Understanding Reverse Charge Mechanism (RCM) under GST: A Simple Guide
The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) in India flips the traditional tax collection process. Usually, the supplier collects and pays GST to the government. But under RCM, the recipient of goods or services becomes liable to pay the tax directly. This is commonly seen in transactions involving unregistered suppliers, imports of services, or certain notified goods and services like legal fees or security services. RCM ensures tax compliance in sectors where it is otherwise hard to track transactions, such as in the informal economy.
According to Indian tax laws, Section 9(3) and 9(4) of the Central Goods and Services Tax (CGST) Act, 2017 clearly define RCM. Section 9(3) allows the government to notify specific categories of goods or services for which the recipient is liable to pay tax. Meanwhile, Section 9(4) applies when registered persons purchase from unregistered dealers, though this is now restricted to certain cases. Additionally, Section 5(3) and 5(4) of the IGST Act, 2017 apply the same rules to interstate transactions. Notifications like Notification No. 13/2017 – Central Tax (Rate) help specify these categories and service types.
Complying with RCM under GST means that the recipient must issue a self-invoice, pay the applicable tax under reverse charge, and report it in GSTR-3B and GSTR-1 returns. The input tax credit (ITC) on the tax paid can usually be claimed, subject to eligibility conditions. Businesses need to maintain meticulous records and ensure proper categorization of vendors and transactions. Failure to do so can result in penalties or denial of ITC during audits.
🧠 Mnemonic to Remember: “R-E-V-E-R-S-E”
- R – Recipient pays tax, not the supplier
- E – Eligible categories are notified under law
- V – Vendor is unregistered in some RCM cases
- E – Entries must be filed in GSTR returns
- R – Rule under Section 9(3)/(4) CGST Act
- S – Self-invoicing is mandatory
- E – Eligible for ITC if conditions are met
