Expert verified Understanding the reverse charge mechanism in GST can be really tricky.
Here’s a simple guide that will break down reverse charge so you know exactly when, why, and how you, the buyer, need to pay GST directly instead of the supplier.
What is the Reverse Charge Mechanism (RCM) in GST?
Under the Goods and Services Tax (GST) system, usually the supplier of goods or services is the one who collects GST from the buyer and pays it to the government. The Reverse Charge Mechanism (RCM), flips the rule.
Instead of the supplier paying GST to the government, the buyer (recipient of goods or services) pays the tax directly. So, the tax “liability” shifts from the seller to the buyer.
The government uses RCM mainly to:
- Curb tax evasion by covering transactions with unregistered or non-compliant suppliers.
- Ensure fair competition by preventing GST avoidance.
- Widen the tax base by taxing high-risk or specialized transactions through the recipient.
Applicability of Reverse Charge Mechanism in GST
The reverse charge mechanism in GST does not apply to all transactions. It is applicable only under specific conditions, laid down by the GST law.
1. Notified Goods and Services
The government (through CBIC) has listed specific goods and services where reverse charge must be applied.
Goods under RCM:
- Cashew nuts (not shelled or peeled)
- Bidi wrapper leaves (tendu)
- Tobacco leaves
- Raw cotton
- Silk yarn (when supplied by any person who manufactures silk yarn from raw silk or silk worm cocoons for supply to a registered person)
These attract RCM only when supplied by an agriculturist to a registered person, Except where specified.
- Supply of certain goods by a registered dealer to an electronic commerce operator in very specific cases, e.g., waste and scrap
- Lottery tickets, kerosene, silk fabrics, and most other goods are not under RCM
- Supply by “unregistered person” is not under general RCM for goods except in the construction/real estate sector.
Services under RCM:
- Goods Transport Agency (GTA): Services provided to specified recipients (including registered persons) are under RCM.
- Legal services by an individual advocate (including senior advocates) or a firm of advocates to a business entity.
- Services supplied by an arbitral tribunal to a business entity.
- Sponsorship services to any corporate or partnership firm.
- Services by a government or local authority to a business entity (excluding certain specified services).
- Security services by any person other than a body corporate to a registered person (if the provider is unregistered and recipient is registered, excluding Government departments).
- Services supplied by a director of a company or a body corporate to the company or body corporate.
- Renting of motor vehicle by individuals, HUF, partnership, AOP (not a company) to body corporate (if provider is not taking input credit).
- Import of services: Any service imported by a business from outside India.
- Certain services by an unregistered supplier to a promoter in the real estate sector.
2. Supply from Unregistered to Registered Dealers
If you buy taxable goods or services from someone who is not registered under GST, you (the buyer) have to pay the GST under reverse charge.
This only applies if you are a registered GST taxpayer.
3. Imports of Services
If you receive imported services (for example, from a foreign consultant), then you, as the recipient, must pay GST on that.
This is because foreign suppliers cannot collect Indian GST, so you as the buyer pay it instead.
4. Services Provided Through E-Commerce Operators
When services are provided through an e-commerce platform, the operator must pay GST under RCM instead of the service provider.
If the operator isn’t based in India, a representative or nominated person must pay the tax.
How Does the Reverse Charge Mechanism Work in GST?
Here’s how the reverse charge mechanism works:
1. Identify if RCM Applies
Find out if the purchase your business is making falls under RCM. The conditions are listed in the section below.
Example:
- You buy office furniture from an unregistered carpenter for ₹50,000.
In this case you are required to pay the GST directly to the government under the Reverse Charge Mechanism (RCM), as the seller is not registered to collect GST.
You’ll calculate the applicable tax and remit it yourself.
- You hire legal services from a registered law firm for ₹1,00,000.
Here your business may still need to pay GST under RCM, as legal services are one of the categories where RCM applies.
This means you pay the tax directly to the government instead of the law firm charging you GST.
2. Receive the Invoice (Without GST)
In RCM cases, the supplier issues an invoice without charging GST.
Example:
- The carpenter gives you an invoice for ₹50,000 (no GST).
