Can I claim Input Tax Credit (ITC) on RCM payments?

Yes, the tax paid under RCM is eligible for ITC. However, the credit can only be claimed in the month the tax is paid to the government, provided the goods or services are used for business purposes.

Is a self-invoice mandatory for RCM transactions?

Yes. When purchasing from an unregistered supplier, the recipient must issue a 'Self-Invoice' on the date of receipt of goods or services. This is a critical compliance requirement for the audit trail.

Who is responsible for paying the tax to the government under RCM?

The recipient of the goods or services is liable to pay 100% of the GST directly to the government. The supplier cannot collect this tax or mention it on their invoice.

What are the common services covered under RCM?

Common services include Goods Transport Agency (GTA) services, legal services by advocates, sponsorship services, and import of services.

When is the 'Time of Supply' for RCM to determine the tax deadline?

The time of supply is the earliest of: 1) The date of payment, or 2) The date immediately following 30 days (for goods) or 60 days (for services) from the date of the supplier's invoice.

GST Reverse Charge Mechanism (RCM): How to Account for It

Overview

The Reverse Charge Mechanism (RCM) under India’s Goods and Services Tax (GST) framework shifts the responsibility to pay GST from the supplier to the recipient of goods or services.
Instead of the supplier charging and remitting GST, the recipient must calculate, pay, and report the tax directly to the government.

RCM is a statutory mechanism defined under the CGST Act and related notifications. It is not optional and applies only to notified categories of transactions.

Why Reverse Charge Mechanism exists

RCM was introduced to address specific compliance and tax collection gaps, including:

Tax leakage in sectors with fragmented or unorganised suppliers
Difficulty in enforcing GST compliance on certain supplier categories
Import of services where the supplier is located outside India
Specific high-risk or policy-driven service categories notified by the government

The intent is regulatory enforcement, not commercial flexibility.

When GST Reverse Charge Mechanism applies

RCM applies only in circumstances explicitly notified under GST law, including:

Specific goods and services listed under Section 9(3) of the CGST Act
Supplies received from unregistered suppliers in notified scenarios
Import of services where the supplier is outside India and the recipient is in India
Certain government or local authority services
Director, legal, sponsorship, and similar professional services

RCM does not apply universally. Each transaction must be evaluated against the notified lists and conditions.

What changes under RCM for the recipient

When RCM applies, the recipient becomes responsible for:

Determining whether RCM is applicable
Calculating the correct GST rate
Paying GST in cash (ITC cannot be used for payment)
Reporting the liability in GST returns
Claiming Input Tax Credit (if eligible) in the appropriate period

Failure at any of these stages leads to non-compliance, interest, or penalties.

Accounting treatment of GST under RCM

From an accounting perspective, RCM introduces self-assessed tax entries rather than supplier-invoiced tax.

At a high level, accounting under RCM involves:

Recording the expense or asset value exclusive of GST
Creating a GST liability entry for the applicable tax
Paying the GST liability through cash
Recording Input Tax Credit separately, if eligible

The tax component does not flow through the supplier invoice but is recognised through internal accounting entries.

Key accounting principles to follow

GST under RCM is a statutory liability, not a vendor payable
Payment must be made in cash, not through ITC utilisation
ITC eligibility depends on the nature of supply and Section 17 restrictions
Timing of recognition must align with GST return reporting periods

RCM accounting must be traceable, auditable, and reconcilable with GST returns.

Common misconceptions

RCM does not apply to all unregistered suppliers
Supplier charging GST incorrectly does not remove recipient liability
ITC is not automatically available for all RCM transactions
RCM is not optional even if the invoice does not mention it

RCM responsibility always rests with the recipient once conditions are met.

Why RCM requires system-level controls

Manual identification and accounting of RCM transactions is error-prone.
Effective compliance requires:

Transaction classification logic
Vendor and service category awareness
Automated GST liability calculation
Controlled accounting entry generation
Audit-ready reporting and reconciliation

RCM is a compliance mechanism that demands precision, not judgment calls. The GST rules governing RCM applicability are published by the Central Board of Indirect Taxes and Customs. For reporting and filing RCM self-invoices, the GST portal is the operative platform.

Summary

GST Reverse Charge Mechanism shifts tax responsibility to the recipient for notified transactions.
It impacts tax payment, accounting treatment, ITC eligibility, and compliance reporting.

Understanding what RCM is and how it should be accounted for is foundational before addressing transaction coverage, ITC logic, or system automation. The ITC eligibility rules that apply to RCM payments are covered in detail in understanding GST input tax credit rules.

IQInvoice handles RCM classification and self-invoice generation as part of its GST compliance module. To see how this works for your invoice mix, book a demo.

Last reviewed for regulatory accuracy on 1 March 2025.