Reverse charge mechanism (RCM) under GST: meaning and examples
Under the reverse charge mechanism, the recipient of goods or services pays GST instead of the supplier, for notified supplies and imports of services.
Short answer
The reverse charge mechanism (RCM) is a GST rule under which the recipient of a supply, rather than the supplier, is liable to pay the tax to the government. It applies to supplies notified under section 9(3) of the CGST Act, to certain supplies from unregistered persons under section 9(4), and to imports of services.
- Governed by
- Sections 9(3) and 9(4), CGST Act; section 5(3), IGST Act
- Payment
- Through the electronic cash ledger, not ITC
- Credit
- Recipient can claim ITC if used for business
- Registration
- Compulsory for persons liable under RCM
Common supplies under reverse charge
The government notifies the goods and services covered by RCM. The ones startups encounter most often are listed below, and the list is updated from time to time, so check current notifications before applying it.
- Legal services by an advocate or firm of advocates to a business entity
- Services of a director to the company
- Goods transport agency services, where the GTA has not opted to pay tax itself
- Sponsorship services to a body corporate or firm
- Renting of residential dwelling to a registered person
- Renting of commercial property by an unregistered person to a registered person
- Import of services from outside India
How RCM works in practice
The recipient determines the time of supply, pays the GST in cash through GSTR-3B, and reports the inward supply in the return. Where the supplier is unregistered, the recipient issues a self-invoice and a payment voucher. Once the tax is paid, the recipient can claim input tax credit on it in the same return, if the supply is used for business and credit is not blocked, so RCM is often cash-flow neutral but not paperwork neutral.
Why it matters for startups
Many startups miss RCM on legal fees, director remuneration and software subscriptions or services bought from foreign providers. These liabilities surface during GST audits and due diligence, with interest. Build an RCM check into your monthly accounts closing, and remember that a business liable to pay tax under RCM must register even if its own turnover is below the threshold.
Related services
Sources
- CBIC GST: Acts, rules and notifications
- GST Portal (GSTN)
- TaxGuru: 25 major tax, GST and company law reforms of 2025
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Can I pay RCM liability using input tax credit?
No. Tax under reverse charge must be paid in cash through the electronic cash ledger.
Is GST payable under RCM on foreign software subscriptions?
Import of services by a registered business is generally taxable under reverse charge, so GST is payable by the Indian recipient.
Can I claim ITC on GST paid under RCM?
Yes, if the supply is used for business and the credit is not blocked, you can claim it in the same return.