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What is Reverse Charge Mechanism (RCM)?
Under normal GST, supplier collects GST from recipient and pays to government. Under RCM (Section 9(3) of CGST Act), the recipient pays GST directly to government — bypassing the supplier.
RCM applies to notified categories where the supplier is typically unregistered, small, or hard to track. The recipient (usually a registered business) pays GST and claims it back as ITC in the same return.
RCM is mandatory for notified categories — there is no option to opt out.
Major RCM categories (notified)
1. Goods Transport Agency (GTA) — 5% (no ITC for GTA) or 12% (with ITC for GTA). Applicable when recipient is a registered business.
2. Legal Services — When provided by an advocate or law firm to a business entity. GST: 18%.
3. Director Services — Services by director (e.g., sitting fees, professional fees other than salary) to the company are taxable under RCM at 18%.
4. Rent — Renting of motor vehicle (without operator) and renting of residential property to a registered business — RCM applies.
5. Services by Government — Most services by Central Govt, State Govt, local authority to a business — RCM at applicable rate.
6. Sponsorship Services — Provided to any body corporate or partnership firm.
7. Insurance Agent — Services by insurance agent to insurance company.
8. Cab Aggregator — Services by drivers through Ola/Uber to passengers.
RCM compliance steps
- Identify RCM applicability — Check if service falls under notified list
- Self-invoicing — Issue self-invoice (raised in your own name) for inward supply under RCM
- Calculate GST — Apply correct GST rate
- Report in GSTR-3B — Inward supplies under RCM (Table 3.1(d))
- Pay GST in cash — Tax under RCM must be paid in cash (cannot use ITC)
- Claim ITC — In the same GSTR-3B, claim the GST paid as ITC (Table 4(A)(3))
- Net effect — In most cases, cash outflow and ITC neutralise; no extra tax burden
Common RCM mistakes
- Missing director payments — Sitting fees and professional fees paid to directors are under RCM; companies often forget
- GTA confusion — Goods transported through registered GTAs are under RCM; through unregistered transporters too. Check carefully.
- Not paying in cash — RCM tax must be paid via cash ledger. Using ITC for payment is not allowed.
- Missing self-invoice — Self-invoice is mandatory for RCM inward supplies (Section 31(3)(f))
- Skipping in 3B but claiming ITC — Cannot claim ITC for RCM tax without first paying it in cash
Section 9(4) — RCM on URD supplies
Section 9(4) once provided RCM on all purchases from unregistered dealers (URD), but this was largely suspended.
Current position:
- Section 9(4) is mostly suspended for general URD purchases
- It applies only to specific categories notified by government
- Currently applies for: cement (by builders/promoters), real estate sector specific notifications
For most regular businesses, day-to-day URD purchases (e.g., from small unregistered vendors below ₹40 lakh threshold) don't attract RCM.