Reverse Charge Mechanism (RCM) Under GST

The Reverse Charge Mechanism (RCM) under GST flips the usual tax payment rule – instead of the supplier paying GST, the recipient becomes responsible. This guide explains how RCM works, which transactions it applies to, and what changed in 2025-26, including key updates on renting, sponsorship services, and GTA. Whether you are a business owner or a finance professional, understanding RCM is essential for GST compliance.

Key RCM Information at a Glance

What Is Reverse Charge Mechanism (RCM) Under GST?

Normally, the supplier collects GST from the buyer and deposits it with the government. Under RCM, this responsibility shifts to the recipient. The supplier does not charge GST on the invoice, and the recipient self-assesses and pays the tax directly to the government.

RCM applies in two main situations:

• Section 9(3): Specific categories of goods or services notified by the government – such as legal services, director services, insurance agent services, and goods transport agencies (GTAs).
• Section 9(4): When a registered person buys from an unregistered supplier, but only for categories notified under law (e.g., renting of commercial property from an unregistered landlord).

Basic Conditions for RCM to Apply

• The recipient must be a registered GST taxpayer.
• The supply must fall under a notified category.
• The place of supply must be within India.

If all three conditions are met, RCM applies and the recipient must account for the GST liability.

Key RCM Changes and Updates (2025-26)

Several significant amendments to RCM came into effect during 2025-26. Here is what changed and how it affects businesses.

1. Renting of Commercial Property from Unregistered Persons

If a GST-registered business rents commercial property from an unregistered landlord, the registered recipient must now pay GST under RCM. This is a major shift from the earlier position where many such transactions went untaxed.

• Notified under Section 9(4)
• Exception: Composition taxpayers are exempt from this liability (Notification 07/2025)
• Businesses renting offices, warehouses, or shops from unregistered owners must now account for RCM.

2. Sponsorship Services (Effective 16 January 2025)

Sponsorship services were earlier fully covered under RCM, meaning the recipient always paid the tax. From 16 January 2025, the rule has been split:

This change shifts the compliance burden back to suppliers who are body corporates, simplifying the process for many recipients.

3. Import of Services

Importing services from outside India is always taxable under RCM as IGST, regardless of whether the foreign supplier is registered or not. Three conditions must all be met:

• The supplier must be located outside India.
• The recipient must be in India.
• The place of supply must be in India.

A self-invoice must be raised within 30 days of the invoice date. Missing this deadline can create a time-bar risk on ITC eligibility.

4. Goods Transport Agency (GTA) – How RCM Works

GTAs have two options for how they pay GST:

Businesses frequently using GTAs should verify annually whether their GTA has opted for forward charge by filing the Annexure V declaration.

5. Other Common RCM Categories

• Legal services provided by an advocate or firm of advocates to a business entity.
• Services provided by a director of a company to that company.
• Services of an insurance agent to an insurance company.
• Services of a recovery agent to a banking company or NBFC.
• Services provided by government or local authorities to a registered business (excluding renting).

RCM Compliance: Step-by-Step Procedure

Meeting your RCM obligations involves three clear steps:

Step 1: Identify and Report

Verify whether the supply falls under a notified RCM category. Once confirmed, report the liability in GSTR-3B under Table 3.1(d) – this is the dedicated field for tax payable under reverse charge.

Step 2: Pay via Cash Ledger Only

RCM tax must be paid entirely through the cash ledger. You cannot use your input tax credit (ITC) balance to discharge RCM liability. This is a hard rule under GST law and non-compliance attracts interest and penalties.

Step 3: Claim ITC After Payment

Once you have paid the RCM tax in cash, you become eligible to claim ITC on that amount. You can claim it in the same return period in which you made the payment, provided the credit is otherwise admissible.

Practical Tips and Key Takeaways

• Always check Notification 13/2017-CT (Rate) and its amendments before entering a new vendor relationship.
• For commercial property rentals, confirm the registration status of your landlord before signing a lease.
• If you use GTAs regularly, ask for their Annexure V filing status before 15 March each year to know which charge mechanism applies.
• Set up a monthly process to identify RCM-applicable transactions before filing GSTR-3B.
• Issue self-invoices for imported services within 30 days – late issuance can jeopardise your ITC claim.
• Maintain a tracker of unregistered vendors to flag potential Section 9(4) obligations promptly.

Conclusion

The Reverse Charge Mechanism is one of the more complex areas of GST compliance, but it follows a logical structure once you understand the basics. RCM shifts the GST payment obligation from the supplier to the recipient, and applies primarily to notified categories under Section 9(3) and Section 9(4). The 2025-26 updates – particularly on renting of commercial property, sponsorship services, and GTA rules – have significant practical impact on businesses. Always pay RCM tax in cash, report it correctly in GSTR-3B, and claim your ITC promptly after payment to stay compliant and avoid penalties.

You can call or whatsapp us on +91 9769647582 for GST filing or RCM queries or services.

Frequently Asked Questions (FAQ)

Can I use my ITC balance to pay RCM tax?

No. RCM tax must be paid in cash through the electronic cash ledger. ITC cannot be used to offset this liability.

Can I claim ITC on RCM paid?

Yes. After paying RCM tax in cash, you can claim ITC in the same month, subject to the usual eligibility conditions under Section 16 of the CGST Act.

What happens if I miss the self-invoice for imported services?

Failing to raise a self-invoice within 30 days creates a time-bar risk. Your ITC eligibility may be denied, and you may attract interest on the delayed payment.

Does RCM apply to composition taxpayers?

Generally, composition taxpayers cannot claim ITC and have simplified GST obligations. Notification 07/2025 specifically exempts them from the RCM liability on renting of commercial property from unregistered persons.

How do I know if my GTA is on forward charge or reverse charge?

Ask your GTA whether they have filed Annexure V with the GST authorities opting for forward charge. If they have not done so before 15 March of the relevant year, RCM applies and you must pay the 5% tax.