Reverse Charge Mechanism Under GST: Meaning, Applicability, Examples, Accounting Entries and Latest Updates

Latest RCM Updates to Check Before Filing

RCM rules are notification-driven, so businesses should not rely only on old examples. Before filing returns, always verify the latest notification and rate position.

Legal Basis of RCM Under GST

Common Goods and Services Covered Under RCM

Common Services Under RCM

The tax liability arises based on the Time of Supply rules. According to Section 13(3) of the CGST Act for services, the Time of Supply under RCM is the earliest of the following dates:

• Payment Date: The date on which the payment is entered in the books of the recipient, OR the date it is debited from their bank account (whichever is earlier).
• 60-Day Invoice Rule: The date immediately following 60 days from the date of the invoice issued by the supplier.
• Book Entry Rule: If the above two dates cannot be determined, it defaults to the date of entry of the service in the books of the recipient.
• Associated Enterprises Rule: If the supplier is located outside India and is an associated enterprise, the date of entry in the books of the recipient OR the date of payment (whichever is earlier).

Common Goods Under RCM

The time of supply for goods under RCM is the earliest of the following: the date of receipt of goods, the date of payment, or the date immediately after 30 days from the date of the supplier’s invoice. If the time of supply cannot be determined using these rules, the date of entry in the recipient’s books of account is used. Section 12 of the CGST Act gives the specific timing rule for reverse charge on goods.

RCM on Import of Services

Import of services is an important RCM area for Indian businesses using foreign SaaS tools, overseas consultants, foreign legal services, cloud subscriptions, online advertising, or cross-border professional services. A service is generally treated as import of services when:

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

When these conditions are met, IGST may be payable by the Indian recipient under reverse charge, subject to the applicable provisions and exemptions . The place of supply for many cross-border services is the recipient's location, unless a specific exception applies. 

Example: An Indian registered business buys a foreign SaaS subscription for business use. If the service qualifies as import of services and no exemption applies, the Indian business may need to pay IGST under RCM and then claim ITC if the subscription is used for eligible business purposes.

When RCM applies when the supplier is unregistered, the recipient may need to issue a self-invoice. Section 31 also requires a payment voucher at the time of making payment to the supplier in specified RCM cases. A practical self-invoice should include:

• Recipient’s GSTIN, name, and address
• Supplier’s name and address
• Invoice number and date
• Description of goods or services
• HSN or SAC, where applicable
• Taxable value
• Applicable GST rate and tax amount
• Whether tax is payable under reverse charge
• Place of supply
• Signature or digital authentication, as applicable

How to Pay RCM and Claim ITC

RCM liability must generally be paid in cash through the electronic cash ledger. Businesses cannot use existing ITC balance to discharge RCM tax liability. After the RCM tax is paid, ITC may be claimed if the expense is used for business and is not blocked under GST law. The GST Council’s RCM guidance also explains that RCM is paid through the cash ledger and credit can be taken after payment, subject to eligibility.

In GSTR-3B, reverse charge liability is reported under inward supplies liable to reverse charge, and eligible ITC on RCM is reported separately under ITC available for inward supplies liable to reverse charge. GST portal guidance refers to Table 3.1(d) for reverse charge liability and Table 4(A)(3) for eligible ITC on inward supplies liable to reverse charge.

Accounting Entries for RCM

The exact accounting entry may vary based on software configuration, ledger structure, and whether the transaction is intra-state or inter-state. For example: A company receives legal services of ₹50,000 from an advocate. GST is payable by the recipient under RCM. Assume GST rate is 18%, split as CGST 9% and SGST 9%.

Example 1: RCM on Legal Services

A registered company receives legal services worth ₹40,000 from an advocate. The advocate does not charge GST because the service is covered under RCM. The company calculates GST on ₹40,000, pays it under RCM in GSTR-3B, and claims ITC if the legal service is used for business and is otherwise eligible.

Example 2: RCM on Import of SaaS Service

An Indian-registered business purchases a foreign software subscription worth ₹1,00,000. The supplier is outside India, the recipient is in India, and the service is used by the Indian business. Assuming an IGST rate of 18%, the business pays ₹18,000 in IGST under RCM. If the software is used for eligible business purposes, the business may claim ITC after payment.

Example 3: Interest on Delayed RCM Payment

Suppose an RCM liability of ₹10,000 was due in April but was paid 20 days late. Then the interest calculation is:

₹10,000 x 18% x 20 / 365 = ₹98.63

The business must pay the tax along with the applicable interest. It should also evaluate whether any penalty exposure arises under Section 74A, Sections 73 and 74 for periods prior to FY 2024-25, and Section 122. Section 50 governs interest on delayed tax payments.

Common RCM Mistakes Businesses Should Avoid

Not tagging RCM transactions at the time of purchase

Many businesses identify RCM entries only during return filing or year-end reconciliation. By then, invoices may be missed, vendor details may be unclear, and tax payments may get delayed. It is better to tag RCM-applicable purchases at the time of entry, especially for legal fees, freight, director payments, sponsorships, rent, scrap purchases, and foreign service payments.

Not checking vendor registration status

RCM treatment can change depending on whether the supplier is registered or unregistered. Businesses should verify vendor GSTIN details before booking such expenses instead of relying only on old vendor records or previous transactions.

Mixing RCM expenses with regular purchases

If RCM expenses are recorded under normal purchase or expense ledgers, they may not appear correctly during GSTR-3B preparation . Creating separate ledgers or tax categories for RCM helps track liability, payment, and eligible ITC more clearly.

Delaying monthly RCM review

RCM should not be checked only at the end of the financial year. A monthly review helps identify missed invoices, unpaid liability, pending self-invoices, and ITC that should be claimed only after tax payment.

Missing foreign service payments

Payments for foreign SaaS tools, cloud subscriptions, online ads, consulting, design, or professional services are often booked as normal expenses. These should be reviewed separately because they may attract IGST under RCM.

Relying on outdated RCM categories

RCM applicability can change through GST notifications. Businesses should review the latest RCM position before filing returns, especially for frequently updated areas such as rent, sponsorship services, scrap purchases, and e-commerce-related supplies.

Conclusion

Reverse Charge Mechanism is not just a GST theory topic. It directly affects vendor checks, purchase booking, self-invoicing, cash tax payment, ITC timing, GSTR-3B reporting, and compliance risk . The safest approach is to maintain a monthly RCM checklist, verify notified goods and services, issue self-invoices on time, pay RCM through the cash ledger, and claim ITC only after confirming eligibility.

For businesses handling multiple vendors, imports, freight, legal services, rent, or scrap purchases, accounting software can reduce manual errors by tracking RCM liability, payment, and ITC in one place.