GST Reverse Charge Mechanism (RCM): Complete Guide with Practical Examples

Understand what Reverse Charge Mechanism means, when RCM applies, who pays the GST, how to record RCM in accounting software, how to pay the tax, and how to claim the corresponding Input Tax Credit.

What is GST Reverse Charge Mechanism?

Under the normal GST mechanism, the supplier collects GST from the customer and deposits the tax with the Government.

Under the Reverse Charge Mechanism (RCM), the responsibility for paying GST shifts from the supplier to the recipient, where the law specifically provides for reverse charge.

RCM is not applicable merely because a supplier does not charge GST on an invoice. It applies only where the GST law specifically places the liability on the recipient, subject to the conditions applicable to the particular category of supply.

Why does GST have Reverse Charge?

RCM is primarily a mechanism used by the GST law to ensure tax collection on specified categories of transactions where it is considered more appropriate for the recipient to discharge the tax.

The recipient therefore needs to identify RCM transactions during its purchase and expense processing rather than relying only on the GST charged by suppliers.

Types of Reverse Charge

Broadly, RCM transactions can arise under provisions where the Government has specifically notified certain supplies, and in certain circumstances involving supplies from specified persons or categories.

1. RCM on notified supplies

The GST law and notifications specify categories of goods and services on which the recipient is required to pay GST under RCM.

2. RCM involving unregistered suppliers – where specifically applicable

The fact that a supplier is unregistered does not automatically mean that every purchase from that supplier attracts RCM. The transaction must fall within the applicable statutory provisions and notifications.

Common Examples of Services Covered by RCM

Some commonly encountered RCM categories include the following, subject to the conditions and notifications applicable to each category:

The above is an illustrative list, not an exhaustive list. RCM notifications and conditions should always be checked for the relevant period and transaction.

Example 1: Freight Invoice under RCM

Consider a business receiving freight transportation services from a Goods Transport Agency where the transaction is liable to RCM.

The important point is that the ₹750 RCM tax is not paid to the supplier. It is a GST liability of the recipient.

How to Account for an RCM Invoice

One of the most common accounting mistakes is to add RCM tax to the supplier's payable amount. That is generally incorrect where the supplier has not collected the tax and the recipient is responsible for paying it.

Step 1 – Record the supplier invoice

The supplier payable is ₹15,000. The ₹750 RCM tax is not credited to the supplier because it is payable by the recipient to the Government.

Step 2 – Record RCM liability and eligible ITC

In accounting software such as TallyPrime, this may be generated through the statutory GST/RCM adjustment functionality rather than through a manually created ordinary journal entry.

How is RCM Tax Paid?

RCM liability has to be discharged by the recipient in accordance with the GST payment mechanism. RCM liability cannot simply be set off against normal eligible ITC in the electronic credit ledger.

This is why a business should maintain a separate reconciliation between:

• RCM transactions recorded in the books;
• RCM liability reported in the GST return;
• RCM tax actually paid; and
• RCM ITC claimed.

How to Report RCM in GSTR-3B

RCM affects both the tax liability section and, where eligible, the Input Tax Credit section of GSTR-3B.

For the ₹15,000 freight example:

GST portal auto-population and reporting requirements can change. The taxpayer should verify the system-generated figures against its books and underlying RCM transactions before filing.

Example 2: Legal Services

A business receives legal services from an advocate for ₹50,000 and the transaction is covered by RCM.

*Illustration assumes an 18% rate solely for explaining the mechanism. The actual rate and applicability should be verified for the specific service and period.

The recipient separately accounts for the RCM liability and, if eligible, claims the corresponding ITC after satisfying the applicable requirements.

Example 3: Rent – Do Not Assume Every Rent Transaction is RCM

Rent is an area where businesses frequently make mistakes.

The first question should not be: “Is this rent? Therefore is it RCM?”

