GST

Reverse Charge Mechanism (RCM) in the New GST Regime

by TaxAcumen Team

The introduction of the Goods and Services Tax (GST) system is among the biggest changes to the tax governance in India in recent years. Under the GST, many indirect taxes that were levied by the union and state government have been merged into one simple system. The most significant change in the GST system is the Reverse Charge Mechanism (RCM), which is intended to simplify the tax system. RCM allows the liability to pay the GST effectively to be shifted from the supplier to the recipient of the goods or services. RCM was first introduced in the Central Goods and Services Tax (CGST) Act of 2017 and continues to develop in the GST system, which has enhanced the financial structure of the country and reduced tax fraud and evasion of taxes.

Concept of RCM

Under the regular system (forward charge mechanism), the supplier collects GST from the buyer and deposits it with the government. Under RCM, this arrangement reverses — the buyer or recipient is responsible for paying the applicable tax directly to the government.

This mechanism generally applies in three cases:

  1. Specified goods and services, as notified by the government under Section 9(3) of the CGST Act.
  2. Purchases from unregistered suppliers, covered under Section 9(4) of the CGST Act.
  3. Imports of services into India, governed by Section 5(3) of the Integrated GST (IGST) Act.

Once the recipient has paid the applicable tax, they can later claim Input Tax Credit (ITC), subject to conditions.

Objectives of the RCM

The main aim of RCM is not just compliance but also ensuring fair tax distribution across industries. It plays a key role in:

  • Taxing informal sectors: RCM brings small-scale and unregistered suppliers into the tax fold indirectly, improving revenue coverage.
  • Ensuring tax on imports: It allows India to collect GST efficiently when services are sourced from foreign entities not registered under Indian laws.
  • Encouraging accountability: Transferring liability to registered recipients makes audits and record-keeping more reliable.
  • Preventing evasion: It helps plug tax leakages that may occur when unorganised or small businesses operate outside the GST system.

Legal Framework

  1. Section 9(3) – Notified Goods and Services: The central government notifies certain goods and services where tax must be paid under RCM. These commonly include:
    1. Legal services by advocates or law firms
    1. Sponsorship services
    1. Transportation by goods transport agencies (GTAs)
    1. Security services provided by non-corporate suppliers
    1. Payment of director’s fees or similar remuneration
    1. Government services supplied to business entities, except exempted ones
  2. Section 9(4) – Purchases from Unregistered Suppliers: This applies when a registered person procures goods or services from an unregistered vendor. Currently, this provision is limited in scope, primarily applying to specific real estate transactions such as shortfall purchases by promoters from unregistered suppliers.
  3. Section 5(3) of the IGST Act: This section covers imports of services, where the Indian recipient bears the liability for paying IGST on the value of services imported from overseas.

RCM Applicability and Recent Updates

The scope of RCM has widened through GST Council decisions, especially during 2024–2025. Key updates include:

  • Imports of online services: Tax coverage now extends to cross-border digital content, cloud computing, and software licensing.
  • Renting of commercial properties: The 54th GST Council Meeting (September 2025) recommended RCM applicability to unregistered suppliers renting commercial units to registered recipients.
  • E-commerce operators: Under Section 9(5), platforms like food delivery apps, cab booking services, and online accommodation portals must pay GST on services provided through them by unregistered providers.

Businesses paying tax under RCM must issue a self-invoice and a payment voucher for every such transaction to ensure proper accounting and audit trails.

Documentation and Compliance Requirements

Compliance under RCM requires businesses to maintain proper documentation and adhere to timelines. Key obligations include:

  1. Issuing self-invoices for supplies from unregistered vendors.
  2. Creating payment vouchers while releasing payments under RCM.
  3. Reporting RCM liabilities and ITC claims in GSTR-1 and GSTR-3B returns.
  4. Ensuring RCM taxes are paid through the cash ledger, as ITC cannot be used for payment of RCM liability.
  5. Retaining records such as tax calculation proofs, service contracts, and transaction details for audit.

All documents must follow the specifications in Rule 46 (for invoices) and Rule 52 (for payment vouchers) of the CGST Rules, 2017.

Conclusion

One of the main components of India’s modern GST framework is the Reverse Charge Mechanism. It encourages fairness and compliance while guaranteeing taxes are collected even from suppliers or industries not included in the official tax chain. Although RCM gives registered businesses more administrative responsibilities, it also improves transparency, expands the tax base, and promotes financial stability. Businesses must remain updated on the latest regulations, keep correct records, and coordinate their internal accounting systems in order to be compliant with the ongoing changes under the new GST regime.