Under normal GST rules the supplier collects the tax and pays it to the government. The reverse charge mechanism (RCM) flips that: for certain supplies it is the recipient who must calculate the GST, pay it in cash, and file it — even though nobody handed them a tax invoice. Miss it and you are not just short on tax; you owe interest, you may lose the input credit, and in a notice the department treats unpaid RCM as your liability, not the supplier’s.
The trouble is that RCM hides in ordinary transactions a small business does every month — a lawyer’s fee, a truck freight bill, a Google or Facebook ad spend, rent paid to a landlord who is not registered. This article walks through the RCM cases that catch small businesses most often, shows a worked example of the cash you actually pay, and sets out the self-invoicing and time-of-supply rules that decide when the liability arises.
Where RCM comes from
RCM operates under Section 9(3) and 9(4) of the CGST Act (and the matching IGST provisions). Section 9(3) covers a fixed list of notified goods and services — the government has named them, and RCM applies whether or not the supplier is registered. Section 9(4) covers specified supplies received from an unregistered person by a registered recipient. The practical point for a small business is that you cannot argue your way out of RCM by pointing at the supplier — if the supply is on the notified list, the duty to pay is yours.
The RCM cases small businesses miss most
Some RCM entries are obvious; the ones below are the quiet ones that surface in a departmental audit long after the money has been spent.
| Supply received | Who pays under RCM | Rate |
|---|---|---|
| Goods Transport Agency (GTA) freight, where the GTA has not opted for forward charge | The registered recipient (company, firm, factory, society, etc.) | 5% (recipient claims ITC) |
| Legal services from an advocate or law firm to a business entity | The business entity | 18% |
| Director’s services to the company (sitting fees, commission — not salary as an employee) | The company | 18% |
| Import of service (foreign ad platforms, software subscriptions, overseas consultants) | The Indian recipient | 18% IGST (typical) |
| Sponsorship to a body corporate or partnership firm | The recipient | 18% |
| Security services (supply of personnel) by a non-body-corporate to a registered person | The registered recipient | 18% |
| Renting of a residential dwelling to a registered person | The registered tenant | 18% |
| Renting of commercial property by an unregistered person to a registered person | The registered tenant | 18% |
Two entries deserve a closer look because the rules changed recently. First, renting of a residential dwelling to a registered person has attracted RCM since 18 July 2022 — but a proviso from 1 January 2023 protects a proprietor who rents a home in a personal capacity for his own residence, so a registered individual living in a rented flat is not caught. Second, from 10 October 2024, renting of commercial (non-residential) immovable property by an unregistered landlord to a registered tenant was brought under RCM (entry 5AB of Notification 13/2017-Central Tax Rate). Many businesses paying rent to an individual landlord who has no GSTIN are now silently accumulating an RCM liability they have never paid.
The import-of-service trap
The most frequently missed RCM item today is import of services. When a small business runs ads on Google or Meta, subscribes to foreign SaaS tools, buys stock images, or pays an overseas freelancer, that is a supply of services from outside India, and the Indian recipient must pay IGST under RCM. The foreign supplier does not charge Indian GST, so the business assumes there is nothing to pay — and a year later the auditor reconciles foreign remittances against the GST returns and raises a demand with interest.
A worked example — the cash you actually pay
Scenario. Priya runs a registered proprietary manufacturing unit. In a month she incurs: Rs. 40,000 as an individual advocate’s fee for a contract review; Rs. 60,000 as freight to a GTA that has not opted for forward charge; and Rs. 1,00,000 on Facebook advertising (import of service).
| Supply | Value (Rs.) | Rate | RCM payable (Rs.) |
|---|---|---|---|
| Legal fee (advocate) | 40,000 | 18% | 7,200 |
| GTA freight | 60,000 | 5% | 3,000 |
| Facebook ads (import) | 1,00,000 | 18% IGST | 18,000 |
| Total RCM paid in cash | 28,200 | ||
The critical rule: RCM must be discharged in cash — you cannot use your input tax credit balance to pay it. Priya pays Rs. 28,200 through the electronic cash ledger. She can then claim that Rs. 28,200 back as input tax credit in the same or a later month, provided the supplies are used for business and are not blocked credits. So for a fully creditable business the net tax cost is nil — but the cash outflow, and the interest if it is missed, are very real. You can sanity-check any of these figures with our GST calculator.
Self-invoicing and when the liability arises
Because the supplier does not issue a GST invoice for many RCM supplies, the recipient must issue a self-invoice under Section 31(3)(f) whenever the supply is received from an unregistered supplier, plus a payment voucher under Section 31(3)(g). From 1 November 2024 a specific time limit applies: the self-invoice must be raised within 30 days of receiving the supply. Skipping the self-invoice is a documentation failure that can jeopardise your ITC claim on the RCM tax you paid.
The time of supply — the point at which the tax becomes due — is not the same as the invoice date. For RCM on services (Section 13(3)) it is the earlier of the date you make payment or the 60th day from the supplier’s invoice date. For RCM on goods (Section 12(3)) it is the earliest of the date of receipt of goods, the date of payment, or the 30th day from the supplier’s invoice. If you delay both payment and recording, the 60-day (or 30-day) rule still fixes the liability — and interest on late RCM runs from that point, which you can estimate using our GST late fee & interest calculator.
Key takeaways
- Under RCM the recipient — not the supplier — pays the GST, for notified supplies under Section 9(3) and certain supplies from unregistered persons under Section 9(4).
- The most-missed cases are import of services (foreign ads and SaaS), GTA freight, advocate and director fees, and rent to an unregistered landlord — with commercial-property rent from unregistered landlords added from 10 October 2024.
- RCM must be paid in cash; you cannot set it off against ITC. You can claim the tax back as ITC later if it is not a blocked credit.
- Issue a self-invoice for supplies from unregistered persons within 30 days, and track the time of supply — 60 days for services, 30 days for goods from the supplier’s invoice date.
- Residential rent to a registered person is under RCM, but a proprietor renting a home for his own personal residence is exempt.
Frequently Asked Questions
Can I pay my RCM liability using input tax credit?
No. Reverse-charge liability must be paid in cash through the electronic cash ledger. Only after it is paid can the same amount be claimed as input tax credit, subject to the normal ITC and blocked-credit rules.
I pay office rent to a landlord who has no GST registration. Do I owe RCM?
If you are a registered person and the property is commercial (non-residential), yes — since 10 October 2024 rent paid to an unregistered landlord attracts GST under RCM in your hands at 18%. If it is a residential dwelling rented in your personal capacity as a proprietor for your own residence, the RCM does not apply.
Do I have to pay RCM on Google and Facebook ads?
Yes. Advertising bought from a foreign platform is an import of service, and the Indian recipient must pay IGST under RCM, typically at 18%. The tax is generally available back as input tax credit if the ads are for your business.
Is RCM payable on a director’s salary?
No. Remuneration to a director in the capacity of an employee (salary) is not a supply and carries no GST. RCM applies to amounts paid to a director in a non-employee capacity — sitting fees, commission and similar payments — which the company pays at 18%.
What happens if I forget to pay RCM?
The unpaid tax remains your liability with interest running from the time of supply, and your input-credit claim on it can be delayed or questioned. It is best to reconcile RCM every month; for anything unclear, our team at Ask a CA — GST can review your transactions.