Reverse charge mechanism

Indian Economy glossary

Also called: RCM · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Beyond NCERT

Meaning

The reverse charge mechanism (RCM) is a GST rule where the recipient (the buyer of goods or services) pays the GST to the government. Under the normal rule, the supplier (the seller) pays it.

It matters because some sellers are small, scattered or unregistered (not signed up under GST), so the government cannot easily collect tax from them. Moving the duty to a registered buyer brings these sales into the tax net.

Explanation

How it works: forward charge vs reverse charge

Forward charge (the normal rule):
The seller adds GST to the bill.
The buyer pays the price plus GST to the seller.
The seller deposits the GST with the government.
Reverse charge:
The seller's bill has no GST on it.
The buyer works out the GST on that purchase and deposits it with the government.
The tax rate stays the same. Only the person who pays changes.
Worked example (18% standard rate):
A registered company buys a notified service worth ₹1,000 from an unregistered supplier.
The supplier bills only ₹1,000, with no GST.
The company pays ₹180 GST (18% of ₹1,000) to the government itself.
If the purchase is inside one state, this is split as ₹90 CGST + ₹90 SGST. If it is between states, it is ₹180 IGST.
Link with input tax credit (ITC): ITC means a business gets back the tax it already paid on its inputs.
If the purchase is used for business, the buyer can usually claim the RCM tax it paid as ITC.
This keeps the credit chain working, so there is no cascading (tax on tax).
The RCM tax itself must be paid in cash, not out of existing credit. This makes sure the government actually receives the money.

Which supplies come under RCM

Notified services, for example:
services of goods transport agencies (GTAs), which are firms that carry goods by road and issue a consignment note
services of advocates (lawyers)
Notified supplies from unregistered persons, where a registered buyer pays the tax for a seller who is outside GST.
Import of services (services bought from a seller abroad): the Indian buyer pays IGST, because the foreign seller is outside Indian law. This is the part of RCM that was challenged in the Mohit Minerals case.

Why the government uses it

The seller is hard to reach. Many truck operators, individual lawyers and small unregistered sellers are hard to track one by one.
The buyer is easy to reach. It is usually a registered business that already files GST returns.
It helps stop evasion. Collecting from a small number of registered buyers is easier than chasing many small sellers.
The cost: buyers have more compliance work to do. They must spot RCM purchases, pay the tax and then claim the credit.

In India

Legal basis: GST was launched on 1 July 2017. RCM is part of the GST laws: the CGST Act, SGST Acts, UTGST Act and IGST Act. The constitutional base is the 101st Amendment Act, 2016 (assent on 8 September 2016).
Who decides what is covered: the lists of RCM supplies are notified by the government, based on recommendations from the GST Council (Art. 279A).
Mohit Minerals case (Supreme Court, 2022):
Facts: an Indian importer bought goods on CIF terms. CIF means the foreign seller pays for freight and insurance up to the Indian port.
What the government did: it charged IGST under RCM on the ocean freight (the shipping charge), and made the importer pay it.
The Court's reasoning: the importer had already paid IGST on the full CIF value of the goods, and that value already includes freight. Taxing the freight a second time was double taxation. So the Court struck down this levy.
The wider ruling: GST Council recommendations are persuasive, not binding. Parliament and state legislatures can still make their own GST laws. This is a key point for cooperative federalism.

Don't confuse with

Forward charge: the supplier collects and pays GST. This is the normal rule. Under RCM, the recipient pays.
Composition scheme: this is a simple option for small taxpayers. They pay a low flat rate on turnover and get no ITC. It changes how much tax a small seller pays, not who pays it.
Exempt / nil-rated supply: no GST is due at all. Under RCM, GST is due. Only the person who pays it changes.
Zero-rated supply (exports, SEZs): no GST is charged, but ITC is kept through a refund. RCM still collects the full tax, from the buyer.

Prelims Hooks

RCM = the recipient, not the supplier, pays GST to the government.
Standard examples: services of goods transport agencies and advocates, and notified supplies from unregistered persons.
The rate does not change under RCM. Only the person liable to pay changes. Trap: RCM is not an extra tax and not an exemption.
Mohit Minerals (Supreme Court, 2022): struck down RCM IGST on ocean freight on CIF imports because it was double taxation.
The same case held that GST Council recommendations are persuasive, not binding. Trap: statements that the Council's decisions are "binding on the Centre and states" are wrong.
IGST applies to inter-state supplies and imports. It is levied by the Centre, so RCM on imported services is charged as IGST.

Mains Points

Compliance vs ease of doing business:
RCM brings small, unregistered and informal sellers into the tax net → less evasion → more formalisation.
But it adds work for registered buyers. They must pay in cash first and claim credit later → working capital is locked up, which hurts MSMEs the most.
Limits of delegated tax design:
Mohit Minerals shows that levies notified through RCM can go beyond what the law intends and lead to double taxation.
Courts then act as a check. This matters for fair taxation and certainty for businesses.
Cooperative federalism (GS-II link):
The ruling that Council recommendations are persuasive, not binding gives states more room to decide.
It also shows that GST depends on political agreement between the Centre and states, not on legal compulsion. This is both a strength and a weak point of the GST system.

Related concepts

GST architecture: dual, destination-based, credit-linked