GST ACT SIMPLIFIED SERIES

Usually, the supplier collects and pays GST. But under the Reverse Charge Mechanism (RCM), this liability flips — the recipient of the goods or services becomes responsible for calculating and paying GST directly to the government. This guide explains when RCM applies, how it works in practice, and how to stay compliant.

When RCM Applies

RCM applies in two broad situations under the CGST Act:

•      Section 9(3) — Notified goods/services: a specific list notified by the government, currently covering categories such as services from a Goods Transport Agency (GTA) that has not opted to pay tax under forward charge, legal services from an advocate or firm of advocates, services by a director to the company or body corporate, sponsorship services, services by an insurance/recovery agent, and import of services

•      Section 9(4) — Supplies from unregistered persons: applicable to specified registered persons (for example, promoters of real estate projects procuring cement or capital goods from unregistered suppliers, who must pay RCM on such purchases)

Common Categories Covered under Section 9(3)

•      Goods Transport Agency (GTA) services (where GTA has not opted for forward charge) — recipient pays GST @5% (without ITC on the GTA's own inputs) under RCM

•      Legal services provided by an individual advocate or firm of advocates to a business entity

•      Services supplied by a director of a company to the company

•      Sponsorship services provided to any body corporate or partnership firm

•      Import of services for a consideration (whether or not in the course of business, for certain categories)

•      Services by an arbitral tribunal to a business entity

•      Purchase of raw cotton from an agriculturist by a registered person

•      Services by way of renting of any motor vehicle designed to carry passengers, from a supplier paying tax at 5% (with limited ITC), to a body corporate

Compliance Requirements under RCM

•      The recipient must issue a self-invoice on the date of receipt of goods/services (since the unregistered/notified supplier doesn't issue a GST-compliant tax invoice with tax charged)

•      A payment voucher must also be issued at the time of making payment to the supplier

•      RCM tax must always be paid in cash — it cannot be adjusted against available ITC balance in the electronic credit ledger

•      Once paid, the recipient can claim ITC on the RCM amount (in the same return period, or later, subject to normal ITC time limits) if the goods/services are used for business

•      RCM liability applies irrespective of the recipient's turnover or registration threshold — even small businesses must comply the moment a notified RCM transaction occurs

•      RCM liability must be reported and paid through GSTR-3B; it cannot be deferred to the annual return

Time of Supply under RCM

For goods, the time of supply under RCM is the earliest of: the date of receipt of goods, the date of payment, or 30 days from the date of issue of invoice by the supplier. For services, it is the earliest of: the date of payment, or 60 days from the date of issue of invoice by the supplier — if neither event can be determined, the date of entry in the recipient's books of account is used as a fallback.

Frequently Asked Questions

Q1. Can RCM tax be paid using existing Input Tax Credit?

A. No, RCM liability must always be discharged in cash; ITC cannot be used to pay it, though the amount paid can itself become eligible ITC afterwards.

Q2. Does RCM apply to import of services?

A. Yes — GST on import of services is always payable by the recipient under RCM, regardless of value, provided it qualifies as a supply under the IGST Act.

Q3. Is there a turnover-based exemption from RCM?

A. No, RCM liability applies even to small businesses and even those below the normal registration threshold, if a notified RCM transaction occurs — in fact, RCM liability itself triggers mandatory registration.

Q4. Who is responsible for issuing an invoice in an RCM transaction?

A. The recipient, not the supplier, must issue a self-invoice, since the supplier (often unregistered, or specifically notified) does not issue a tax invoice charging GST.

Q5. Can ITC be claimed on tax paid under RCM?

A. Yes, provided the goods/services are used for business purposes and are not covered under any blocked-credit category — the RCM tax paid in cash becomes available as ITC.

Q6. Is director's remuneration always under RCM?

A. Only remuneration paid to a director for services rendered in a non-employee capacity is subject to RCM; remuneration that is genuinely for an employer-employee relationship (like salary, reported under TDS on salary) is outside the scope of GST altogether.