Reverse Charge Mechanism (RCM)

Learning Objectives

• Understand what Reverse Charge Mechanism (RCM) is and why it exists
• Identify services and goods notified under Section 9(3) that always attract RCM
• Know when Section 9(4) applies for purchases from unregistered persons
• Create a self-invoice and record RCM liability correctly
• Claim ITC on RCM paid — and understand the same-month ITC restriction
• Record RCM transactions in Tally Prime

What Is Reverse Charge Mechanism?

In the normal charge (forward charge) mechanism:

• Supplier charges GST on the invoice
• Supplier collects GST from buyer
• Supplier deposits GST to the government

In Reverse Charge Mechanism (RCM):

• Supplier does NOT charge GST on the invoice
• Buyer pays the GST directly to the government
• Buyer creates a self-invoice and files GSTR-3B to pay

The liability to pay GST shifts from the supplier to the recipient.

Why Does RCM Exist?

RCM solves two enforcement problems:

1. Unorganised suppliers — Small service providers (advocates, small transporters) who are unregistered cannot collect and remit GST. Rather than chase millions of small suppliers, the government makes the large registered recipient responsible.

2. Import of services — Foreign service providers are outside Indian jurisdiction. The Indian recipient is made liable to pay IGST under RCM (called IGST on import of services).

Section 9(3) — Specified Goods and Services Under RCM

Section 9(3) of CGST Act lists specific goods and services where RCM always applies, regardless of whether the supplier is registered or unregistered.

Key Services Under Section 9(3) RCM

Key Goods Under Section 9(3) RCM

RCM Quick-Scan Checklist for Accounts Teams

Before processing any vendor invoice, scan this list. If the service is ticked, check whether RCM applies to your entity:

• Goods Transport Agency (GTA) — any road freight contractor that issues a consignment note → 5% (no ITC) or 12% (with ITC)
• Individual advocate or law firm — any legal fee, retainer, or consultation from a lawyer → 18% IGST
• Arbitral tribunal — dispute resolution fees → 18%
• Sponsorship payment — any event sponsorship paid to any person by a body corporate or partnership → 18%
• Director sitting fees or commissions — payments by a company to a non-employee director → 18%
• Import of any service — payment to any foreign vendor (Google Ads, AWS, Zoom, Microsoft, consulting) → 18% IGST
• Rent-a-cab (non-corporate operator) — renting a motor vehicle for employee commute → 5%
• Security services (non-corporate provider) — security guards from a proprietorship or partnership → 18%
• Works contract for immovable property — construction, renovation, interior → 18%
• Intellectual property (authors, composers, photographers) — royalties paid to individual creators → 12%
• Insurance agent commission — insurance company pays agent → 18%
• Recovery agent — bank pays recovery agent → 18%

Section 9(4) — Purchases from Unregistered Persons

Section 9(4) makes the registered buyer liable for RCM when they purchase from an unregistered supplier.

Current status: Section 9(4) was broadly suspended in 2017–2019. Currently it applies only to:

• Specific goods notified by the government (e.g., bidi wrapper leaves, silk yarn from agriculturists)
• Real estate: Promoters buying goods/services from unregistered sub-contractors for under-construction projects

For most regular business purchases (trading companies like Sunrise Retail), Section 9(4) does not trigger RCM just because you buy from an unregistered supplier.

Section 9(4) — Mini-History of How the Scope Changed

The story of Section 9(4) is the most-rewritten provision in GST law. Knowing how the scope changed protects you from quoting outdated rules:

The takeaway: When someone says "Section 9(4) applies", press them on the specific notification under which it applies. The default state is now SUSPENDED. The exceptions are narrow — real estate, specific agricultural commodities. For a phone trader like Sunrise Retail, Section 9(4) does NOT apply to routine vendor purchases from unregistered chai-walas, courier boys, or local stationers.

