RCM Liability under GST
The Goods and Services Tax (GST) regime introduced in India revolutionized the indirect tax structure, streamlining multiple taxes into a unified system. While GST brought much-needed transparency and uniformity, it also introduced some new concepts—one of the most crucial being the Reverse Charge Mechanism. It transfers tax payment obligations from the supplier to the recipient. Understanding the Introduction of RCM liability under GST is vital for businesses, professionals, and even government bodies to ensure compliance and avoid penalties.
What is RCM Liability under GST?
In the usual course of business, the supplier is responsible for collecting and depositing GST. However, under the RCM liability under GST, the tax liability shifts to the recipient of the goods or services. This mechanism is typically used in cases involving unregistered vendors, specified categories of goods or services, or certain notified transactions.
Legal Basis
It is governed by:
- CGST Act, 2017 Sections 9(3) and 9(4)
- IGST Act, 2017 Sections 5(3) and 5(4)
- Notifications issued by the CBIC (Central Board of Indirect Taxes and Customs) from time to time.
Why was RCM Introduced?
The main reasons for implementing are as follow:
- To include unorganized sectors in the tax base in order to increase its size.
- To ensure tax compliance in high-risk areas.
- To enable better tax tracking in service-based and B2B transactions.
Types of RCM under GST
1. Specified Category of Goods and Services (Section 9(3))
Under this category, it applies to notified goods or services such as:
- Legal services by advocates
- Services provided by a Goods Transport Agency (GTA)
- Import of services
- Sponsorship services
- Supply by an agricultural produce marketing committee
2 Unregistered Supplier to Registered Recipient (Section 9(4))
Initially, this section applied to all transactions from unregistered to registered persons. However, post amendments, this now applies only to notified classes of registered persons and specific goods/services, especially in the construction and real estate sector.
RCM Applicability – Examples
| Nature of Supply | Supplier | Recipient | RCM Applicable? |
| Legal services | Advocate | Company | Yes |
| Rent-a-cab | Unregistered Operator | Registered Business | Yes, if specified |
| Raw material purchase | MSME Unregistered | Large Manufacturer | Yes, in some cases |
| Import of consulting services | Foreign Vendor | Indian Company | Yes |
GST Rates under RCM
The GST rate is the same as it would have been in the event that the provider had paid the tax. For example:
- Legal services: 18%
- Import of services: 18%
- 5% or 12% for GTA services, depending on the availability of input credit
Time of Supply under RCM
The time of supply under reverse charge is crucial for determining the due date of payment. Here’s a quick breakdown:
For Goods:
- Earliest of: Date of receipt of goods, payment date, or 30 days from invoice date.
For Services:
- 60 days from the invoice date or the payment date, whichever comes first.
Input Tax Credit (ITC) under RCM
The ability to claim ITC (Input Tax Credit) for the recipient who pays GST under RCM is one advantage of the program, as long as the goods or services are utilized in the course of business. The ITC can be availed in the same month of payment, making it tax-neutral in many scenarios.
RCM Reporting in GSTR-3B and GSTR-1
In GSTR-3B:
- It must show the tax paid under RCM in Table 3.1(d).
- In Table 4(A)(3), the corresponding ITC is to be claimed.
In GSTR-1:
- These transactions are not reported as the supplier does not collect tax.
Practical Challenges in RCM Compliance
While it is conceptually clear, businesses often face practical challenges:
- Identifying these transactions correctly
- Maintaining records and proof of payment
- Mismatch in invoice dates and payment dates
- Accounting complexities and system limitations
- Risk of penalties and interest in case of default
Industries Affected Most by RCM
Certain sectors are more impacted than others:
- Logistics and transport services
- Construction and real estate
- Legal and professional services
- Importers of goods or services
- Agricultural trading businesses
RCM and MSMEs
It has a dual impact on MSMEs. While it helps bring accountability in transactions with large corporations, it also imposes compliance burdens on small, unregistered suppliers. Businesses engaging with MSMEs must ensure they’re aware of any liability they might trigger.
Government Initiatives and Clarifications
Over time, the government has relaxed and clarified several provisions to reduce the compliance burden:
- Certain industries are now exempt from RCM on unregistered acquisitions.
- Advance Rulings have helped determine the liability in complex scenarios.
- Practical application is explained in a number of CBIC circulars and frequently asked questions.
How Cretum Advisory Can Help
At Cretum Advisory, we assist businesses in overcoming the difficulties associated with RCM and GST compliance.
- These transaction identification and classification
- GST registration, return filing & audit support
- Input Tax Credit optimization
- Compliance reviews and GST litigation support
- Training for in-house tax teams
With experienced professionals from ex-Big Four firms and a strong presence across India and the UAE, we offer tailored indirect tax solutions for startups, MSMEs, and corporates.
📩 Need expert help with these services then Reach us at: info@cretumadvisory.com
The Final Thought
Understanding RCM liability under GST is essential for every business operating in India. It ensures tax compliance, minimizes risks, and helps businesses claim ITC benefits where eligible.
Frequently Asked Questions (FAQs)
Q1. What is RCM under GST?
It is a provision under GST where the recipient of goods or services pays the tax instead of the supplier.
Q2. When does it apply?
It is applicable to imports, notified products and services, and some transactions involving unregistered suppliers and registered recipients.
Q3. Can Input Tax Credit (ITC) be claimed on these payments?
As long as the goods or services are utilized for business objectives, it is possible to claim the Input Tax Credit (ITC) on GST paid via RCM.
Q4. Is it applicable to the import of services?
Yes, it applies to services imported, and the recipient is required to pay IGST.
Q5. In GST returns, where should these transactions be reported?
In GSTR-3B, tax is reported in Table 3.1(d) and ITC in Table 4(A)(3). It is not reported in GSTR-1.
Q6. What is the time of supply under the Reverse Charge Mechanism?
It’s 30 days from the invoice or the earliest of receipt and payment for items. Services must be paid for within 60 days of the invoice.