Reverse charge mechanism under GST

How it differs from normal GST

Normally the supplier charges GST on the invoice, collects it and pays it. Under reverse charge (RCM), the supplier bills without GST and the recipient pays the tax directly. The government uses it where suppliers are numerous, small, or hard to track, such as transporters and advocates, or where the supplier is outside India.

There are two kinds:

• Notified supplies under section 9(3): listed goods and services where RCM applies whoever the supplier is.
• Purchases from unregistered suppliers under section 9(4): applies only to notified classes of recipients, currently mainly real estate promoters for certain shortfalls. An ordinary trader buying from an unregistered supplier does not pay RCM on that just for the supplier being unregistered.

Common cases for MSMEs

Goods under RCM include items such as raw cashew nuts, tendu leaves and raw cotton supplied by agriculturists. The lists change by notification; check cbic-gst.gov.in for the current schedule and conditions.

Worked example: freight

A Rajkot manufacturer hires a transport company (a GTA) that has not opted to charge GST itself. The freight bill is ₹50,000 without GST, and RCM applies at 5%.

1. The GTA issues a consignment note and an invoice for ₹50,000, marked "tax payable on reverse charge".
2. The manufacturer books ₹50,000 freight and an RCM liability of ₹2,500 (IGST if the GTA is in another state, else CGST ₹1,250 + SGST ₹1,250).
3. In GSTR-3B, ₹2,500 goes into Table 3.1(d) and is paid in cash. It cannot be paid using credit.
4. In the same GSTR-3B, ₹2,500 is claimed as ITC in Table 4A(3), since the freight is for business.

Net cost of the tax: zero, but cash is paid first and credited back, so a business short of cash still has to fund it. Confirm current GTA rates and options before relying on the 5% figure.

Time of supply and paperwork

When the tax becomes payable, in general terms:

• Goods: earliest of the date of receipt, the date of payment, or 31 days after the supplier's invoice.
• Services: earlier of the date of payment or 61 days after the supplier's invoice.

Documents: if the supplier is unregistered, the recipient issues a self-invoice, within the time limit set in the rules (currently 30 days from receipt), and a payment voucher when paying. If the supplier is registered, their invoice marked RCM is the document, and it should appear in your GSTR-2B.

Claiming the credit

RCM tax paid is generally available as input tax credit if the supply is used for business and is not blocked. For example, RCM paid on rent-a-cab services may be blocked under the same rules that block such credit for normal invoices; see blocked input tax credit. The 180-day payment rule for ITC does not apply to RCM supplies. Composition dealers pay RCM but cannot claim credit.

This is general information, not tax advice.

Common mistakes

• Paying RCM tax from the credit ledger. It must be paid in cash.
• Claiming the credit without paying the tax first.
• Paying the transporter's GST when the GTA has already charged GST on forward charge, or not paying RCM when it has not.
• Missing self-invoices for RCM purchases from unregistered suppliers.
• Forgetting RCM on director sitting fees and legal fees, which come up only a few times a year.

Tracking RCM in Tally and Cashflow OS

RCM entries are made in TallyPrime like any purchase, with the reverse charge setting on the ledger or voucher. Cashflow OS shows the freight, legal and rent ledgers and the Day Book on the phone, so the owner can see each month's RCM-type expenses at a glance. The GSTR-3B view prepared from Tally data shows the totals as booked; payment and filing happen on the GST portal.