Reverse Charge Mechanism (RCM) under GST [Updated July 2025]
Introduction
The Goods and Services Tax (GST) in India is a multi-stage, destination-based tax that aims to unify the country’s indirect tax system. One important provision under GST is the Reverse Charge Mechanism (RCM), which shifts the tax liability from the supplier to the recipient under certain conditions. This helps in plugging revenue leakages and ensuring tax compliance, especially when dealing with unregistered or overseas suppliers.
What is Reverse Charge Mechanism (RCM)?
Under RCM, the recipient of goods or services is liable to pay the applicable GST directly to the government instead of the supplier. This applies when the supplier is unregistered or when the law specifically notifies certain services or goods under RCM. For example, if a registered business avails legal services from an advocate, the business has to pay GST under RCM.
Who is Liable to Pay Tax under RCM?
The following persons are liable to pay GST under RCM:
- Registered businesses receiving notified goods/services
- Importers of services from outside India
- Businesses dealing with unregistered suppliers (for certain categories)
Goods and Services Covered under RCM (2025 Updated List)
| Service/Goods | Supplier | Recipient Liable | GST Rate |
|---|---|---|---|
| Goods Transport Agency (GTA) | Transporter | Registered business | 5% / 12% |
| Legal services | Advocate/law firm | Business entity | 18% |
| Director’s services | Company director | Company | 18% |
| Import of Services | Overseas supplier | Importer in India | 18% |
| Renting by government | Central/State Govt. | Business entity | 18% |
| Arbitral Tribunal services | Tribunal | Business entity | 18% |
| Security services | Non-body corporate | Body corporate | 18% |
Steps to Pay GST under RCM
- Identify transactions covered under RCM.
- Calculate GST on the taxable value using applicable rate.
- Generate a self-invoice (if supplier hasn’t issued a tax invoice).
- Pay GST using form PMT-06 through the GST portal (cash ledger only).
- Report the RCM tax in GSTR-3B (under Table 3.1(d)) and claim ITC (if eligible).
Input Tax Credit (ITC) on RCM
Businesses can claim ITC on GST paid under RCM, provided:
- They are registered under GST
- Tax is paid in cash via PMT-06
- The goods/services are used for business
- Invoice and payment voucher are available
Common Challenges in RCM Compliance
- Misunderstanding of applicability
- Errors in return filing (GSTR-3B)
- Lack of self-invoicing or supporting documentation
- Cash flow management issues
- Delayed payment resulting in interest and penalties
Recent Amendments (2024–25)
- Mandatory self-invoice and payment voucher for all RCM supplies
- Updated list of services under RCM (including gig platforms)
- Increased threshold for small suppliers (₹25 lakh in certain states)
- Clarification: Director’s remuneration is not taxable if in salary form
- e-Invoicing optional for RCM (except B2B above ₹5 Cr)
Real-life Case Studies
1. Construction Sector
A construction firm hired sub-contractors for civil work. As per GST rules, the main contractor is liable to pay GST under RCM for services received from an unregistered sub-contractor. The firm generated self-invoices, paid taxes under PMT-06, and availed ITC in GSTR-3B.
2. Tech Startup
An IT startup subscribed to a foreign SaaS service for project management. Since it was an import of service, the startup paid GST under RCM and claimed ITC in the next filing cycle.
3. Retail Handicraft Seller
A registered trader bought handmade goods from unregistered artisans. GST was paid by the trader under RCM and recorded accordingly.
Recordkeeping and Documentation
Under RCM, the following records must be maintained:
- Self-invoice (if supplier is unregistered)
- Payment voucher (proof of consideration)
- PMT-06 challan copy
- RCM reporting in GSTR-1 and 3B
- ITC ledger (if credit is claimed)
Tools for RCM Compliance
- GST Portal (for payments & return filing)
- Accounting software like Tally, Zoho Books, Marg ERP
- Excel/Google Sheets trackers for small businesses
- Reconciliation apps with GSTR-2A/2B
RCM Compliance Checklist
- ✔ Identify RCM applicable transactions
- ✔ Generate self-invoice & payment voucher
- ✔ Pay via PMT-06 (cash only)
- ✔ Report in GSTR-3B & GSTR-1
- ✔ Claim ITC if eligible
- ✔ Maintain records for 6 years
FAQs on Reverse Charge Mechanism
Q1. Can I use ITC to pay RCM liability?
No. RCM must be paid in cash via the electronic cash ledger.
Q2. Can I claim ITC on RCM?
Yes, you can claim full ITC in the next month after payment if used for business.
Q3. Do I need to file a separate return for RCM?
No, RCM is reported in GSTR-3B under Table 3.1(d).
Q4. What if I forget to pay RCM?
Interest @ 18% per annum and penalty may apply. Pay via DRC-03 if missed.
Q5. Are imports covered under RCM?
Yes. All imports of services are taxed under RCM.
Conclusion and Outlook (2025–2026)
The Reverse Charge Mechanism is vital for GST compliance, especially in an evolving digital and gig economy. With greater automation, AI integration, and e-invoicing, managing RCM will become easier but stricter. Businesses must keep themselves updated, ensure timely filings, and maintain solid records. A proactive approach to RCM compliance will not only reduce legal risks but also contribute to a clean, transparent tax ecosystem in India.
