Glossary
What is reverse charge mechanism (RCM)?
When the buyer, not the seller, pays the GST on a purchase.
Updated
In short
Under the reverse charge mechanism, the buyer pays GST on certain purchases directly to the government instead of the supplier. SimpleERP has no reverse charge flag on bills; your accountant records the RCM tax with a journal entry.
The reverse charge mechanism is a GST rule under which the buyer, not the supplier, pays the tax on certain notified supplies, such as legal services from an advocate, goods transport by a transport agency in some cases, security services and some rentals from unregistered landlords. The buyer pays this tax in cash through GSTR-3B and can then usually claim it back as input tax credit.
Reverse charge mechanism (RCM): a worked example
Lakshmi Steel Furnitures pays an advocate ₹20,000 for drafting a dealer agreement. Legal services from an advocate to a business are under reverse charge, so the advocate bills ₹20,000 with no GST and Lakshmi Steel pays ₹3,600 at 18% to the government in cash. It then claims the ₹3,600 as input tax credit, so the net cost is nil if the credit is eligible. Rates change, so confirm the rate for your goods with your CA or the GST portal before you rely on it.
| Step | Amount |
|---|---|
| Advocate's bill, no GST | ₹20,000 |
| RCM tax paid in cash, CGST + SGST | ₹1,800 + ₹1,800 |
| Input tax credit claimed | ₹3,600 |
Can reverse charge tax be paid from input tax credit?
No. Tax under reverse charge must be paid in cash through the electronic cash ledger, even if you hold unused credit. Once paid, it becomes credit you can use in the same or a later return, so the cost is usually timing, not money.
FAQ
Questions, answered
Do I need to issue an invoice for a reverse charge purchase?
If the supplier is unregistered, yes: you issue a self-invoice for the purchase and a payment voucher when you pay. If the supplier is registered, they issue the invoice marked as reverse charge, and you keep it for your credit.
Does rent paid to an unregistered landlord come under RCM?
Since October 2024, renting of commercial property by an unregistered person to a registered business has been under reverse charge, with some later relief for composition dealers. Rules in this area change, so confirm with your CA before you pay.
When is RCM tax due?
Generally on the earlier of the date you pay the supplier or a set number of days after their invoice. You report and pay it in the GSTR-3B for that month, and claim the credit in the same return if eligible.
Can a composition dealer pay tax under reverse charge?
A composition dealer does pay tax under reverse charge. It must pay reverse charge tax at the normal rate on notified purchases, in addition to its composition tax, and cannot claim it back as credit. That makes RCM purchases a real cost for composition businesses.
Related
Keep reading
Input tax credit (ITC)
The GST paid on purchases that a business sets off against the GST it collects on sales.
Read moreGSTR-3B
The summary GST return where you declare sales, claim credit and pay the net tax.
Read moreAccounting
A double-entry ledger with journals, bank registers, statements and a lock date.
Read more
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