RCM Under GST: What is Reverse Charge, When it Applies & Complete List

Under the Goods and Services Tax (GST) regime in India, the general rule is that the supplier of goods or services is liable to collect and pay tax to the government. This is known as the Forward Charge Mechanism (FCM) or normal charge. However, the GST law provides for an exception to this rule in specific cases, known as the Reverse Charge Mechanism (RCM).  

The Reverse Charge Mechanism under GST shifts the responsibility of paying tax from the supplier to the recipient of goods or services. This mechanism is crucial for ensuring tax compliance in certain sectors and for specific types of supplies where collecting tax from the supplier might be difficult or not administratively feasible.  

What is Reverse Charge Mechanism (RCM)?

Reverse Charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply. In the standard forward charge scenario, the supplier issues a tax invoice, collects GST from the buyer, and then remits this collected tax to the government. Under RCM, the supplier issues an invoice (often indicating that tax is payable under RCM), but they do not charge or collect GST from the recipient. The recipient of the goods or services is directly liable to calculate the applicable GST, pay it to the government, and fulfill the necessary compliance requirements.  

Why RCM Exists: The RCM is implemented for various reasons, including:

• Taxing supplies from the unorganized sector.  
• Taxing certain services where the recipient is better placed to comply.
• Bringing certain international transactions (like import of services) into the tax net.  

How RCM Works

The process under RCM involves the following steps for the recipient:

1. Identify RCM Applicability: The recipient must first determine if the goods or services received fall under the RCM provisions.
2. Receive Invoice: The supplier issues an invoice, which may or may not explicitly mention that tax is payable under RCM. Even if not mentioned, the recipient must identify and apply RCM if applicable.
3. Self-Invoice (if applicable): In certain cases, particularly for supplies from unregistered persons (where still applicable), the registered recipient may need to issue a self-invoice for the inward supply.  
4. Calculate GST Liability: The recipient calculates the applicable GST (CGST, SGST/UTGST, or IGST) on the value of the supply at the prevailing rates.  
5. Pay GST to Government: The recipient pays the calculated GST amount directly to the government through the electronic cash ledger. Important Note: Tax payable under RCM must be discharged using the electronic cash ledger only; ITC cannot be used to pay RCM liability.  
6. Avail ITC: The recipient is eligible to avail Input Tax Credit (ITC) of the tax paid under RCM, subject to the normal conditions for claiming ITC (i.e., the goods or services are used or intended to be used in the course or furtherance of business) and provided they report it correctly in their GST returns. The ITC on RCM paid can be claimed in the same month or a subsequent month, subject to the time limits for claiming ITC.  

Applicability of RCM under GST Law

RCM provisions under GST are primarily covered under Section 9(3) and Section 9(4) of the CGST Act, 2017 (and corresponding sections under SGST/UTGST and IGST Acts).  

1. Section 9(3) – RCM on Specified Goods and Services: This is the most common application of RCM. The Central Government, on the recommendations of the GST Council, notifies specific categories of supply of goods or supply of services or both, where the tax liability shifts to the recipient.  
2. Section 9(4) – RCM on Supplies from Unregistered Person to Registered Person: Originally, this section mandated RCM on all taxable supplies by an unregistered person to a registered person. However, the implementation of this broad provision was kept in abeyance and has since been modified. Currently, Section 9(4) RCM is applicable only to specified categories of supply of goods or services or both received by specified classes of registered persons from any unregistered supplier. As of recent notifications, this mainly applies to supplies to Promoters in the real estate sector for certain inward supplies like Transfer of Development Rights (TDR), Floor Space Index (FSI), long-term lease of land, and also for a specified percentage of cement and capital goods if procured from unregistered suppliers. For most other businesses, the blanket RCM on purchases from unregistered dealers is not currently applicable.  
3. Import of Services: Services imported into India are generally subject to GST under RCM in the hands of the recipient located in India, provided they are received for a consideration for business purposes.  

