Forward charge vs reverse charge
Under normal GST — forward charge — the supplier collects tax from the buyer and pays it to the government. Under the Reverse Charge Mechanism (RCM), the flow flips: the recipient of the goods or services pays the GST directly to the government instead of the supplier.
| Forward charge | Reverse charge (RCM) | |
|---|---|---|
| Who pays GST to govt | Supplier | Recipient (buyer) |
| Who issues the invoice | Supplier | Supplier — and recipient self-invoices for unregistered purchases |
| How the liability is paid | Either cash or ITC | Cash only — you cannot use ITC to pay RCM |
| ITC on the tax | Buyer claims on the invoice | Recipient claims after paying the RCM tax (if otherwise eligible) |
When does reverse charge apply?
RCM is not a choice — it applies to specific notified supplies. The common triggers are:
- Goods Transport Agency (GTA) services — freight charged by a GTA is a classic RCM service for specified recipients, unless the GTA has opted to pay GST under forward charge (by filing the prescribed declaration), in which case the GTA charges and pays the tax and you simply claim ITC. Always check which basis the GTA's invoice is on before paying RCM, to avoid double taxation.
- Legal services from an advocate or law firm to a business entity.
- Services of a director to their company (where not under employment).
- Sponsorship services provided to a body corporate or partnership firm.
- Import of services — when you pay an overseas vendor for a service, you pay IGST under RCM.
- Specified purchases from unregistered suppliers notified for certain recipients (for example, promoters in real estate).
RCM liability must be paid in cash through your electronic cash ledger — you cannot offset it using existing input tax credit. Budget for the cash outflow even though you may recover it as ITC the same month.
Self-invoicing for unregistered purchases
When RCM applies to a purchase from an unregistered supplier, the supplier cannot issue a GST invoice — so you, the recipient, must raise a self-invoice for that purchase. You also issue a payment voucher when you pay them. Keeping these documents is essential: they are your evidence for both the RCM liability you paid and the ITC you claim.
Claiming ITC on RCM tax
Here is the part businesses miss: after you pay GST under reverse charge, that tax is itself eligible for input tax credit — provided the underlying supply is not a blocked credit under Section 17(5) and you use it for business. So the typical cycle is: report the RCM supply, pay the tax in cash, then claim it back as ITC in the same return. The net cash impact is often nil — but only if you remember to claim the credit.
Common RCM mistakes
- Forgetting to self-invoice unregistered-supplier purchases that attract RCM.
- Paying RCM with ITC instead of cash — the portal will not allow it, and the return will not validate.
- Not claiming the ITC on RCM tax paid, leaving real money on the table.
- Missing RCM on imports of services — foreign software subscriptions and consulting are frequent culprits.
How ReadyBooks.ai helps
ReadyBooks.ai lets you flag a purchase as reverse-charge so the GST is computed and tracked correctly, supports self-invoice generation for unregistered-supplier purchases, and surfaces RCM liability and the matching ITC in your GST dashboard — so the cash you pay under reverse charge flows straight through to the credit you are owed.
RCM notifications and rates change from time to time. Verify the current list of notified supplies on the GST portal or with your chartered accountant.