- The law firm invoices ₹1,00,000 (no GST included, even though they are registered).
3. Calculate GST Payable
Calculate the GST on the invoice value you received.
- Check the applicable GST rate (e.g., 18% for legal services).
- For intra-state supply: GST is split into CGST (9%) + SGST (9%).
- For inter-state supply: GST is charged as IGST (18%).
Example (Legal services, intra-state): ₹1,00,000 × 18% = ₹18,000 (₹9,000 CGST + ₹9,000 SGST)
4. Issue a “Payment Voucher”
Create a Payment Voucher (as per Section 31(3)(g) of CGST Act).
A Payment Voucher under GST is a document used to record advance payments or payments made under the reverse charge mechanism (RCM) before an invoice is issued.
It helps track the GST payment made for a supply, detailing the amount, GST, and related supply information. This ensures proper documentation and compliance with GST provisions.
This includes:
- Supplier name
- Invoice number and date
- Description of service
- Amount and applicable GST
This records your liability under RCM.
5. Pay GST in Cash
Pay the calculated GST in cash using your electronic cash ledger. You cannot use ITC to pay RCM liability .
Pay by the 20th of the following month, along with your GSTR-3B return.
6. Report in GST Returns
In GSTR-3B:
- Table 3.1(d): Report RCM GST under “Tax payable under reverse charge”.
- Table 4(A)(1): Claim the Input Tax Credit (ITC) for the RCM GST paid.
In GSTR-1:
- Table 4B: Report the RCM supplies received.
7. Claim Input Tax Credit (ITC)
After paying GST under RCM, you are eligible to claim ITC in the same tax period, if you’re making taxable supplies.
Example: You paid ₹18,000 GST under RCM for legal services. You can now claim ₹18,000 as ITC in your GSTR-3B and adjust it against your output tax liability.
Input Tax Credit (ITC) under Reverse Charge Mechanism
Under GST, ITC means you can claim credit for the GST you paid on your purchases, so you don’t pay tax again when you sell your products or services.
That same principle also applies under reverse charge, but in a different way.
How ITC Works Under Reverse Charge
When you pay GST under reverse charge, you:
- First pay GST directly to the government from your own pocket (in cash, you cannot use other credits for this payment).
- Once paid, you can then claim it as input tax credit in your GST returns.
- You adjust the amount against your future GST liabilities.
Example:
You buy legal services worth ₹10,000
GST @ 18% = ₹1,800
You pay ₹1,800 directly to the government under reverse charge
After paying, you can use that ₹1,800 as ITC to reduce your GST payable on your own sales
Key Conditions to Claim RCM ITC
You can claim ITC only if:
- You must have paid the GST under reverse charge first
- You must report it correctly in GSTR-3B and GSTR-1 returns
- The goods/services should be used for business (not personal use)
Why Reverse Charge Mechanism in GST Matters for Businesses?
If you run a business, the reverse charge mechanism in GST can impact you in a big way. Here’s why it really matters:
1. Direct Financial Impact
Cash Flow Strain: You pay RCM GST in cash (not from ITC) upfront. This creates a temporary cash outflow until you claim ITC.
Cost Management: Missed RCM means lost ITC. If you fail to pay RCM on time, you cannot claim ITC, increasing your costs by 5%–18% depending on the GST rate.
2. Compliance & Penalty Risks
Heavy Penalties: Late RCM payments attracts 18% annual interest + 100% penalty on unpaid tax ; It may also trigger GST audits
61-Day Rule Trap (Services): Even if the supplier hasn’t invoiced you, GST under RCM becomes due on the 61st day after service provision.
3. Vendor Management & Procurement Strategy
Supplier Vetting: Purchasing from unregistered vendors triggers RCM which forces due diligence on supplier GST status.
True Cost Comparison: A “cheaper” unregistered vendor isn’t cheaper if RCM adds 18% GST + compliance burden.
Contract Clauses: Negotiate terms for RCM-notified services (e.g., legal, transport) to shift cash flow burden.
4. Input Tax Credit (ITC) Optimization
ITC Eligibility: RCM GST is claimable as ITC only if paid and reported correctly. Any delay or error means permanent ITC loss.
