Reverse Charge Mechanism Under GST — Complete Guide
In most transactions, the seller collects GST from the buyer and pays it to the government. However, the Reverse Charge Mechanism (RCM) turns this on its head. Specifically, under RCM the buyer is responsible for paying GST directly to the government — bypassing the supplier entirely. Furthermore, this rule catches many business owners off guard, creating unexpected tax liabilities.
- Under RCM, the buyer pays GST directly to the government instead of the supplier — and must self-invoice.
- RCM applies in three main scenarios: purchases from unregistered suppliers, notified goods/services under Section 9(3), and import of services.
- Common notified categories include legal services, GTA freight, sponsorship, director's services, and security services.
- RCM liability cannot be paid using ITC — it must be paid in cash, though ITC can usually be claimed afterward.
- Importing services from abroad (e.g. SaaS subscriptions, foreign consultants) triggers IGST under RCM.
- For many fully registered businesses, the net cash impact of RCM is zero once the corresponding ITC is claimed.
Moreover, RCM is not a rare exception. Specifically, it applies to a broad range of transactions including purchases from unregistered suppliers, imports of services, legal services, and goods transport. Consequently, any business that buys from unregistered vendors or imports services from abroad must understand RCM thoroughly.
What Is Reverse Charge Mechanism — and Why Does It Exist?
RCM exists primarily to ensure GST compliance in transactions where the supplier is either unregistered, operating in an unorganised sector, or located outside India. Specifically, the government recognised that collecting tax from millions of small unregistered vendors would be administratively impossible. Consequently, it shifted the compliance burden to the GST-registered buyer — who is already in the tax system and has a GSTIN.
Additionally, RCM applies to specific categories of notified goods and services under Section 9(3) of the CGST Act — regardless of whether the supplier is registered or not. Therefore, even when buying from a fully registered GST vendor, RCM can apply if the transaction falls under the notified list.
When Does RCM Apply? The Three Main Scenarios
Scenario 1 — Purchases from unregistered suppliers (Section 9(4))
When a GST-registered business purchases goods or services from an unregistered supplier, RCM applies. Moreover, this was a major compliance concern for small businesses buying from local vendors, contractors, and petty traders who are not GST-registered.
Scenario 2 — Notified goods and services (Section 9(3))
Certain specific goods and services attract RCM regardless of whether the supplier is registered. Furthermore, these are listed in notifications issued by the GST Council. Consequently, businesses in these sectors must check applicability proactively.
Legal services: Services by an advocate or law firm to a business entity. Therefore, companies paying legal fees must pay GST under RCM.
Goods Transport Agency (GTA): Freight services by a GTA to a registered recipient attract 5% GST under RCM (alternatively, the GTA can charge 12% and pay themselves).
Sponsorship services: Any body corporate or partnership firm receiving sponsorship services pays GST under RCM.
Director's services: Services by a director to their own company attract RCM on the company.
Security services: Supply by an individual to a registered body corporate attracts RCM.
Renting of motor vehicles: In specific configurations defined by GST notifications.
Scenario 3 — Import of services from outside India
When a business imports services from a foreign supplier — for instance, paying a US-based SaaS company, a UK marketing agency, or a Singapore consultant — IGST under RCM applies. Specifically, the Indian recipient must pay IGST at the applicable rate on the foreign payment amount. Moreover, this is called Online Information and Database Access or Retrieval (OIDAR) services in specific contexts. Consequently, Indian businesses paying for Zoom subscriptions, Google Workspace, Adobe Creative Cloud, or foreign consulting fees all have potential RCM liability.
How to Comply With RCM — Step by Step
Identify the RCM transaction. Specifically, check whether the purchase is from an unregistered supplier or falls under the Section 9(3) notified list.
Issue a self-invoice. Furthermore, the registered buyer must create an invoice on behalf of the unregistered supplier — showing their own GSTIN as recipient, the supplier's details, and the GST amount.
Calculate the GST liability. Apply the appropriate rate to the transaction value.
Pay the GST in cash. Specifically, RCM liability cannot be paid using existing ITC balances in your electronic credit ledger. As a result, it must be paid in cash to the government.
Declare in GSTR-3B. Report the RCM liability in Table 3.1(d) of GSTR-3B in the month the payment is made to the supplier.
Claim ITC on the RCM paid. Crucially, the buyer can claim ITC on the RCM GST paid — provided the purchase is for business purposes and not blocked under Section 17(5). Consequently, the net cash outflow is often zero for fully registered businesses.
Can You Claim ITC on RCM Payments?
Yes — with conditions. Specifically, ITC on RCM-paid GST is available in the same return period in which the RCM GST is paid. Moreover, this ITC is available only if the underlying purchase is for business purposes and not in the blocked credit list. Consequently, for many businesses the ITC immediately offsets the RCM liability, making the net impact zero. However, the compliance steps — self-invoice, GSTR-3B declaration, cash payment — must still be completed correctly.
For calculating the GST amount payable under RCM on any transaction, use our GST calculator. Additionally, understanding which type of GST (CGST/SGST or IGST) applies to your RCM purchase requires knowing the place of supply — see our guide on CGST vs SGST vs IGST. Furthermore, for how ITC works after RCM payment, read our full article on Input Tax Credit under GST.
GST Portal — reverse charge notifications
CBIC — Section 9(3) and 9(4), CGST Act
Reverse Charge Mechanism — Frequently Asked Questions
Who pays GST under Reverse Charge Mechanism?
The buyer (recipient) pays GST directly to the government instead of the supplier, and must also issue a self-invoice and declare the liability in GSTR-3B.
Can RCM liability be paid using ITC balance?
No. RCM liability must be paid in cash to the government — it cannot be offset using existing Input Tax Credit in your electronic credit ledger.
Can a business claim ITC on GST paid under RCM?
Yes, in the same return period the RCM GST is paid, provided the purchase is for business purposes and not in the blocked credit list under Section 17(5).
Does RCM apply to foreign software subscriptions?
Yes. Importing services from a foreign supplier — such as SaaS tools, Zoom, or overseas consulting fees — triggers IGST under RCM, payable by the Indian recipient.
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