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Reverse Charge Mechanism Under GST


When the recipient of the goods becomes the person obligated to pay the taxes, the GST reverse charge procedure is used. In most cases, the seller of goods and services is required to pay the Goods and Services Tax (GST).

The government has explicitly stated a few cases when the reverse charge mechanism is used, and understanding them may assist both companies and individual consumers comprehend their transactions more thoroughly.

GST rate under RCM

A GST rate of 5% or 12% is applied depending on whether the service provider, i.e. the Goods Transport Agency, is eligible for Input Tax Credit (ITC) (GTA).

The Purpose of the Reverse Charge

The reverse charge mechanism's objective is to collect indirect tax from the recipient simply and conveniently, as well as to boost tax revenues more effectively when the supplier of certain products or services is located in the non-taxable territory or is unfamiliar with tax rules.

Reverse Charge Mechanism In Respect Of an Unregistered Person

The buyer is responsible for paying the GST on the provision of goods or services, or both, by an unregistered provider to a registered person (buyer). All terms of the GST Act apply to such a buyer as if he were the person responsible for paying the tax on the supply of such goods or services, or both.

Assume you own a modest paper firm that is GST registered. However, one of your vendors that supplies your organization with glossy paper is not GST registered. The reverse charge is applicable in this scenario. In this scenario, the paper firm must pay the GST rather than the vendor of glossy paper.

It is also important to note that the registered dealer must perform self-invoicing rather than having the vendor send the invoice to the company.

Reverse Charge Mechanism In Respect Of Services through an E-Commerce Website

If an e-commerce website provides any services, the reverse fee applies to the e-commerce operator. For example, if you use a brand that lists service vendors, such as beauticians, you must pay the GST on the bill rather than the vendors paying the same to the brand.

Reverse charge mechanism in respect of the supply of specific goods listed by CBIC 

The reverse fee applies if you supply specific commodities designated by the Central Board of Indirect Taxes and Customs (CBIC). Cashew nuts, betel leaves, silk thread, tobacco leaves, and other items fall under this category.

Time of supply under reverse charge mechanism (RCM)

The term "time of supply" refers to the specific point in time when goods or services are given or furnished under GST. The tax rate applicable to products or services, the individual liable to pay tax, and the due dates for paying GST and submitting returns may all be found using the time of delivery. The technique used to calculate the time of supply for goods and services differs under the reverse charge mechanism.

Read Our Blog: GST Return

The period of supply for products delivered under RCM will be the earliest of the following dates:

  • The date on which the items were received
  • Date immediately following 30 days from the date of the supplier's invoice issuance

If the time of supply cannot be determined using the aforementioned criteria, the time of supply will be the date of entry in the recipient's books of account.

In the event of RCM services, the time of provision will be the first of the following dates:

  • Payment date
  • Date immediately following 60 days from the date of the supplier's invoice issuance

If you are unable to ascertain the time of delivery under the specified circumstances, the time of supply will be the date of entry in the recipient's books of account.

Invoicing Based On the Reverse Charge Mechanism

The recipient or buyer of the products or services issues an invoice upon receipt of the goods or services from the provider under the reverse charge method. Furthermore, while making payment to the provider, they must issue a payment voucher.

If the aggregate value of such supply surpasses INR 5,000 in a day, a registered recipient or buyer can submit a consolidated invoice at the end of the month.

GST Payment Method under the Reverse Charge Mechanism

The person delivering the products must indicate in the tax invoice whether tax is payable using the reverse charge method, according to GST law.

Here are some things to keep in mind when making a GST payment through reverse charge:

  • A beneficiary of services may claim ITC on the tax amount paid under reverse charge on goods and services only if the products or services are utilized for business or the advancement of business.
  •  A composition dealer who falls under reverse charge is ineligible to claim any tax-paid credit. Furthermore, the dealer will be required to pay tax at the regular rates rather than the composition rates.
  • A GST compensation cess would be levied on taxes payable or paid via the reverse charge system.

Reverse Charge Mechanism Input Tax Credit

A supplier/seller is not permitted to claim an Input Tax Credit (ITC) for GST paid on goods and services provided using the reverse charge system (RCM).

Only if such goods or services are used or will be utilized for business purposes may the buyer/recipient claim ITC on the GST amount paid under reverse charge on receipt of goods or services.

The ITC cannot be applied to the payment of output GST on goods or services under reverse charge by the receiver. GST under reverse charge will only be collected in cash.
Read Our Blog: GST New Update

Important Considerations for the Reverse Charge Mechanism

  • Even if their revenue does not reach the threshold, everyone paying tax using the reverse charge system is required to register for GST.
  • The reverse charge GST must be submitted with the government on the 20th of each month.
  • Only intrastate transactions will be subject to the reverse charge mechanism.
  • GST is also levied on any advance payments made for reverse charge supplies. The individual who makes the advances must pay tax on a reverse charge basis.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.


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