GST Reverse Charge Mechanism: How TaxBuddy Helps You Identify RCM Liabilities
- Dipali Waghmode
- Jan 11
- 10 min read
Updated: 7 days ago
The GST Reverse Charge Mechanism shifts the responsibility of paying GST from the supplier to the recipient for specific goods, services, and transactions notified under the law. This mechanism is designed to ensure tax compliance in sectors where supplier-side enforcement is difficult, including unregistered vendors, legal services, transport services, and certain e-commerce transactions. Incorrect identification or delayed payment of RCM liabilities during GST filing can lead to interest, penalties, and blocked input tax credit. Understanding when RCM applies and how to comply has become critical for businesses, especially after the 2025 compliance updates and stricter verification systems.
Table of Contents
What Is Reverse Charge Mechanism Under GST
The Reverse Charge Mechanism (RCM) under GST shifts the responsibility of paying tax from the supplier to the recipient of goods or services. Instead of the seller charging and depositing GST, the buyer pays GST directly to the government. This mechanism is primarily used to bring tax compliance into sectors where suppliers may be unregistered, fragmented, or difficult to regulate. Under RCM, the recipient must assess tax liability, pay GST in cash, and then claim eligible input tax credit, subject to conditions.
When Does Reverse Charge Mechanism Apply Under GST
RCM applies in three broad situations defined under the GST law. The first is when the government notifies specific goods or services under Section 9(3) of the CGST Act. The second applies to certain purchases from unregistered suppliers under Section 9(4), but only for notified categories. The third applies to specific services where the liability is placed on e-commerce operators under Section 9(5). Businesses must evaluate each transaction carefully to determine whether RCM applies.
Goods Covered Under GST Reverse Charge Mechanism
Certain goods are notified under RCM when supplied by specific categories of suppliers. Common examples include cashew nuts supplied by agriculturists, raw cotton supplied by farmers, and metal scrap supplied by unregistered persons. Other notified goods include tendu leaves, tobacco leaves, silk yarn, and used vehicles supplied by government or local authorities. The liability to pay GST in these cases rests with the registered recipient.
Services Covered Under Reverse Charge Mechanism
RCM applies to several commonly used services. These include Goods Transport Agency services, legal services provided by advocates or law firms, director services to companies, insurance agent services, recovery agent services to banks and NBFCs, and security services provided by non-corporate entities. Import of services from outside India is also covered under RCM, making the Indian recipient liable to pay IGST.
Reverse Charge Mechanism for E-Commerce Operators
Under GST, certain services supplied through e-commerce platforms attract RCM, where the platform operator is liable to pay tax instead of the service provider. These include passenger transportation services such as taxi rides, accommodation services, housekeeping services, and restaurant services when supplied by unregistered vendors. This provision ensures tax compliance in the digital and gig economy.
GST Rates Applicable on RCM Transactions
The GST rate applicable under RCM depends on the nature of goods or services. For example, GTA services may attract 5 per cent or 12 percent, depending on ITC conditions, legal services attract 18 percent, and scrap transactions can range from 5 percent to 18 percent based on material type. The applicable rate remains the same as under the forward charge unless specifically notified otherwise.
Time of Supply Rules Under Reverse Charge Mechanism
Time of supply under RCM determines when tax becomes payable. For goods, it is the earliest of the date of receipt of goods, date of payment, or 30 days from the invoice date. For services, it is the earliest of the date of payment or 60 days from the invoice date. If none of these can be determined, the date of entry in the books of accounts is considered.
Input Tax Credit Rules for GST Paid Under RCM
GST paid under RCM is eligible for input tax credit if the goods or services are used for business purposes and not blocked under ITC restrictions. However, ITC can be claimed only after the tax has been paid in cash. The credit cannot be used to offset the RCM liability itself and must be reflected correctly in GST returns.
Mandatory GST Registration and Documentation for RCM
Any person liable to pay tax under RCM must register under GST, irrespective of turnover thresholds. Proper documentation is essential, including self-invoices for purchases from unregistered suppliers, payment vouchers, and proof of tax payment. These documents are critical during audits and assessments.
GST Return Reporting for Reverse Charge Mechanism
RCM liabilities must be reported in GSTR-3B under Table 3.1(d). Eligible input tax credit on RCM payments is reported in Table 4. Businesses must ensure accurate reporting to avoid mismatches and denial of ITC. RCM transactions are also reflected in internal reconciliations and compliance reviews.