Comprehensive List of Goods Under RCM (as per Section 9(3) of CGST Act)

As per Notification No. 4/2017-Central Tax (Rate) dated 28.06.2017 (as amended), RCM applies to the supply of the following goods:

Example for Goods under RCM: A registered garment manufacturer purchases raw cotton worth ₹50,000 from an agriculturist. Since raw cotton supplied by an agriculturist is under RCM, the garment manufacturer (recipient) is liable to pay GST on ₹50,000 directly to the government, not the agriculturist.  

Comprehensive List of Services Under RCM (as per Section 9(3) of CGST Act)

As per Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 (as amended), RCM applies to the supply of the following services:

Example for Services under RCM: A registered business entity avails legal services from an individual advocate. As legal services provided by an individual advocate to a business entity are under RCM, the business entity (recipient) is liable to pay GST on the advocate’s fees directly to the government. The advocate (supplier) will not charge GST on their invoice.  

RCM on Imports of Services

When a person located in a taxable territory in India receives services from a person located in a non-taxable territory (outside India) for a consideration, the recipient in India is liable to pay IGST under RCM. This is crucial to ensure that imported services are taxed, bringing them on par with domestically supplied services.

Example for Import of Services under RCM: An Indian company (registered under GST) subscribes to software services from a US-based company. The US company will typically not charge Indian GST. The Indian company (recipient) is liable to calculate and pay IGST on the subscription fee under RCM.  

RCM on Supplies from Unregistered Dealer to Registered Dealer (Section 9(4) – Limited Applicability)

As mentioned earlier, the broad RCM on all supplies from unregistered to registered persons under Section 9(4) is not currently in force for most supplies. It is applicable only to specified registered persons receiving specified categories of goods or services from unregistered suppliers.

Currently, the notable applications of Section 9(4) RCM are primarily in the real estate sector on specified supplies like TDR, FSI, long-term lease received by promoters, and also for a certain percentage of cement and capital goods procured by promoters from unregistered suppliers. Businesses should refer to the latest notifications (e.g., Notification No. 05/2019-Central Tax (Rate)) for the precise and updated list of supplies and recipients covered under Section 9(4).  

Exceptions and Important Points under RCM

While Reverse Charge Mechanism (RCM) applies to specific goods and services, it’s crucial to understand that it doesn’t apply universally to all transactions falling under broad categories. Several exceptions and important points exist:

• Exempt Supplies are not under RCM: RCM is applicable only on taxable supplies. If the supply of goods or services is already exempted from GST under any exemption notification, RCM will not apply to that specific exempted supply, even if it might fall into a category generally covered by RCM.
  • Example: Transportation of agricultural produce by a GTA is exempt from GST. Therefore, RCM on GTA services does not apply to this specific exempted transport service.
• Specific Exclusions/Conditions within Notified Services (Section 9(3)): Many entries in the RCM service notification have specific conditions or exclusions:
  • Certain Government Services: Services supplied by the Central Government, State Government, Union Territory, or local authority to a business entity are generally under RCM. However, certain services are explicitly excluded from this RCM entry:
    • Services by the Department of Posts (like speed post, express parcel post, life insurance, agency services provided to a person other than Government).
    • Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport.  
    • Transport of goods or passengers. (Note: Renting of immovable property by Government/Local Authority to a registered person IS specifically under RCM vide a separate entry – Entry 5A).  

• Security Services Supplier: RCM on security services (supply of security personnel) only applies when the supplier is any person other than a body corporate. If the security service is provided by a body corporate to a registered person, it is under Forward Charge, not RCM.
• Renting of Motor Vehicle Condition: RCM applies to renting of a motor vehicle (designed to carry passengers) to a body corporate if the supplier is any person other than a body corporate AND the supplier does not opt to pay GST at the specified higher rate (currently 12% with ITC) under Forward Charge. If they opt for the higher rate, RCM is not applicable, and it remains under FCM.
• GTA Services Recipient: RCM on GTA services applies only when the recipient falls under specific categories (e.g., factory, society, registered person, body corporate, partnership firm, casual taxable person). If a GTA provides services to an unregistered individual or an entity not falling in the specified list, RCM does not apply (though the GTA might have to pay tax under FCM if their turnover exceeds the threshold, or the service might be exempt if consideration is below specified limits per consignment/consignee).
• Legal Services Recipient: RCM on legal services (by advocate/firm) only applies when the recipient is a “business entity”. If the recipient is NOT a business entity (e.g., an individual for personal matters), RCM does NOT apply, and taxability depends on the advocate’s FCM status.

