Reverse Charge Mechanism Under GST: Services, Goods and Compliance

Under the normal GST mechanism, the supplier collects tax from the buyer and remits it to the government. Under Reverse Charge Mechanism (RCM), this liability is reversed — the recipient pays the tax directly to the government. This applies in situations where the supplier is not registered (or it is impractical to collect) or where the Government has specifically notified certain supplies.

Types of RCM

1. Mandatory RCM under Section 9(3) — Specified Supplies

Government-notified list of goods and services where RCM always applies (even if both parties are registered).

2. RCM on Imports of Services (Section 5(3) IGST Act)

Any import of service into India triggers IGST under reverse charge in the hands of the Indian recipient.

3. Section 9(4) — Notified Procurement from Unregistered Suppliers

Currently limited to notified goods (tobacco, cashew nuts in shell, raw cotton etc.) when procured from unregistered persons.

Key Services Under Mandatory RCM (Section 9(3) Notification)

Import of Services — IGST under RCM

• Any service received by an Indian registered person from an overseas supplier (regardless of registration status of overseas supplier)
• Rate: standard IGST rate for that service (18% for most business services)
• Time of supply: earlier of payment to overseas supplier or expiry of 60 days from date of invoice of overseas supplier
• Value: foreign exchange amount converted at RBI reference rate on date of supply
• ITC available if the service is for business purposes and not blocked under Section 17(5)

Compliance for RCM

1. Invoice: The recipient must issue a self-invoice (Section 31(3)(f)) for each RCM transaction
2. Payment: GST must be paid in cash (electronic cash ledger) — cannot use ITC balance
3. Return: RCM payments reported in GSTR-3B (Table 3.1(d)) and GSTR-2B auto-populated
4. ITC claim: ITC of RCM paid is available in the same tax period (reported in Table 4(A)(3) of GSTR-3B)

Practical Example — GTA RCM

XYZ Pvt. Ltd. (registered) hires a GTA to transport goods. Invoice from GTA: Rs.1,00,000 (no GST charged as per RCM). XYZ pays Rs.5,000 (5% IGST) as RCM to government. XYZ can claim Rs.5,000 as ITC immediately. Net GST cost = Nil.