Key GST Reverse Charge Updates Applicable in 2025
Recent updates include expanded RCM coverage for digital and gig economy services, mandatory registration for scrap dealers, revised GST rates for select goods, and tighter e-invoicing thresholds. Authorities have also introduced automated data verification to identify unreported RCM liabilities, increasing the importance of accurate compliance.
How TaxBuddy Helps Identify and Manage RCM Liabilities
TaxBuddy assists businesses by reviewing transaction data, identifying RCM-applicable invoices, and flagging liabilities before return filing. The platform supports self-invoicing, correct cash payment computation, and accurate return reporting. With built-in compliance checks and expert guidance, businesses can manage RCM obligations efficiently and reduce the risk of notices or penalties.
Common Mistakes Businesses Make Under Reverse Charge Mechanism
Common errors include missing RCM applicability on imported services, incorrect GST rate application, claiming ITC before tax payment, failure to issue self-invoices, and incorrect return reporting. These mistakes often result in interest, penalties, and blocked credits during assessments.
Compliance Checklist for GST Reverse Charge Mechanism
Compliance under the GST Reverse Charge Mechanism requires a structured and transaction-level approach, as the responsibility of tax payment and reporting shifts entirely to the recipient. The following checklist explains each step in detail to help businesses maintain accuracy and avoid penalties.
The first step is to verify whether the goods or services received fall under the Reverse Charge Mechanism. This involves checking the latest list of notified goods and services issued under GST provisions. Businesses should review vendor invoices, contracts, and nature of supply to determine whether RCM applies under Section 9(3), Section 9(4), or Section 9(5). Periodic review is important because the list of notified items and services is updated from time to time.
The next step is to confirm the supplier’s registration status under GST. RCM applicability often depends on whether the supplier is registered or unregistered. Businesses should verify the supplier’s GSTIN through the GST portal and maintain records of registration status at the time of the transaction. Any change in supplier status during the year should also be tracked to ensure correct tax treatment.
Where supplies are received from unregistered suppliers and fall under notified categories, businesses must issue self-invoices. The self-invoice should contain all mandatory details such as description of goods or services, taxable value, applicable GST rate, and tax amount. In addition, a payment voucher must be issued at the time of making payment to the supplier. These documents serve as primary evidence during audits and assessments.
GST payable under the Reverse Charge Mechanism must be paid in cash through the electronic cash ledger. Input tax credit cannot be used to discharge RCM liability. Businesses should ensure that the tax is paid within the prescribed due dates based on the correct time of supply. Delays in payment result in interest and may lead to compliance notices.
Input tax credit on GST paid under RCM can be claimed only after the tax has been paid. Businesses must verify that the goods or services are used for business purposes and are not restricted under blocked credit provisions. The credit should be claimed in the appropriate return period and supported by proper documentation, including proof of tax payment and self-invoices where applicable.
Accurate reporting of RCM liabilities in GST returns is a critical compliance requirement. RCM tax liability must be disclosed under the reverse charge section of, and eligible input tax credit must be reported separately. Errors in reporting, such as omission of RCM liability or incorrect ITC claims, are commonly flagged during automated scrutiny.
Regular reconciliation plays a key role in maintaining ongoing compliance. Businesses should periodically reconcile purchase registers, expense ledgers, GST returns, and bank payments to identify any missed RCM transactions. This reconciliation helps detect errors early and allows timely corrections through subsequent returns.
Finally, proper documentation and record retention should be maintained for all RCM-related transactions. Contracts, invoices, self-invoices, payment vouchers, tax payment challans, and return filings should be organised and preserved as per statutory timelines. A disciplined documentation process ensures smoother audits, reduces litigation risk, and supports long-term GST compliance.
Conclusion
Reverse Charge Mechanism compliance requires careful identification of applicable transactions, timely tax payment, accurate reporting, and disciplined documentation. With expanded RCM coverage and stricter enforcement, structured compliance support becomes essential. For businesses looking for help in managing GST obligations and reverse charge liabilities, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted plans to suit different taxpayer needs. The self-filing option is designed for income sources, GST-linked income, capital gains, or notices. The expert-assisted plan provides access to qualified tax professionals who handle filing, review documents, and ensure compliance. This flexibility allows users to choose support based on complexity rather than forcing a single approach.
