The Reverse Charge Mechanism (RCM) in GST is a system where the liability to pay tax shifts from the seller to the buyer. Normally, suppliers collect GST from customers and deposit it with the government. However, under RCM, the recipient of goods or services becomes responsible for paying the tax directly.
This system ensures better tax compliance and helps track transactions in specific sectors. Every taxpayer must understand to avoid penalties and compliance issues.
When Does RCM Apply in GST?
The law specifies certain cases where Reverse Charge Mechanism (RCM) in GST is mandatory. These include:
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Supply of goods like cashew nuts, tobacco leaves, silk yarn, etc.
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Services provided by advocates, arbitral tribunals, or transport agencies.
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Import of services from outside India.
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Purchases from unregistered dealers (in some cases).
👉 In short, RCM applies when the government wants the tax burden to fall on the recipient instead of the supplier.
Example of RCM in GST
Let’s understand what is Reverse Charge Mechanism (RCM) in GST with an example:
| Transaction | Supplier | Recipient | Who Pays GST? |
|---|---|---|---|
| Legal services | Lawyer (unregistered) | Business entity | Recipient under RCM |
| Transport services | GTA (Goods Transport Agency) | Manufacturer | Recipient under RCM |
| Import of services | Foreign company | Indian company | Indian company under RCM |
Here, the buyer pays GST directly under RCM instead of the supplier charging it.
Compliance for RCM
Businesses covered under Reverse Charge Mechanism (RCM) in GST must:
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Self-invoice for purchases from unregistered suppliers.
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Pay GST in cash (Input Tax Credit cannot be used).
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Claim Input Tax Credit (ITC) later, if eligible.
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Report transactions in GST returns (GSTR-3B, GSTR-1).
Thus, RCM creates an additional responsibility for businesses but ensures tax is collected efficiently.
Benefits of RCM
While it may feel like an extra burden, Reverse Charge Mechanism (RCM) in GST has benefits:
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Brings unorganized sectors into the tax net.
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Ensures government collects tax even from unregistered suppliers.
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Increases transparency in cross-border transactions.
Conclusion
Understanding what is Reverse Charge Mechanism (RCM) in GST is important for every business. It shifts tax liability from supplier to buyer, applies in specific transactions, and requires strict compliance. Businesses must maintain accurate records and pay GST on time to avoid penalties.
👉 Need help with RCM compliance? Contact HelpTax.in for expert guidance.