Tax, GST and company law glossary

Reverse Charge Mechanism (RCM)

A rule under which the buyer, not the supplier, pays GST on certain supplies.

In short

Common cases are legal services from advocates, goods transport agencies, directors' services to a company and commercial rent paid to an unregistered landlord.

What it means

Normally the supplier collects GST from the buyer and pays it to the government. Under the reverse charge mechanism (RCM), the buyer pays the GST directly to the government instead. It applies to specific notified supplies under section 9(3) of the CGST Act, and in some cases to purchases from unregistered persons under section 9(4).

How it works

Common RCM cases for a registered business:

  • Legal services from an individual advocate or law firm.

  • Goods transport agency (GTA) services, where the GTA has not opted to pay tax itself.

  • Services of a director to the company (sitting fees, remuneration not under employment).

  • Sponsorship services, and security services from a non-corporate supplier.

  • Renting of commercial property by an unregistered person to a registered person (other than composition taxpayers).

  • Import of services.

The buyer must:

  • Issue a self-invoice within 30 days of receiving the service, if the supplier is unregistered.

  • Pay the RCM tax in cash through GSTR-3B. It cannot be paid using input tax credit.

  • Then claim ITC of the same amount, if otherwise eligible, in the same return.

Example

A registered private company in Pune, in one month:

  1. Pays office rent of ₹1,00,000 to an unregistered landlord. RCM at 18%: ₹18,000 (CGST ₹9,000 plus SGST ₹9,000).

  2. Pays an advocate ₹50,000 for legal advice. RCM at 18%: ₹9,000.

  3. Pays a GTA ₹20,000 freight under the 5% option. RCM: ₹1,000.

  4. Total RCM payable in cash: ₹18,000 + ₹9,000 + ₹1,000 = ₹28,000.

  5. The company claims ITC of ₹28,000 in the same GSTR-3B, which it uses against its output tax. Net cash cost is nil, but the cash must be paid first.

Key points to remember

  • RCM is often missed on rent, legal fees and director remuneration, and shows up in GST audits with interest at 18%.

  • Do not pay RCM liability using ITC; it must be paid in cash.

  • Report RCM purchases in the correct table of GSTR-3B so the credit is matched.

  • Even small amounts are covered; there is no general threshold for notified RCM services.

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