Reverse Charge Mechanism (RCM) is a system under India’s Goods and Services Tax (GST) where the responsibility to pay tax shifts from the seller to the buyer or recipient of goods or services. Normally, the supplier collects GST from the buyer and deposits it with the government. However, under RCM, it becomes the buyer’s duty to pay the applicable GST directly to the government.
RCM is applicable in two main scenarios:
- When a business purchases certain notified goods or services (like legal services or transport services).
- When a registered business takes services or goods from an unregistered supplier.
This mechanism ensures that the government collects tax even in situations where the supplier is not in a position to do so—like in case of unregistered vendors. It helps bring more transactions into the formal economy and strengthens tax compliance.
For small businesses and new entrepreneurs, understanding RCM is crucial for staying compliant with GST laws. It affects how you file your GST returns (like GSTR-3B and GSTR-1) and how you manage Input Tax Credit (ITC). If you're liable to pay GST under RCM, you must self-invoice the transaction, pay the tax, and then claim ITC (if eligible), provided you’re not under the Composition Scheme.
Failing to follow RCM rules can lead to penalties and disrupt your GST filings, so it's important to identify whether any of your purchases fall under RCM.
For a detailed breakdown of how RCM affects your business and guidance on GST compliance, visit FinTax24’s GST Solutions.
Understanding RCM is a key step toward building a tax-compliant and financially sound business.