Reverse Charge Mechanism (RCM) under GST – Meaning, Applicability & Compliance (2025 Guide)

The Reverse Charge Mechanism (RCM) is one of the most important provisions under the Goods and Services Tax (GST) in India. It shifts the responsibility of paying GST from the supplier to the recipient of goods or services. This mechanism is crucial for ensuring tax compliance in specific cases where the government wants to track transactions more effectively.

In this detailed guide, we will cover everything you need to know about RCM under GST – its meaning, applicability, examples, benefits, compliance requirements, and key points to remember in 2025.

What is Reverse Charge Mechanism (RCM)?

Under the normal GST process, the supplier of goods or services is responsible for collecting and depositing GST with the government. However, under Reverse Charge Mechanism, this liability gets shifted to the recipient (buyer) of goods or services.

This means that the recipient is required to:

Pay the applicable GST directly to the government.
Self-invoice if the supplier is unregistered.
Claim Input Tax Credit (ITC) on the tax paid (if eligible).

Applicability of Reverse Charge Mechanism

RCM is applicable in the following scenarios:

Specified Goods and Services
The government has notified certain goods and services where RCM applies irrespective of whether the supplier is registered or not.
Examples include supply of cashew nuts, tobacco leaves, legal services by advocates, services provided by a director to the company, and services by Goods Transport Agencies (GTA).
Unregistered Supplier to Registered Recipient
If a registered business procures goods or services from an unregistered supplier, it has to pay GST on reverse charge basis (except where exempted).
Import of Services
When services are imported from outside India, GST is payable under RCM by the recipient.

Key Examples of RCM Transactions

Here are some common examples where RCM applies:

Legal Services: Fees paid to an advocate or law firm by a business entity.
GTA Services: Transportation of goods by road (where the recipient is a registered person).
Director’s Remuneration: If the remuneration is not considered salary, GST under RCM applies.
Import of Services: Digital services, consulting, or technical services procured from outside India.

Benefits of Reverse Charge Mechanism

While it may seem like an additional compliance burden, RCM offers several advantages:

Brings Unregistered Suppliers into Tax Net – Helps government track transactions that would otherwise go untaxed.
Promotes Tax Compliance – Ensures that GST is paid on every eligible transaction.
Encourages Organized Trade – Registered recipients often prefer to deal with registered suppliers to avoid RCM liability.
ITC Availability – Recipients can claim input tax credit (subject to conditions), reducing their net tax liability.

Compliance Requirements under RCM

Businesses liable to pay tax under RCM must follow certain compliance rules:

Payment in Cash: GST under RCM must be paid in cash through the electronic cash ledger. It cannot be paid using ITC.
Self-Invoicing: If the supplier is unregistered, the recipient must issue a self-invoice and a payment voucher.
Monthly Return Filing: Report RCM transactions in GSTR-3B and GSTR-1 as applicable.
Maintain Records: Proper documentation is mandatory for availing ITC on RCM payments.

Important Points to Consider in 2025

Threshold Limits: There is no minimum threshold limit for RCM on notified goods and services. Even a single rupee transaction is liable.
Timely Payment: Delays in RCM tax payment may attract interest and penalties.
Sector-Specific Impact: Businesses in logistics, legal services, imports, and professional services should review their RCM liability regularly.
E-Invoicing Compliance: If you are subject to e-invoicing, ensure RCM transactions are properly reported.

Steps to Pay GST under RCM

Identify the RCM liability for the month.
Calculate the applicable GST on such transactions.
Generate self-invoices and payment vouchers (if required).
Pay GST in cash through GST portal.
Report details in monthly returns and claim ITC in the same or subsequent month.

Final Thoughts

The Reverse Charge Mechanism under GST is a critical compliance area for businesses in India. Understanding its applicability, maintaining proper documentation, and timely payment of taxes is essential to avoid penalties.

Though it adds extra responsibility, RCM also ensures fair tax collection and offers input tax credit benefits, which ultimately reduce the overall tax burden for eligible businesses.

By regularly reviewing purchases and services received, businesses can stay fully compliant with GST laws and avoid unnecessary interest or penalties.