Chapter 9: Reverse Charge Mechanism (RCM)

Under normal circumstances, the supplier of goods or services is liable to pay GST. However, under the Reverse Charge Mechanism (RCM), the liability to pay tax shifts to the recipient of supply.

Statutory Basis: Section 9(3) and 9(4) of the CGST Act, 2017; Section 5(3) and 5(4) of the IGST Act; and Notification Nos. 13/2017 – CT (Rate) & 10/2017 – IT (Rate).

Purpose of RCM:

To tax unorganised sectors where the supplier base is small or unregistered.

To ensure better tax collection and compliance.

To make recipient-based reporting and payment mandatory in select cases.

Key Features: ✅ Liability rests with recipient. ✅ Recipient must raise self-invoice and payment voucher. ✅ Recipient can claim Input Tax Credit (ITC) if used for business. ✅ Applicable to both goods and services.

RCM applies in two broad situations:

(A) Specified Supplies Notified by Government – Section 9(3)

The Government notifies specific goods or services where tax is payable under RCM by the recipient.

(i) Goods under RCM (Notification No. 4/2017-CT (Rate)):

(ii) Services under RCM (Notification No. 13/2017-CT (Rate)):

(Notifications are periodically amended — readers should refer to latest updates.)

(B) Supplies from Unregistered Persons – Section 9(4)

Originally, RCM was applicable to all supplies received from unregistered suppliers. However, post-amendments (Notification No. 07/2019-CT (Rate)), RCM under Section 9(4) is now restricted to specific cases — mainly when prescribed for certain class of registered persons or transactions (e.g., developers of real estate projects purchasing from unregistered suppliers beyond threshold).

The recipient must comply with distinct steps when paying tax under RCM.

Step-by-Step Compliance Process

1️⃣ Identify RCM Liability: Check whether the inward supply falls under any notified RCM category. 2️⃣ Self-Invoice & Payment Voucher: If supplier is unregistered, raise self-invoice u/s 31(3)(f) and payment voucher under Rule 52. 3️⃣ Payment of Tax: Pay tax under RCM in cash only through electronic cash ledger (Form PMT-06). 4️⃣ Reporting: Declare liability in Table 3.1(d) of GSTR-3B. 5️⃣ Claim of ITC: Recipient may claim ITC of tax paid under RCM in the same month (subject to Section 16 conditions). 6️⃣ Bookkeeping: Maintain separate records for RCM transactions to avoid duplication of credit.

Example: A company pays ₹50,000 to a GTA for freight. Tax @ 5% = ₹2,500 (2.5% CGST + 2.5% SGST). Company pays ₹2,500 in cash under RCM and then claims the same as ITC if used for business.

Important Notes:

Tax liability cannot be offset using ITC for RCM payment.

ITC of RCM tax is available only after payment to the Government.

RCM applies irrespective of invoice value (no threshold exemption).

Determining the Time of Supply is vital as it decides when tax liability arises for the recipient.

(a) Goods – Section 12(3)

Time of supply is the earliest of:

Date of receipt of goods, or

Date of payment, or

30 days from the date of invoice issued by supplier.

If none of the above determinable → date of entry in recipient’s books.

Example: Goods received on 10 July; invoice dated 5 July; payment on 20 Aug. → Time of supply = 10 July (earliest).

(b) Services – Section 13(3)

Time of supply is the earliest of:

Date of payment, or

60 days from the date of invoice issued by supplier.

If not determinable → date of entry in recipient’s books.

Example: Advocate invoice dated 10 June; payment on 5 Aug → Time of supply = 10 Aug (60 days from invoice).