Sunrise Retail — RCM Scenarios

💼 Sunrise Retail Pvt Ltd — Telangana

Scenario 1 — Legal Fees from Advocate

Sunrise Retail retains Adv. Ramesh Verma (unregistered individual advocate, Delhi) to handle a contract dispute. Fee: ₹25,000.

Self-invoice created by Sunrise Retail:

Self-Invoice — RCM

Invoice No: SR-RCM-2025-001
Date: 15-Apr-2025

Supplier: Adv. Ramesh Verma, Delhi (Unregistered)
Recipient: Sunrise Retail Pvt Ltd
GSTIN: 36AACCS1234A1ZP

Service: Legal consultancy
Value: ₹25,000
GST rate: 18% (IGST — POS Telangana, supplier Delhi → interstate)
IGST: ₹4,500

Note: Tax payable under Reverse Charge (Section 9(3))

Scenario 2 — Goods Transport Agency

Sunrise Retail hires Vishnu Logistics (GTA, unregistered) to transport phones from Mumbai to Hyderabad. Freight: ₹8,000.

Note: If Sunrise Retail opts to pay 12% on GTA services, they can claim that 12% as ITC. At 5%, no ITC is available. Most businesses pick the 12% option when the freight is substantial.

Scenario 3 — Import of Services (Digital Advertising)

Sunrise Retail pays Google Ireland ₹1,20,000 for Google Ads (online advertising service).

Self-Invoice — When and How

For every RCM transaction where the supplier is unregistered, the recipient must issue a self-invoice within 30 days of the supply.

Mandatory fields on self-invoice:

• Sequential invoice number
• Date of supply
• Supplier's name and address (no GSTIN — they're unregistered)
• Tax invoice marked as "Self-Invoice — Reverse Charge"
• Description of goods/services
• Taxable value
• GST amount (type: CGST+SGST or IGST based on POS)
• Declaration that tax is payable under reverse charge

For registered suppliers under Section 9(3) RCM (e.g., a GTA company that is registered), the supplier issues the invoice — but leaves the GST column blank or shows "Tax payable under RCM." The recipient still pays the tax.

Payment of RCM in GSTR-3B

RCM liability is reported and paid in GSTR-3B:

GSTR-3B — Table 3.1(d): Inward supplies liable to reverse charge

| Nature | Taxable Value | IGST | CGST | SGST |
|--------|-------------|------|------|------|
| Inward RCM supplies | ₹1,53,000 | ₹25,500 | ₹2,250 | ₹2,250 |

Breakdown for Sunrise Retail April 2025:

• Advocate fees: ₹25,000 → IGST ₹4,500
• GTA (12% option): ₹8,000 → IGST ₹960
• Google Ads: ₹1,20,000 → IGST ₹21,600
• Total IGST on RCM: ₹27,060

This RCM liability must be paid in cash — it cannot be paid from ITC balance.

ITC on RCM — The Same-Month Rule

ITC on RCM paid is available — but only in the same tax period after payment.

Rule:

ITC on RCM is available in the month in which the RCM tax is paid (not when the supply is received).

Eligibility for ITC on RCM:

GSTR-3B Table 4 — ITC on RCM:

Table 4(A)(3): ITC on inward supplies (attracting reverse charge)

IGST ITC from RCM: ₹26,100 (advocate ₹4,500 + GTA at 12% ₹960 + Google ₹21,600)
(GTA at 5% excluded — blocked)

Important: The same payment must appear in both Table 3.1(d) (liability) and Table 4(A)(3) (ITC). Net cash flow = RCM paid to government minus ITC claimed = ₹0 for eligible services. For ineligible services (5% GTA), no ITC → actual cash outflow.