• Limited Applicability of Section 9(4) RCM (Unregistered to Registered): The initial broad RCM requirement on all supplies from unregistered persons to registered persons (Section 9(4)) has been significantly restricted. It now applies only to specified categories of inward supply received by specified classes of registered persons from unregistered suppliers (primarily impacting promoters in the real estate sector for specific inputs like TDR, FSI, long-term lease, cement, and capital goods under certain conditions). The general rule is that for most other registered businesses, supplies from unregistered dealers are not under RCM via Section 9(4).
• Supplier Exclusively Making RCM Supplies: A person who is engaged in making only those supplies where the entire tax is payable by the recipient under RCM (under Section 9(3)) is exempt from mandatory GST registration based on turnover. This is an exception to the general turnover-based registration requirement for the supplier.
• Composition Scheme Dealers (Recipient): While not an exception to RCM applicability itself, businesses registered under the Composition Scheme must pay tax under RCM at normal GST rates (not their composition rate) when receiving RCM-liable supplies. Crucially, they are not eligible to claim Input Tax Credit of the RCM tax paid.

Time of Supply under RCM

Determining the time of supply is crucial under RCM as it signifies the point when the tax liability arises and tax becomes payable. Unlike the forward charge, the time of supply under RCM has specific rules:

• For Goods under RCM: The time of supply is the earliest of the following dates:
  1. Date of receipt of goods.
  2. Date of payment (as entered in the books of account or date of debit in the bank account, whichever is earlier).
  3. The date immediately following thirty days from the date of issue of invoice by the supplier.

• Example: Goods received on 15th May, payment recorded on 18th May (bank debit 19th May), invoice dated 10th May. Earliest of May 15, May 18, June 9 (May 10 + 30 days) is May 15.

• For Services under RCM: The time of supply is the earliest of the following dates:

1. Date of payment (as entered in the books of account or date of debit in the bank account, whichever is earlier).
2. The date immediately following sixty days from the date of issue of invoice or any other document by the supplier.  

• Example: Legal services invoice dated 1st June, payment recorded on 10th August (bank debit 9th August). Earliest of August 9, July 31 (June 1 + 60 days) is July 31.

(Note: If the above dates are not determinable, the time of supply is the date of entry in the books of account of the recipient of supply.)

Compliance Requirements & Practical Aspects

Compliance under RCM requires careful attention from the recipient:

• Mandatory Registration for Recipient: A recipient liable to pay RCM must compulsorily register under GST regardless of turnover.
• Invoice & Documentation:
  • The supplier’s invoice should ideally explicitly state that tax is payable by the recipient under RCM.
  • For supplies under Section 9(4) (where applicable), the registered recipient may need to issue a self-invoice for the inward supply.
  • The recipient must issue a payment voucher at the time of making payment to the supplier for supplies where RCM applies.
• Payment of Tax: RCM tax must be paid exclusively in cash via the electronic cash ledger. ITC balance cannot be used for discharging RCM liability.
• Claiming ITC: Eligible ITC on RCM paid in cash can be claimed by the recipient in the same month (subject to payment) or a subsequent month, provided the supplies are for business purposes and claimed within the stipulated time limits for ITC.

Reporting RCM in GST Returns

Correct reporting of RCM transactions in GST returns is a key compliance step:

• GSTR-1 (Filed by Supplier):
  • Suppliers making outward supplies that attract RCM report the details of these supplies (e.g., in Table 4B for B2B) clearly marking them as attracting Reverse Charge. They do not declare or pay tax on these supplies in GSTR-1.
• GSTR-3B (Filed by Recipient & Supplier):
  • Recipient: Reports inward supplies attracting RCM and tax payable in Table 3.1(d) “Inward supplies on which tax is to be paid on reverse charge basis”.
  • Recipient: Claims the eligible ITC of the RCM tax paid in Table 4A(3) “ITC Available – Inward supplies liable to reverse charge (other than import of goods)”.
  • Supplier: Reports the value of RCM outward supplies in GSTR-1, which auto-populates into the recipient’s GSTR-2A/2B for reconciliation.

