🔹 Introduction

The Reverse Charge Mechanism (RCM) shifts the liability to pay GST from the supplier to the recipient of goods or services. This ensures tax compliance in sectors prone to evasion and expands tax coverage. RCM is highly relevant for SMEs, corporates, and professionals.

(Reference: Sec. 9(3), 9(4) of CGST Act, relevant Notifications updated till FY 2024-25)

🔹 Categories of Supplies Covered under RCM

✅ 1. Specified Goods (Sec. 9(3))

Some notified goods under RCM include:

• Cashew nuts (not shelled/peeled).

• Bidi wrapper leaves (tendu).

• Tobacco leaves.

• Silk yarn.

• Supply of lottery.

✅ 2. Specified Services (Sec. 9(3))

Key services under RCM include:

• Services of a Goods Transport Agency (GTA).

• Legal services by advocate or firm.

• Services supplied by an arbitral tribunal.

• Sponsorship services.

• Services by a director of a company.

• Services by recovery agents.

• Import of services.

✅ 3. Purchases from Unregistered Persons (Sec. 9(4))

• Applicable only for notified classes of registered persons (not all).

• E.g., Promoters procuring goods/services from unregistered suppliers for construction (real estate sector compliance).

🔹 Step-by-Step RCM Compliance Process

📌 Step 1: Identify RCM Transaction
Check if supply falls under notified list of RCM goods/services or Sec. 9(4).

📌 Step 2: Self-Invoicing
If supplier is unregistered, recipient must issue a self-invoice u/s 31(3)(f).

📌 Step 3: Payment Voucher
Recipient issues payment voucher to supplier.

📌 Step 4: Tax Payment
Recipient pays GST in cash (not ITC) via GSTR-3B.

📌 Step 5: ITC Claim
RCM tax paid can be claimed as ITC (if used for business purposes and not blocked u/s 17(5)).

📌 Step 6: Return Reporting

• Outward liability under RCM → GSTR-3B, Table 3.1(d).

• ITC on RCM → GSTR-3B, Table 4(A)(3).

🔹 Practical Examples

Example 1: GTA Services
A trader pays ₹50,000 to a GTA. RCM @ 5% applicable. Trader pays ₹2,500 GST in cash and claims ITC of ₹2,500.

Example 2: Legal Services
A company avails legal services worth ₹1,00,000 from an advocate. Company pays 18% GST = ₹18,000 under RCM → eligible for ITC.

Example 3: Director’s Remuneration
Director receives professional fees (not salary) of ₹2,00,000. Company pays ₹36,000 GST under RCM → ITC available.

Example 4: Construction Services (Sec. 9(4))
Promoter purchases cement worth ₹5,00,000 from unregistered supplier. GST @ 28% = ₹1,40,000 payable under RCM.

🔹 Common Mistakes

• Treating all purchases from unregistered suppliers as RCM (only notified cases apply).

• Not issuing self-invoice for RCM transactions.

• Paying RCM liability through ITC (must be paid in cash).

• Missing ITC claim for RCM paid tax.

🔹 Best Practices

• ✅ Maintain separate register for RCM transactions.

• ✅ Train accounts team on self-invoice & payment voucher requirements.

• ✅ Reconcile RCM liabilities with GSTR-3B regularly.

• ✅ Track notification updates for new RCM categories.

🔹 FAQs

Q1. Can RCM tax be paid through ITC?
➡️ No, it must be paid in cash. ITC can be claimed later.

Q2. Is RCM applicable on import of services?
➡️ Yes, importer must pay IGST under RCM.

Q3. Can composition taxpayers claim ITC on RCM?
➡️ No, they cannot claim ITC.

Q4. Do freelancers need to pay RCM on legal services?
➡️ Only if they are registered under GST.

Q5. Is RCM applicable on director’s salary?
➡️ No, only on professional services fees, not salary (treated as employer-employee relationship).

🔹 Conclusion

RCM plays a critical role in ensuring tax compliance in high-risk sectors. Businesses must properly identify applicable supplies, issue self-invoices, and pay tax in cash to stay compliant. Proper ITC claim thereafter ensures no financial loss.

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