Reverse Charge Mechanism

Reverse Charge Mechanism (RCM) is a provision under the Indian GST framework where the recipient of goods or services is made liable to pay GST directly to the government, instead of the supplier collecting and remitting it. Under normal GST (forward charge), the supplier charges GST on the invoice and pays it to the government. Under RCM, this responsibility shifts entirely to the buyer.

RCM is governed by Section 9(3) and Section 9(4) of the CGST Act, 2017 and the corresponding provisions of the IGST Act.

Why Does RCM Exist?

RCM was introduced to bring transactions involving unregistered suppliers or specific high-risk categories into the GST net. Since unregistered suppliers cannot collect and remit GST themselves, the government makes the registered recipient responsible for paying the tax — ensuring no revenue leaks from these transactions.

Two Types of RCM

Section 9(3) — Specified Goods and Services

The government has notified a specific list of goods and services where RCM always applies, regardless of whether the supplier is registered or not. Key examples include:

Section 9(4) — Purchases from Unregistered Suppliers

When a GST-registered business purchases goods or services from an unregistered supplier, RCM applies on the transaction. The registered buyer must self-assess and pay GST on the purchase as if they were the supplier. This provision ensures that the exemption enjoyed by small unregistered suppliers does not create a tax gap in the supply chain.

Currently, Section 9(4) RCM is applicable only to specific notified categories of goods and services, not across all unregistered purchases. The government activates it selectively to avoid excessive compliance burden on small buyers.

How RCM Works in Practice

When RCM applies, the process works as follows:

The supplier issues an invoice without charging any GST (since the tax liability is on the recipient). The invoice must mention "Reverse Charge: Yes" on the face of the document.

The recipient self-assesses the applicable GST on the transaction and pays it directly to the government using the Electronic Cash Ledger (cash only — ITC cannot be used to pay RCM liability).

The recipient then declares the RCM liability in their GSTR-3B under the "Tax payable on reverse charge basis" row.

ITC on RCM Payments

After paying GST under RCM, the registered recipient can claim the amount paid as Input Tax Credit (ITC) — but only in the same or subsequent tax period in which the RCM tax was paid. The ITC claimed on RCM can then be used to offset future output tax liabilities.

This effectively means RCM results in a cash outflow and then a credit inflow in the same period, making it revenue-neutral for most registered businesses (though it temporarily blocks cash).

RCM and Unregistered Freelancers

For Indian businesses hiring unregistered freelancers or consultants, RCM can apply under the notified categories. For example, if a registered company receives legal services from an unregistered advocate, the company must pay GST under RCM on that fee.

For self-employed professionals who are themselves GST-registered, they generally operate under the forward charge (they collect and remit GST themselves), so RCM does not apply to their outward supplies unless they fall under a Section 9(3) notified category.

RCM on Import of Services

When an Indian business receives services from a foreign supplier — such as paying for cloud software subscriptions, international consulting, or digital advertising from overseas platforms — this qualifies as import of services and is always subject to RCM under IGST. The Indian recipient must pay IGST on the transaction even though the foreign supplier has no GST registration in India.

This is highly relevant for Indian businesses using global SaaS platforms, international freelancers, or foreign consultants.

Mandatory Mention on Invoices

Every tax invoice or bill must clearly state whether the transaction is subject to reverse charge. The field "Whether tax is payable on reverse charge basis" is a mandatory field on all GST invoices — it must be marked "Yes" or "No" as applicable.

RCM and Composition Scheme Taxpayers

Taxpayers under the Composition Scheme are also liable to pay GST under RCM for purchases that attract it. However, unlike regular taxpayers, composition scheme taxpayers cannot claim ITC on the RCM tax paid — making RCM a pure cost for them rather than a recoverable tax.

Use JetInvoice's free GST Invoice Generator to correctly mark the reverse charge field on every invoice — ensuring your invoices are fully compliant and your buyers have the correct information for their RCM filings.