Reconciliation Burden: Your RCM ITC must match auto-generated data in GSTR-2B. Any mismatch can trigger GST notices.
5. Sector-Specific Exposures
Businesses in these sectors face higher RCM risks:
- Logistics: Goods Transport Agency (GTA) services.
- Legal/Consulting: Advocate services, director fees.
- Importers: Services from overseas (e.g., SaaS, cloud tech).
- Manufacturing: Notified goods (e.g., raw cotton, tobacco).
6. Strategic Advantages
Lower Operational Costs: Timely RCM compliance ensures full ITC recovery → reduces your tax burden.
Audit Resilience: Clear records and proper documentation shield you during GST audits.
Better Vendor Relations: Educating suppliers about RCM helps avoid wrong invoicing and future disputes.
Registration Requirements for Reverse Charge Mechanism in GST
Here are some key requirements for RCM:
- GST registration: Mandatory for anyone liable to pay tax under the Reverse Charge Mechanism, regardless of their turnover. You only need a standard GSTIN (regular or composition).
- Normal Registration Thresholds Don’t Apply: The standard ₹20 lakh / ₹40 lakh threshold for registration does not apply if you are paying GST under reverse charge. So, even if your turnover is minimal, you must register if you fall under RCM.
- Suppliers of RCM-only Goods/Services: Suppliers who only provide goods or services taxed under RCM (i.e., tax is paid by the recipient) are not required to register for GST.
- Composition Scheme: Dealers under the composition scheme must pay GST at regular rates on RCM transactions and cannot claim input tax credit on these payments.
- E-commerce Transactions: For certain notified services provided through e-commerce platforms, the platform itself must register and pay GST under RCM.
- Registration Timeline: GST registration must be completed within 30 days from the date liability under RCM arises.
When to Pay RCM GST: Time of Supply under Reverse Charge Mechanism?
The “Time of Supply” determines the exact date when your GST liability under RCM arises.
Unlike regular transactions where the supplier pays GST on invoice issuance, under RCM, you have to self-assess and pay GST by specific triggers. Missing these deadlines can attract penalties.
Rules for Time of Supply under RCM
For goods: GST is due on the earliest of:
- Date of receipt of goods
- Date of payment (to the supplier)
- 30 days from the date of supplier’s invoice
Example: You receive goods on June 10, You pay the supplier on June 15, The supplier issued the invoice on June 1.
Time of Supply = June 10 (earliest of receipt/payment/invoice+30 days).
For services: GST is due on the earliest of:
- Date of payment (to the supplier)
- 60 days after invoice issuance by the supplier
- If neither applies: Date of entry in your books of accounts
Critical Exception (The 61-Day Rule): If no invoice is issued and no payment is made within 60 days of service provision, GST liability arises on the 61st day from service completion.
Example: You receive legal services on May 1, No invoice or payment by July 1 (61 days later).,
Time of Supply = July 1 (61st day)
FAQs on Reverse Charge Mechanism in GST
1. What is reverse charge mechanism in GST?
Reverse charge means the buyer pays GST directly to the government instead of the supplier.It helps cover situations where the supplier is unregistered or where certain goods/services are notified.
2. Is reverse charge mandatory for all purchases?
No, reverse charge applies only to specific notified goods or services, or purchases from unregistered dealers. It does not apply to every single transaction under GST.
3. Can I claim input tax credit on reverse charge payments?
Yes, you can claim ITC on reverse charge payments after paying the tax in cash.This helps you set off your GST liability in the next return.
4. How do I pay GST under reverse charge?
You must pay it in cash through your GST cash ledger. You cannot use your existing input tax credits for this payment.
5. What happens if I don’t pay reverse charge GST on time?
If you miss paying reverse charge on time, you may face interest and penalties from the GST department. Properly reporting it in GSTR-3B is critical.
6. Do I need to register for GST if I am paying under reverse charge?
Yes, registration is compulsory if you are liable to pay GST under reverse charge. Threshold exemptions do not apply in such cases.
7. Is there a due date for paying reverse charge GST?
Yes, you must pay reverse charge GST by the due date of filing your GSTR-3B return. Delays attract penalties and interest.
