Reverse Charge Mechanism: When the Buyer Pays GST

Normally the supplier collects GST from the buyer and deposits it. Reverse Charge Mechanism (RCM) flips this: the BUYER pays GST directly to the government on behalf of the supplier. Common scenarios: legal services from an individual advocate, goods transport agency (GTA) services, importing services from abroad. If you consume these without realising RCM applies, GST is owed + interest + potential audit. Tech consultancies importing from US cloud vendors (Datadog, Sentry, Stripe) face this quietly.

By the end, you will know the common RCM categories, the self-invoice mechanism, and the input-credit claim on RCM payments that recovers most of the cash flow.

Common RCM scenarios

Legal services from individual advocate to business entity. Advocate does not charge GST; buyer pays 18% RCM on the fee.
Goods transport agency (GTA) services on inter-state or intra-state freight, above specified thresholds.
Services imported from outside India (cloud subscriptions, SaaS tools, offshore consulting). Buyer pays 18% RCM on the invoice value.
Services supplied by unregistered person to specified registered person (limited categories. Director sitting fees, rent on residential property if used commercially).

RCM is different from "forward charge" where the supplier collects from the buyer. Under RCM, the supplier does NOT charge GST; the buyer calculates GST separately and pays it to government. No GST ever flows from buyer to supplier; only the NET AMOUNT (without GST) flows to supplier. This is why it trips up buyers who see a Rs. 1,00,000 invoice from their US cloud vendor and pay that. Without realising they owe an additional Rs. 18,000 as RCM GST on top.

The self-invoice flow

Buyer issues self-invoice (a GST invoice in the buyer's name, with buyer's GSTIN, for the RCM-liable transaction), deposits GST in next GSTR-3B (in the "tax paid on RCM" section), claims input credit (if eligible for the business) in the SAME return. The entire cycle is in the buyer's books; the supplier's books show a net receipt without GST. Self-invoice is legally required even though no actual "invoice" goes to the supplier.

Input credit on RCM: generally available if the service is used in the course of business (similar rules to regular input credit). Director sitting fees, legal fees, GTA services, imported SaaS. All typically eligible for credit. Exception: RCM on rent of residential property used for business (limited credit). Net effect: RCM GST is largely a cash-flow event (you pay it, then immediately claim credit), not a cost. But the compliance requirement is non-trivial.

Applies even when supplier is unregistered

RCM applies even if the supplier is UNREGISTERED (below GST threshold). Common trap: you hire an individual advocate with Rs. 15 lakh turnover (below Rs. 20L threshold). They do not charge GST. You, as a registered business, are still liable to pay 18% RCM on their invoice. Missing this is the most common RCM error. Companies only look at "does the supplier charge GST" instead of asking "is this an RCM category".

Reverse charge does not need supplier to be registered

RCM applies even when supplier is unregistered. You as registered buyer pay on their behalf. Missing this on cross-border imports (US cloud services, foreign consultants) is the most common error. Compliance requires checking "is this RCM category" not just "does supplier charge GST".

Reverse charge does not need supplier to be registered

RCM applies even when supplier is unregistered. You as registered buyer pay on their behalf. Missing this on cross-border imports (US cloud, foreign consultants) is most common error.

Cloud/SaaS import from foreign vendor

US SaaS invoice Rs. 1L. You owe Rs. 18,000 RCM GST. Vendor is unregistered in India. You issue self-invoice, pay RCM in GSTR-3B, claim input credit same return. Net cash flow zero-ish, but compliance mandatory.

Residential property rented for commercial use

Rent paid for residential property used for commercial purposes (registered office in a flat) triggers RCM on the rent. Landlord does not charge GST (residential is typically exempt); tenant pays 18% RCM + claims credit. Common in startup registered offices.

Key Takeaways

RCM: buyer pays GST on behalf of supplier (reverse of normal flow).
Common in legal services, GTA, imported services, unregistered supplier specific categories.
Self-invoice + GSTR-3B + input credit claim in same return.
Applies even when supplier is unregistered.
Missing RCM compliance: GST owed + interest + potential audit scrutiny.