Reverse charge mechanism (RCM) shifts the burden of paying GST from the supplier to the recipient. This unusual provision helps widen the tax net and ensures compliance from unorganized or unregistered suppliers. Let’s see how RCM works in India, when it applies, and what businesses must do to stay compliant.
What is Reverse Charge Mechanism (RCM)?
Under the reverse charge mechanism, the recipient of goods or services becomes liable to pay the GST directly to the government — not the supplier. Normally, suppliers collect GST and remit it. However, in RCM, that obligation reverses. Both goods and services may attract reverse charge.
In legal terms, RCM is governed by sub-sections (3) and (4) of Section 9 of the Central Goods and Services Tax Act (CGST Act) and corresponding sections of the Integrated Goods and Services Tax Act (IGST Act) for inter-state supplies.
When Does Reverse Charge Apply:
RCM applies mainly in two scenarios:
- When supplies come from an unregistered supplier to a registered recipient.
- When supply involves goods or services specifically notified by the government under RCM.
For example, agricultural goods such as unshelled cashew nuts sold by a farmer (unregistered) to a GST-registered buyer come under RCM. Similarly, certain services — like legal services, transportation services, or other notified services — may also attract RCM liability for the recipient.
However, general retail purchases (e.g., ready-made garments, electronics) from unregistered sellers typically do not attract RCM unless explicitly notified
Key Implications for Businesses:
If you are liable under RCM, you must register under GST even if your aggregate turnover is below the usual threshold (₹20 lakh in most states). That is because RCM imposes tax liability directly on the recipient. Also, when you pay GST under RCM, you may claim Input Tax Credit (ITC), subject to standard ITC rules.
However, suppliers under RCM cannot charge GST in their invoice. Moreover, the “time of supply” rules change: for goods supplied under RCM, the time of supply is the earlier of (a) receipt of goods, or (b) payment or debit in bank books.
Why RCM Matters — Benefits & Challenges
RCM helps the government widen GST coverage — especially into unorganized sectors and small suppliers. This reduces tax evasion and improves compliance transparency. For buyers — businesses that receive supplies — RCM simplifies compliance when dealing with smaller or unregistered vendors.
However, many businesses view RCM as cumbersome. For example, soon after GST rollout, some trade bodies urged the government to scrap RCM, citing compliance burden on small dealers. Because of these challenges, some RCM provisions were deferred in early GST days.
Conclusion:
Reverse charge mechanism in India offers a way to widen tax compliance and trim informal economy leakages. For businesses — especially manufacturers, importers of services, and buyers from unregistered vendors — understanding RCM is essential. Explore more GST and tax-compliance insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Reverse charge mechanism here – https://www.bajajfinserv.in/rcm-in-gst