Accounting Treatment for RCM

Proper accounting entries are essential for managing RCM transactions correctly:

1. On receipt of service/goods attracting RCM:
   • Debit: Relevant Expense Account (e.g., Legal Fees, Freight) – Value of Supply
   • Debit: Input CGST (RCM) A/c
   • Debit: Input SGST (RCM) A/c (or Input IGST (RCM) A/c)
   • Credit: Supplier’s Account (Value of Supply)
   • Credit: Output CGST (RCM) A/c (to create liability)
   • Credit: Output SGST (RCM) A/c (or Output IGST (RCM) A/c)
2. On making payment to the supplier:
   • Debit: Supplier’s Account
   • Credit: Bank Account
3. On paying RCM tax to the government (from Cash Ledger):
   • Debit: Output CGST (RCM) A/c
   • Debit: Output SGST (RCM) A/c (or Output IGST (RCM) A/c)
   • Credit: Electronic Cash Ledger
4. Claiming the ITC of RCM Paid (after payment, in GSTR-3B):
   • Debit: Electronic Credit Ledger (to make credit available)
   • Credit: Input CGST (RCM) A/c
   • Credit: Input SGST (RCM) A/c (or Input IGST (RCM) A/c)

Common Challenges and Penalties

Navigating RCM can present practical challenges for businesses:

• Keeping Up with Changes: The list of RCM items can be updated via notifications.
• Identifying Applicability: Accurately determining if a supply falls under RCM can be complex.
• Tracking Transactions: Ensuring all RCM inward supplies are identified and recorded.
• Cash Flow Impact: RCM tax must be paid in cash, affecting working capital.
• Time of Supply Determination: Incorrectly determining the time of supply can lead to delays and interest.

Penalties for Non-Compliance:

Failure to comply with RCM provisions carries significant consequences:

• Interest: Delayed payment attracts interest @ 18% per annum.
• Penalty: Non-payment or short payment can lead to penalties (10% of tax due or ₹10,000 higher, or significantly higher in fraud cases).
• Denial of ITC: Failure to pay RCM tax or paying late may result in the denial of the corresponding ITC.
• Failure to Register: Not registering when liable under RCM can also attract penalties.

Time Limit for Claiming RCM ITC

• Time Limit for Claiming ITC on RCM Paid: You can claim the ITC of RCM paid tax in your GSTR-3B latest by the thirtieth day of November following the end of the financial year to which such invoice (supplier’s invoice) or debit note pertains, or the date of filing of the annual return for the said financial year, whichever is earlier. Failing to claim the ITC within this timeframe will result in losing the credit permanently. Ensure you pay the RCM tax in cash first, as eligibility for ITC arises after the payment is made.

Importance of Understanding RCM

Understanding and correctly applying the Reverse Charge Mechanism under GST is crucial for several reasons:

• Compliance: Failure to identify and pay tax under RCM can lead to interest, penalties, and non-allowance of ITC.  
• ITC Availability: Correctly paying RCM tax ensures that the recipient is eligible to claim the corresponding ITC, reducing the overall tax burden.  
• Avoiding Double Taxation: RCM prevents situations where tax might not be paid by an unregistered or difficult-to-tax supplier, ensuring the supply is taxed in the hands of the recipient.  

Conclusion

The Reverse Charge Mechanism (RCM) under GST is a significant departure from the standard taxation rule. It places the tax liability on the recipient for specific categories of goods and services, including certain supplies from unregistered persons (under limited scope) and import of services. Businesses, especially those dealing with suppliers or services covered under the RCM list, must have a robust system in place to identify such transactions, calculate and pay the tax correctly, and comply with the relevant reporting requirements in GST returns to avoid penalties and ensure the smooth flow of Input Tax Credit. Staying updated with the latest notifications regarding additions or changes to the goods and services under RCM is essential for compliance.