Q. Which is the best site to file ITR?
The best site to file an income tax return depends on accuracy, ease of use, and post-filing support. While the official income tax e-filing portal is the primary government platform, many taxpayers prefer platforms that provide guided filing, error detection, tax calculation clarity, and assistance in case of notices or revisions. Platforms like TaxBuddy combine compliance accuracy with usability, making them suitable for taxpayers who want a structured and error-minimised filing experience.
Q. Where to file an income tax return?
Income tax returns can be filed directly on the government’s income tax e-filing portal or through authorised tax-filing platforms. Filing through an assisted platform is particularly useful when returns involve GST data, advance tax calculations, deductions validation, or reconciliation with AIS and Form 26AS. These platforms help ensure correct reporting and reduce the risk of mismatches that may trigger notices.
Q. Is GST under Reverse Charge Mechanism payable using input tax credit?
GST payable under the Reverse Charge Mechanism must be paid entirely in cash through the electronic cash ledger. Input tax credit cannot be used to discharge RCM liability. This rule applies uniformly across all goods and services covered under RCM. Only after the tax has been paid in cash does the recipient become eligible to claim the corresponding input tax credit, subject to ITC conditions.
Q. Can input tax credit be claimed on GST paid under RCM?
Yes, input tax credit can be claimed on GST paid under RCM, provided the goods or services are used for business purposes and are not restricted under blocked credit provisions. The key condition is that the RCM tax must be paid first. Once paid, the ITC can be claimed in the same return or subsequent returns, depending on reporting timelines. Accurate documentation and return reporting are essential to avoid credit denial.
Q. Is GST registration mandatory only because of RCM liability?
GST registration becomes mandatory if a person is liable to pay tax under the Reverse Charge Mechanism, even if turnover is below the standard registration threshold. This provision ensures that recipients paying GST under RCM are brought within the compliance framework. Businesses that frequently receive notified RCM services or goods must assess this requirement carefully to avoid non-registration penalties.
Q. Which GST return captures Reverse Charge Mechanism liability?
RCM liability is reported in GSTR-3B under Table 3.1(d), which specifically captures inward supplies liable to reverse charge. Any eligible input tax credit related to RCM payments is reported in Table 4. Accurate reporting in these sections is critical, as mismatches or omissions are commonly flagged during automated GST scrutiny.
Q. Does Reverse Charge Mechanism apply to all purchases from unregistered suppliers?
No, RCM does not apply to all purchases from unregistered suppliers. It applies only to specific goods and services notified by the government. General purchases from unregistered suppliers are not automatically subject to RCM. Businesses must check whether the transaction falls under the notified categories before treating it as a reverse charge supply.
Q. What happens if Reverse Charge GST is not paid on time?
Failure to pay GST under RCM on time attracts interest and penalties under GST law. In addition, input tax credit related to such transactions may be blocked until the tax is paid and correctly reported. Persistent non-compliance can also lead to notices, audits, and increased scrutiny of future returns, making timely RCM payment essential.
Q. Are e-commerce operators responsible for GST under Reverse Charge Mechanism?
Yes, e-commerce operators are responsible for paying GST under RCM for certain notified services provided through their platforms. These include passenger transportation services, accommodation services, housekeeping services, and restaurant services supplied by unregistered vendors. In such cases, the operator is treated as the supplier for tax payment purposes, ensuring compliance within the digital economy.
Q. How is time of supply determined under Reverse Charge Mechanism?
Time of supply under RCM determines when GST becomes payable. For goods, it is generally the earliest of the date of receipt, date of payment, or 30 days from the invoice date. For services, it is the earliest of the date of payment or 60 days from the invoice date. If these cannot be determined, the date of entry in the books of accounts is considered. Correct determination of the time of supply is crucial for timely tax payment.
Q. Can TaxBuddy help track Reverse Charge Mechanism compliance?
TaxBuddy helps track RCM compliance by identifying transactions that attract reverse charge, guiding self-invoicing requirements, computing cash tax liability, and ensuring correct reporting in GST returns. The platform also assists with documentation checks and compliance reviews, helping businesses reduce errors, avoid penalties, and stay aligned with evolving GST rules.
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