Reverse Charge Mechanism (RCM)
A GST arrangement where the buyer, not the seller, is liable to pay tax directly to the government, applicable to specified goods, services, and supplier categories.
In short
- Shifts the responsibility to pay GST from the seller to the buyer, for specified categories of goods, services, and suppliers.
- A registered buyer who pays tax under reverse charge can typically claim input tax credit for the same amount.
- Mainly a timing and compliance-tracking issue for a registered business, not an additional net tax cost.
Under normal GST rules, the seller collects tax from the buyer and deposits it with the government. Reverse charge flips that: for specified categories, certain services like those from goods transport agencies, purchases from unregistered suppliers in specified cases, and a defined list of goods and services, the buyer is directly responsible for paying GST to the government, rather than paying it to the seller.
A registered buyer who pays tax under reverse charge can typically claim input tax credit for that same amount, subject to the usual ITC conditions, so RCM mainly shifts who deposits the tax and when, rather than changing the total tax cost for a registered business. It does create a cash flow timing difference and an extra compliance step that's easy to miss if a business isn't specifically tracking which purchases fall under RCM.
Also referred to as: RCM, reverse charge.
Frequently asked questions
Who pays GST under reverse charge, the buyer or the seller?
The buyer pays it directly to the government, instead of paying it to the seller as part of the invoice.
Can I claim input tax credit on tax paid under reverse charge?
Yes, generally, subject to the usual ITC conditions, so RCM is mostly a cash-flow timing difference rather than an added cost.
Does reverse charge apply to purchases from unregistered suppliers?
In specified cases, yes, which is one of the categories most likely to be missed by a business that isn't specifically tracking its RCM-liable purchases.
Disclaimer
This glossary entry is for general informational purposes only and does not constitute professional tax, legal, or financial advice. Rules and rates change, so consult a qualified Chartered Accountant for advice specific to your situation.