R.C.M. #10
Reverse Charge Mechanism
Who pays GST when the supplier is unregistered? The Reverse Charge Mechanism (RCM) flips the liability to the recipient. Learn RCM transactions, Rule 8, ledgers, Time of Supply, and complete Journal Entries — all through the VRL Logistics example.
📌 Comment ‘RCM’ on Instagram for full notes.
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Reverse Charge Mechanism (RCM) — Who Pays, Rule 8, Ledgers & Journal Entries
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What is Reverse Charge Mechanism?
Normally, the supplier collects and pays GST. Under RCM, this is reversed — the recipient is liable to pay GST directly to the government. This applies when the supplier is unregistered or when specific notified services are involved.
🚛 Day 10 Example — VRL Logistics → AB Enterprise
Freight Inward Service ₹100
💡 Since VRL Logistics is Unregistered — RCM applies
AB Enterprise (recipient) must pay the GST, not VRL Logistics (supplier). The recipient also issues a Self Invoice and a Payment Voucher.
Recipient’s 3 Obligations under RCM
Pay Tax
Pay the GST liability directly to the government on behalf of the unregistered supplier
Issue Self Invoice
Since supplier is unregistered, recipient must raise their own invoice for the transaction
Issue Payment Voucher
A payment voucher must be issued at the time of making payment to the supplier
Rule 8 — How RCM Tax is Paid
⚙️ Rule 8 — Payment of RCM Liability
RCM GST liability must be paid through the Cash Ledger only — actual cash payment to government.
RCM liability CANNOT be set off using Input Tax Credit balance. ITC cannot be used to pay RCM GST.
RCM Ledgers — 6 Special Accounts
RCM transactions use separate dedicated ledgers to distinguish RCM entries from regular GST entries. These 6 ledgers are maintained:
🔑 Input = ITC Asset | Output = Tax Liability
When RCM GST is recorded, Input RCM ledger increases (Dr — ITC asset for future set-off) and Output RCM ledger increases (Cr — current liability to pay). Once paid in cash, Output RCM is debited to clear the liability.
Time of Supply under RCM
TOS under RCM is different from forward charge — it is based on the recipient’s actions (receipt, books entry, payment) rather than the supplier’s invoice date.
In Case of Goods (W.E.E)
In Case of Services (W.E.E)
📌 Key Difference — 31 Days vs 61 Days
- For Goods: 31st day from supplier’s invoice date triggers TOS
- For Services: 61st day from supplier’s invoice date triggers TOS
- This gives service recipients more time before GST becomes due under RCM
Journal Entries — RCM
Three journal entries are required to completely record an RCM transaction — (1) recording the expense, (2) recording the GST, and (3) payment of GST liability. Watch till end for complete understanding!
Recording the Expense under RCM
| Particulars | Nature | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1st July 2025 — Freight Inward charged by VRL Logistics | |||
| Freight Inward A/c [Expense ↑ → Dr] | Dr | 100 | |
| VRL Logistics A/c [Liability ↑ → Cr] [Creditor] | Cr | 100 | |
| (Being freight inward expense recorded — VRL Logistics credited as creditor) | |||
| 6th July 2025 — Payment made to VRL Logistics | |||
| VRL Logistics A/c [Liability ↓ → Dr] | Dr | 100 | |
| Bank A/c [Asset ↓ → Cr] | Cr | 100 | |
| (Being payment made to VRL Logistics — liability cleared) | |||
| Total | 200 | 200 | |
Recording GST on the RCM Expense
| Particulars | Nature | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 31st July 2025 — GST liability under RCM recorded | |||
| Input CGST-RCM A/c [Asset ↑ → Dr] | Dr | 2.5 | |
| Input SGST-RCM A/c [Asset ↑ → Dr] | Dr | 2.5 | |
| Output CGST-RCM A/c [Liability ↑ → Cr] | Cr | 2.5 | |
| Output SGST-RCM A/c [Liability ↑ → Cr] | Cr | 2.5 | |
| (Being GST under RCM recorded — Input RCM = ITC Asset, Output RCM = Liability to pay) | |||
| Total | 5 | 5 | |
Payment of RCM GST Liability
| Particulars | Nature | Dr (₹) | Cr (₹) |
|---|---|---|---|
| On payment date — RCM GST paid to government via Cash Ledger | |||
| Output CGST-RCM A/c [Liability ↓ → Dr] | Dr | 2.5 | |
| Output SGST-RCM A/c [Liability ↓ → Dr] | Dr | 2.5 | |
| Bank A/c [Asset ↓ → Cr] | Cr | 5 | |
| (Being RCM GST liability paid in cash — Output RCM ledgers cleared) | |||
| Total | 5 | 5 | |
🧠 The Full RCM Picture — Summary
- Who pays: Registered Recipient (not unregistered supplier)
- 3 documents: Self Invoice + Payment Voucher + GST Payment Challan
- Rule 8: Cash Ledger ONLY for RCM payment — no ITC set-off
- 6 Ledgers: Input/Output × CGST/SGST/IGST (all with “RCM” suffix)
- ITC benefit: Input RCM A/c is an ITC asset — can be used for future output liability (just not for paying the RCM itself)
- TOS — Goods: Earlier of Receipt / 31st Day from Invoice / Payment
- TOS — Services: Earlier of Self Invoice / 61st Day from Supplier Invoice / Payment
