Reverse Charge Mechanism (RCM) Under GST: Complete Guide
Reverse Charge Mechanism (RCM) flips the normal GST payment rule. Instead of the supplier paying tax, YOU (the recipient) must pay the tax to the government. Understanding RCM is crucial to avoid penalties.
What is Reverse Charge Mechanism?
Normally, the supplier collects GST from you and pays it to the government. Under RCM, this is reversed - you pay the GST directly to the government on behalf of the supplier.
📊 Normal vs Reverse Charge
Normal Charge: Supplier charges ₹10,000 + ₹1,800 GST → Supplier pays ₹1,800 to government → You pay ₹11,800 to supplier
Reverse Charge: Supplier charges only ₹10,000 (no GST) → You pay ₹10,000 to supplier → YOU pay ₹1,800 GST directly to government
When Does RCM Apply?
RCM applies in two main scenarios:
1. Specified Services (Section 9(3))
Certain services are always under RCM, regardless of supplier's status:
| Service | Supplier | Recipient (You) |
|---|---|---|
| Goods Transport Agency (GTA) | Any GTA | Any registered person |
| Legal Services | Advocate/Legal firm | Any business |
| Sponsorship Services | Any sponsor | Any business |
| Security Services | Individual/Partnership/Proprietorship | Any business |
| Director Services | Director | Company |
2. Purchases from Unregistered Persons (Section 9(4))
If you buy goods/services worth more than ₹5,000/day from an unregistered supplier:
- You must pay GST under RCM
- Threshold is ₹5,000 per day per supplier
- Applies only to registered persons buying from unregistered
⚠️ Important: ₹5,000 Limit
Purchase from unregistered vendor: ₹4,000 → No RCM (below threshold)
Purchase from unregistered vendor: ₹6,000 → RCM applies on full ₹6,000
How to Pay RCM
Step 1: Identify RCM Transaction
Check if supplier is unregistered OR if service falls under notified RCM categories.
Step 2: Calculate Tax
Apply applicable GST rate on the transaction value (same rate as if it were normal supply).
Step 3: Report in GSTR-3B
Declare in Table 3.1(d) - "Inward supplies liable to reverse charge"
Step 4: Pay Tax
Pay GST in cash (cannot use ITC for RCM tax payment)
Step 5: Claim ITC (if eligible)
Claim ITC in same month's GSTR-3B Table 4 (if you're eligible for ITC)
💡 Example: GTA Service
Scenario: You hire a transport company to move goods. Invoice: ₹20,000 (no GST charged)
- Identify: GTA service = RCM applicable
- Calculate: ₹20,000 × 5% = ₹1,000 GST
- Pay transport company: ₹20,000 (no GST)
- Pay government: ₹1,000 (in GSTR-3B Table 3.1(d))
- Claim ITC: ₹1,000 (in same GSTR-3B Table 4, if eligible)
- Net effect: Zero (paid ₹1,000, claimed ₹1,000 back)
ITC Under RCM
Good news: You can claim ITC on RCM tax paid (if you're eligible for ITC):
- Pay RCM tax in Table 3.1(d)
- Claim ITC in Table 4(A)(3) in the same month
- Net effect = zero (if full ITC eligible)
✓ Important Point
Since you pay and claim ITC in the same month, RCM often results in zero net outflow (if you're fully eligible for ITC). But you MUST follow the process - can't simply ignore RCM!
Common RCM Scenarios
Scenario 1: Advocate Fees (Legal Services)
- You: Registered business
- Supplier: Lawyer/Advocate
- Invoice: ₹50,000 (no GST charged by lawyer)
- Your action: Pay ₹50,000 to lawyer + Pay ₹9,000 GST (18%) to govt under RCM
Scenario 2: Security Guard Services
- You: Company needing security
- Supplier: Security agency (individual/partnership)
- Invoice: ₹1,00,000 (no GST)
- Your action: Pay ₹1,00,000 to agency + Pay ₹18,000 GST (18%) under RCM
Scenario 3: Purchase from Unregistered Supplier
- You: GST registered trader
- Supplier: Local vendor (not GST registered)
- Purchase: ₹10,000 worth goods
- Your action: Pay ₹10,000 to vendor + Pay applicable GST under RCM (if >₹5,000/day)
Exemptions from RCM
RCM does NOT apply when:
- Supplier is composition dealer (they pay nominal tax)
- You're also a composition dealer (composition dealers don't deal with RCM)
- Transaction value is below ₹5,000/day (for unregistered supplier purchases)
- Service/goods are exempt from GST
Penalties for Non-Compliance
Not paying RCM when required:
- Tax dues: Full tax amount + 18% interest from due date
- Penalty: 10% of tax or ₹10,000 (whichever is higher)
- Notices: System-generated demands and notices
Calculate Your Tax Liability
Use our GSTR-3B Helper to calculate output tax including RCM liability.
Calculate Now →Reporting RCM in Returns
| Return | Where to Report | What to Report |
|---|---|---|
| GSTR-1 | Not applicable | RCM purchases not reported here |
| GSTR-3B | Table 3.1(d) | Tax liability under RCM |
| GSTR-3B | Table 4(A)(3) | ITC on RCM (if eligible) |
Key Takeaways
- RCM = You pay supplier's GST to government
- Applies to: Specified services (GTA, legal, security) + Unregistered supplier purchases >₹5,000/day
- Process: Pay supplier (no GST) → Pay GST to govt → Claim ITC back (if eligible)
- Report in GSTR-3B Table 3.1(d) and claim ITC in Table 4(A)(3)
- Must pay in cash, then claim ITC
- Net effect often zero if full ITC eligible, but compliance is mandatory
Frequently Asked Questions
Do I need to issue invoice under RCM?
No. The supplier issues invoice (without GST). You self-assess and pay GST. You may issue a payment voucher for your records.
Can I pay RCM using my ITC ledger?
No. RCM tax must be paid in CASH first. Then you can claim it as ITC in the same month.
What if I forget to pay RCM?
Pay immediately with interest (18% p.a. from due date). Report in next month's GSTR-3B with interest payment.