Quick answer: The reverse charge mechanism (RCM) makes the buyer, not the seller, pay GST on certain supplies. It rests on section 9(3) and 9(4) of the CGST Act and section 5(3) and 5(4) of the IGST Act. In India it covers services imported from abroad and a notified list such as legal, director and security services.
- Tax under reverse charge must be paid from the electronic cash ledger, never from input tax credit.
- Once paid, the buyer can claim the same amount as credit if otherwise eligible.
- A registered business importing services issues a self-invoice under section 31(3)(f) of the CGST Act.
- From 30 March 2026, intermediary services bought from abroad also fall under reverse charge.
How does reverse charge work in practice?
You become the taxpayer on your own purchase. Sounds odd. It closes a gap. The supplier sits outside the tax net, either abroad or unregistered.
The flow runs in four steps:
- You receive the service and its commercial invoice.
- You raise a self-invoice for the GST.
- You pay that tax in cash through your GST return.
- You claim it back as input tax credit in the same cycle, if the service is used for taxable supplies.
The GST Council’s reverse charge flyer is blunt on step 3: reverse charge liability “cannot be discharged by using input tax credit”. Cash first, credit later. So even a fully creditable charge ties up your working capital for about a month, until the return that books the credit is filed.
Which services fall under domestic reverse charge?
| Service | Who pays GST |
|---|---|
| Goods transport agency | Recipient business |
| Legal services by an advocate or firm | Business entity receiving them |
| Director’s services to a company | The company |
| Security personnel supplied to a registered person | Registered recipient |
| Commercial property rented from an unregistered owner | Registered tenant |
The list changes by notification. Sponsorship moved out in January 2025.
What does RCM on import of services mean after March 2026?
RCM on import of services means your Indian company self-assesses 18% IGST on services bought from abroad. The 2026 change widened that net.
Before 30 March 2026, section 13(8)(b) of the IGST Act placed intermediary services at the supplier’s location. A foreign sales agent billing an Indian company was therefore outside Indian GST. Not any more. Section 157 of the Finance Act, 2026 omitted that clause, so the recipient’s location now governs. Grant Thornton Bharat notes that Indian recipients must now self-assess IGST under reverse charge.
Suppose your Pune entity pays a Singapore agent ₹10 lakh in commission, so you pay ₹1,80,000 IGST in cash and then claim it as credit if the commission relates to taxable supplies. Where credit is restricted, as it is for some hotels, airlines and financial services businesses, that ₹1,80,000 becomes a real cost.
Does reverse charge apply to your EOR invoice?
Usually not. An Indian EOR is a registered supplier inside India, so it charges GST on EOR services itself under forward charge. Nothing is left for you to self-assess. Reverse charge comes up only if your Indian entity buys services from abroad.
The income-tax side is separate. It sits under withholding tax and Forms 145 and 146.
How does Remunance keep reverse charge off your plate?
When you hire through Remunance, our Indian entity bills you, files its own GST and handles the employment taxes underneath. If you already run an Indian company, our compliance management in India service covers payroll and statutory filings, so your finance team can focus on GST and remittances. To map which India costs carry which tax, ask our team for an India cost and tax walkthrough. Our post on employer of record tax implications covers the wider picture.
What else do people ask about reverse charge?
Can input tax credit be used to pay RCM?
Never. Reverse charge tax must be paid in cash through the electronic cash ledger. You can claim it as credit afterwards if the purchase qualifies.
Who pays GST when an Indian company buys services from abroad?
The Indian buyer. It self-assesses IGST, issues a self-invoice and pays in cash. Online services sold to individuals for personal use differ: the foreign supplier registers and pays.
What is the RCM rate on imported services?
It is the normal rate for that service, paid as IGST. For most professional and intermediary services that is 18%.