Tally Prime — Recording RCM

Step 1 — Create RCM Ledgers

Gateway of Tally → Masters → Ledgers → Create

Ledger 1: IGST RCM Payable
Under: Duties & Taxes
Tax Type: IGST
Nature of Tax: Reverse Charge

Ledger 2: IGST RCM ITC
Under: Duties & Taxes
Tax Type: IGST
Nature of Tax: Reverse Charge (Input)

Step 2 — Journal Entry for Advocate Fees (RCM)

Gateway of Tally → Vouchers → F7 Journal

Date: 15-Apr-2025
Narration: Legal fees — Adv. Ramesh Verma — RCM IGST @ 18%

Dr: Legal Charges A/c          ₹25,000
Dr: IGST RCM ITC A/c           ₹4,500   ← ITC to be claimed
Cr: Adv. Ramesh Verma (Creditor)  ₹25,000
Cr: IGST RCM Payable A/c       ₹4,500   ← Liability to pay govt

Step 3 — Payment Entry (GSTR-3B Filing)

Date: 20-May-2025 (while filing GSTR-3B)
Dr: IGST RCM Payable A/c  ₹4,500
Cr: Bank A/c               ₹4,500

Step 4 — Enable RCM in Tally

Gateway of Tally → Features → F11 → GST Features
Enable Reverse Charge in GST: Yes → Accept

Once enabled, Tally provides an option in the party ledger to mark suppliers as unregistered, and in vouchers to specify "Reverse Charge Applicable: Yes."

Practice Exercise

Exercise 1: Sunrise Retail hires a security agency (proprietary firm, unregistered) to guard its Hyderabad warehouse. Monthly charges: ₹15,000. What is the RCM liability and can ITC be claimed?

Exercise 2: Sunrise Retail uses a local taxi driver (unregistered, not a GTA) to deliver a laptop to a customer. Charges: ₹500. Does RCM apply?

Key Terms

Module Summary

• RCM shifts GST liability from supplier to recipient — used for unorganised sectors and cross-border services
• Section 9(3) is the main RCM provision — covers GTA, advocates, arbitral tribunals, import of services, etc.
• Section 9(4) (unregistered suppliers) is currently limited to specific notified goods — not a general rule
• For unregistered RCM suppliers: self-invoice is mandatory within 30 days
• RCM must be paid in cash (cannot use ITC to pay RCM liability)
• ITC on RCM is available in the same month as payment — eligible services only (5% GTA blocked)
• Net cash impact of RCM = zero for eligible services; actual cash outflow only for ineligible services

Checklist — what you should now be able to do:

• Scan any vendor invoice against the RCM checklist and identify if RCM applies
• Prepare a self-invoice for an unregistered RCM supplier with all mandatory fields
• Report RCM liability in GSTR-3B Section 3.1(d) and claim ITC in Section 4(A)(3) correctly
• Explain why RCM cannot be paid from the ITC ledger (must be cash)
• Advise on the GTA rate choice — 5% (no ITC) vs 12% (full ITC) — and calculate the breakeven

Quick Quiz

1. Under which section of CGST Act does RCM on Goods Transport Agency services fall?

• a) Section 9(4) — unregistered supplier
• b) Section 9(3) — specified services
• c) Section 10 — composition scheme
• d) Section 17(5) — blocked ITC

2. Sunrise Retail pays a Delhi advocate ₹50,000. The RCM amount is:

• a) ₹5,000 (10%)
• b) ₹9,000 (18%)
• c) ₹6,000 (12%)
• d) No RCM — advocate services are exempt

3. RCM liability in GSTR-3B must be paid:

• a) From ITC balance (IGST first, then CGST, then SGST)
• b) In cash only — cannot use ITC to pay RCM
• c) In the next quarter
• d) Only if total RCM exceeds ₹5,000

4. ITC on RCM paid is available:

• a) In the same month as RCM payment
• b) In the next month after filing GSTR-1
• c) Only at year-end during GSTR-9
• d) Never — blocked under Section 17(5)

5. Sunrise Retail chooses 5% GST on GTA services. The ITC on this is:

• a) Available — ₹5% × freight value
• b) Partially available — 50% of paid GST
• c) Not available — 5% GTA ITC is specifically blocked
• d) Available only if freight exceeds ₹10,000