In India, almost every business registered under GST is mandated to pay the Goods and Services Tax (GST) on the products bought & sold and services given. Usually, the GST is collected by the sellers of a particular good or service and paid to the government.
However, this system is not efficient in monitoring taxation and compliance in certain cases, especially in industries/sectors that are difficult to track or unorganised. To solve this problem, the Indian government launched a new system called the Reverse Charge Mechanism (RCM). Under this mechanism, the GST is paid by the buyer of a particular good or service instead of the seller.
In this blog, we’ll explain GST RCM in detail, including what it means, when it applies, and how to file it correctly.
Under GST, the Reverse Charge Mechanism (RCM) is a system that transfers the responsibility for paying taxes from the seller to the buyer of goods or services. In most cases, the seller collects GST from the buyer and pays it to the government. However, with RCM, this process is reversed.
RCM helps the government ensure it collects taxes from sectors or transactions that are hard to track otherwise —for example, when goods or services are bought from a supplier that isn’t registered, or when services like legal or transportation services are requested.
In these situations, the customer pays GST directly to the government instead of the supplier. The buyer can later claim Input Tax Credit (ITC) if the items or services are used for business. This method makes the GST system transparent, accountable, and compliant.
RCM is present only under specific conditions provided in the GST Act. There are three broad categories where RCM is applicable:
The government has issued a list of goods and services on which the recipient has to pay GST in RCM. This is being specifically done for high-risk or unorganised segments.
Examples of Notified Goods:
Examples of Notified Services:
As the list of products and services under RCM can change, businesses need to review the GST Council’s latest notices and modifications regularly.
If the registered buyer is purchasing goods or services from an unregistered dealer, RCM is applicable, however, only for the notified categories.
For example, if a real estate developer buys cement from an unregistered supplier, then the developer will have to pay GST under RCM at 28%[1] . Likewise, capital goods or other inputs purchased from unregistered entities for a project, when bought, will involve RCM.
In certain e-commerce scenarios, the tax is to be paid by the platform provider and not the individual seller.
For example:
This eases the process of tax collection and reduces the burden of tax compliance on small, individual service providers.
The GST rate for the Reverse Charge Mechanism (RCM) is the same as the rate that would normally apply to that commodity or service.
For example:
The recipients of the goods must make sure they use the right GST rate based on the kind of supply and any applicable notifications. Using the wrong rate can make them pay interest or stop them from getting an Input Tax Credit (ITC) during compliance checks.
Here are some examples that will help you understand RCM better:
Example 1: Import of Services
In the scenario where a company avails consultancy services from a foreign entity, GST must be paid by the recipient in India under RCM. Then, the Indian company remits Integrated GST (IGST) and can subsequently claim ITC if for business purposes.
Example 2: Goods Transport Agency (GTA)
An industrial company engaging the GTA to carry goods has to pay GST under RCM. The GTA does not charge GST on the invoice; the company has to pay the government directly.
Example 3: Legal Services
When a company hires a lawyer or a law firm, the lawyer does not charge GST. The company pays the tax under RCM at 18%.
Example 4: Unregistered Supplier
Let’s say a real estate business promoter purchases cement from an unregistered dealer. As the dealer is unregistered, the real estate promoter is liable to pay the GST under RCM. He/she also has to submit a GST self-invoicing document in relation to the transaction.
Here are some of the important rules for filing and compliance under RCM in India:
Mandatory Registration
Every individual obligated to pay GST under RCM must register under GST. This rule is applicable regardless of whether the turnover is below the prescribed threshold limit or not.
Cash Payment of Tax
The tax under RCM cannot be paid through ITC. It must be paid in cash through the GST portal. Once paid, ITC can be availed within the same tax period.
Payment Vouchers and Self-Invoicing
When the supplier is not registered, the recipient should make a self-invoice. A self-invoice is a document created by the recipient to record the supply and calculate the GST liability, instead of relying on the supplier’s invoice. The recipient also needs to make a payment voucher to the supplier at the time of making the payment.
The time of supply determines when GST becomes payable under RCM.
For goods:
The earliest of
For services:
The earliest of:
RCM transactions must be reported carefully in monthly GST returns:
| Role | Return Form | Table | Purpose |
| Recipient | GSTR-3B | 3.1(d) | Report RCM GST liability |
| Recipient | GSTR-3B | 4(A)(3) | Claim ITC on tax paid under RCM |
| Supplier | GSTR-1 | 4B | Report outward supplies under RCM |
The Reverse Charge Mechanism (RCM) is a system under GST where the tax liability shifts from the seller to the buyer. It is not a penalty or an additional tax. Rather, it ensures that GST is collected from the person who is legally responsible for payment in certain situations. RCM is particularly useful when the seller is unregistered, located outside India, or operating in unorganised sectors.
The list of goods and services under RCM gets revised from time to time; hence, business owners must keep themselves informed. Ensure timely GST RCM payments and avoid penalties.
1. Do I need to pay RCM if I buy goods from an unregistered supplier for personal use?
No, RCM applies only to purchases made for business purposes, not for personal use.
2. How do I issue a self-invoice under RCM if my supplier gives no bill at all?
You must create a GST self-invoicing document with all required details like date, value, tax rate, and supplier name.
3. Can I pay RCM using Input Tax Credit from previous months?
No, RCM must be paid in cash first. You can claim ITC on it only after payment.
4. What if the supplier wrongly charges GST even though RCM applies?
You should not pay GST to the supplier; pay it to the government directly under RCM instead.
5. How should I record RCM transactions in my accounting books?
Record the purchase, create a self-invoice, pay GST in cash, and then credit the same amount as Input Tax Credit.
6. Is RCM applicable to purchases made from composition dealers?
No, RCM doesn’t apply to supplies received from composition scheme dealers.
7. What happens if I miss reporting an RCM transaction in GSTR-3B?
You’ll need to pay the tax later with interest and may lose the timely ITC for that month.
8. Is RCM applicable when making payments to freelancers or consultants?
If they’re registered under GST, no RCM applies. If unregistered and covered under notified categories, RCM applies.
9. How can I check if a service I use is covered under RCM?
You should refer to the latest GST RCM list issued by the government or consult a tax professional.
10. Does RCM apply to advances paid to unregistered suppliers?
Yes, if the supply is covered under RCM, GST must be paid on advances too when they are paid.
