Reverse Charge Mechanism (RCM)

A GST mechanism where the recipient of goods or services is liable to pay the tax instead of the supplier.

Under the Reverse Charge Mechanism (RCM), the liability to pay GST shifts from the supplier to the recipient of the goods or services. This is the opposite of the normal GST mechanism where the supplier collects and remits the tax.

When does RCM apply?

  • Section 9(3): Notified categories of goods/services (e.g., legal services, GTA services, sponsorship, director fees)
  • Section 9(4): Supplies from unregistered persons to registered persons (for specific notified categories)
  • Import of services: Always under RCM

Common RCM scenarios for businesses:

  • Hiring a Goods Transport Agency (GTA) for freight
  • Legal services from individual advocates
  • Fees paid to company directors (who are not employees)
  • Sponsorship services
  • Renting a motor vehicle from non-body corporates
  • Security services from individuals

ITC on RCM: Tax paid under RCM can be claimed as ITC in the same month, effectively making it cash-flow neutral. However, it must be properly reported in GSTR-3B under the RCM section.

Related Terms

ITC (Input Tax Credit)

The credit a business receives for GST paid on purchases, which can be set off against GST collected on sales.

GSTIN (Goods and Services Tax Identification Number)

A unique 15-digit alphanumeric code assigned to every registered GST taxpayer in India.

Input Tax Credit (Detailed)

The mechanism under GST that allows businesses to reduce their tax liability by claiming credit for taxes paid on business inputs.

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