Instead, determine:

1. Who is the supplier?
2. Who is the recipient?
3. What type of property/service is involved?
4. Is the transaction specifically covered by an RCM notification?
5. What is the applicable rate and conditions?

Utility Charges, Electricity, Water and DG Charges

Another common area of confusion is when a landlord or facility operator raises a single invoice containing several components such as:

• Rent / licence fee;
• CAM / maintenance charges;
• Electricity charges;
• Water charges;
• DG charges;
• Demand charges; and
• Other facility-related charges.

The TDS treatment, GST treatment and accounting treatment should not automatically be assumed to be identical for every component.

The underlying agreement, nature of supply, invoice description, GST treatment and applicable tax provisions should be examined component-wise.

Example 4: Import of Services

Import of services can also result in GST liability under RCM for the Indian recipient, depending on the applicable provisions.

For example, suppose an Indian company receives professional consulting services from a foreign service provider for an equivalent value of ₹1,00,000.

The Indian recipient should examine:

• Whether the transaction qualifies as an import of service;
• Place of supply;
• Time of supply;
• Applicable GST rate;
• Whether RCM applies;
• Foreign remittance and withholding tax requirements; and
• Eligibility of the resulting ITC.

Import of services therefore requires coordination between GST, accounting, foreign remittance and income-tax/TDS compliance.

Can ITC be Claimed on RCM?

Yes, RCM tax paid by the recipient can generally become eligible for Input Tax Credit if the underlying inward supply is eligible and all applicable ITC conditions are satisfied.

The important point is that RCM liability and RCM ITC are two separate compliance events.

Therefore, a business should not assume that “₹10,000 RCM paid means ₹10,000 immediately available as ITC.” Eligibility must be tested separately.

10 Common RCM Mistakes

1. Assuming every invoice without GST is an RCM invoice.
2. Assuming every purchase from an unregistered person attracts RCM.
3. Paying RCM tax to the supplier instead of the Government.
4. Adding RCM GST to the supplier payable when the supplier has not charged it.
5. Using normal ITC to directly discharge RCM liability.
6. Claiming RCM ITC without checking eligibility.
7. Recording RCM purchases as normal GST purchases.
8. Failing to reconcile RCM liability between books and GSTR-3B.
9. Duplicating RCM ITC because both the purchase voucher and a manual journal were posted.
10. Not checking the latest notification/rate applicable to the specific RCM category.

Monthly RCM Compliance Checklist

RCM Accounting in TallyPrime – Practical Approach

Businesses using TallyPrime should configure the relevant expense/service ledger appropriately for RCM rather than treating the transaction as an ordinary GST purchase.

For a freight service of ₹15,000 taxable at 5% under RCM:

A properly configured accounting system should identify the RCM liability and corresponding ITC without requiring duplicate manual entries.

After posting the transaction, review the accounting software's RCM report and ensure that the amount shown as “Balance to be Booked” is nil after the relevant statutory adjustment.

RCM Reconciliation – A Good Control for Businesses

RCM should ideally be reconciled every month rather than only at the end of the financial year.

Key Takeaways

• RCM means the recipient pays GST instead of the supplier, where the law so provides.
• RCM does not apply merely because a supplier has not charged GST.
• The RCM tax should generally be treated separately from the supplier's invoice payable.
• RCM liability is reported separately in GSTR-3B.
• Eligible RCM ITC is separately reported in the ITC section of GSTR-3B.
• RCM liability must be discharged through the prescribed payment mechanism and should not simply be adjusted using normal electronic credit.
• Businesses should maintain a monthly RCM reconciliation between invoices, accounting records, GST liability, tax payment and ITC.

Simplify Your GST Compliance — Let Us Handle the Complexity

GST compliance doesn't have to be complicated. From identifying RCM transactions and reconciling Input Tax Credit to maintaining books, filing GST returns and keeping your records audit-ready, we can help you build a simple, systematic and reliable GST compliance process.

Need help simplifying your GST process? Talk to us.