax rates, applicable notifications, and record-keeping.

• Cash Flow Impact: Since GST under RCM must be paid in cash, it can temporarily affect working capital.

• Audit Sensitivity: RCM transactions are often scrutinized during GST audits and assessments.

• Training & Awareness: Businesses must regularly train their accounts and procurement teams to stay updated on notified supplies.

Recent Updates on RCM

• The government periodically updates the list of notified goods and services under RCM. Businesses should keep track of CBIC notifications.

• RCM in real estate sector: Builders need to pay GST on cement and capital goods purchased from unregistered persons.

• E-commerce operators are liable to collect GST under RCM in certain cases (e.g., passenger transport, housekeeping services).

Conclusion

The Reverse Charge Mechanism is a vital component of the GST ecosystem that ensures tax compliance in specific high-risk areas. While it increases responsibility for the recipient, it also allows for input tax credit, making the mechanism tax neutral when handled correctly.

Understanding when and how RCM applies is essential for GST compliance. Businesses must stay updated, maintain accurate records, and train teams to handle RCM transactions efficiently