Reverse Charge Mechanism (RCM)
When the buyer pays the GST to the government, not the seller. Here is exactly when and how.
Normal charge vs Reverse charge
Normal charge (the default): the seller collects GST from the buyer along with the invoice amount, then pays it to the government.
Reverse charge (RCM): the buyer pays GST directly to the government without collecting it from anyone else. The seller's invoice shows no GST.
RCM flips the usual flow. It is used in specific cases where the government finds it easier or safer to collect from the buyer rather than the seller.
When RCM applies
Case 1 — Supply by an unregistered supplier to a registered person. Applicable for specific categories notified by the government (currently narrow but can expand).
Case 2 — Specific notified services regardless of supplier's registration status. Examples include goods transport agency (GTA) services, legal services by advocates, services by directors to their companies, sponsorship services, services by the government (except a few), services by insurance agents, services by recovery agents, etc.
Case 3 — Import of services. Any service imported into India by a GST-registered person triggers RCM.
The full list is in Notification 13/2017 and 10/2017 of CGST and IGST, updated periodically.
How to issue an RCM invoice
The seller's invoice carries the line: "Tax payable on reverse charge basis: YES".
The seller does NOT add GST amounts to the invoice value.
The buyer, upon receipt, generates a "self-invoice" (in the absence of the supplier issuing a proper GST invoice) and computes the GST they owe to the government.
The buyer pays this GST through their GSTR-3B return and can claim ITC on it (subject to rules).
InvoiceForge has a "Reverse charge applicable" toggle that adds the required declaration and suppresses the tax amounts automatically.
RCM for import of services — the common case
An Indian freelancer pays a US-based SaaS company ₹10,000 per month for a tool. That is import of service.
The SaaS company has no GST registration in India and will not charge GST.
Under RCM, the Indian freelancer must compute GST on the ₹10,000 at the applicable rate (usually 18% for SaaS) — ₹1,800 IGST.
The freelancer files this ₹1,800 IGST in their GSTR-3B as RCM liability, pays it, and claims it back as ITC in the same return. Net zero cash outgo, but compliance must happen.
Missing this is a common freelancer error. InvoiceForge's expenses module (Phase 3) will flag import-of-service entries and compute the RCM liability automatically.
GTA (Goods Transport Agency) — the classic RCM case
When a factory hires a transport truck to move goods, the transporter (GTA) is often the supplier of service.
By default, the GTA's service is under RCM — the recipient (factory) pays the 5% GST (without ITC) or 12% GST (with ITC), instead of the GTA collecting it.
The GTA can opt for forward charge too (by filing a declaration), in which case the GTA collects GST and RCM does not apply. Many GTAs opt for forward charge to simplify things for their corporate customers.
Self-invoicing
When an unregistered person supplies under RCM, there is no supplier invoice with GST. The buyer must issue a "self-invoice" (also called a tax invoice by the recipient) within the time limit of receipt.
The self-invoice has the same fields as a regular Rule 46 invoice — buyer fills in what would normally be supplier fields. The buyer signs it.
Self-invoices are numbered in a separate series from regular invoices. InvoiceForge has a "Self-Invoice" document type that handles this.
ITC rules under RCM
GST paid under RCM is generally eligible for ITC, provided (a) it is paid through cash (not set off against ITC), and (b) the supply is used for business.
For GTA services, the recipient can claim ITC if the GST is paid at 12% (forward charge or RCM at 12%). If RCM is paid at 5%, no ITC.
For import of services, full ITC is available after paying the RCM IGST in cash.
ITC cannot be claimed if the underlying supply would have been ITC-blocked (like motor vehicles for personal use, food expenses, etc.).
Common RCM mistakes
Issuing an RCM invoice WITH tax amounts filled in. Double-charging — tax department sees an inconsistency.
Forgetting to file RCM liability in GSTR-3B on imported services.
Claiming ITC on RCM before paying the cash tax — ITC is only available after the cash tax is paid.
Using ITC to pay RCM liability — not allowed. RCM must be paid in cash.
Not keeping a GTA service declaration of forward/reverse charge handy.