Reverse Charge (RCM): The GST You Owe on Purchases You Didn't Expect

Under the Reverse Charge Mechanism (RCM), the buyer — not the supplier — pays GST directly to the government. It applies to specified services, imports of services, and certain purchases, and it catches startups off guard because you owe GST on things you bought. The classic case: you pay an overseas software or consulting vendor, and you owe GST on that payment under RCM — even though no Indian supplier charged you. Here's when RCM hits and how to handle it.

What reverse charge is

Normally the supplier collects GST and pays it. Under reverse charge, that flips: the recipient self-assesses and pays the GST directly, then (usually) claims it back as input credit. It exists to capture tax where the supplier can't easily be made to collect it — notably foreign suppliers and unregistered ones.

When RCM hits a startup

The common triggers for an Indian startup:

• Import of services — paying a foreign SaaS tool, an overseas contractor, a foreign consultant, cloud services, ad platforms billing from abroad. You owe IGST under RCM on these.
• Specified services from any supplier — e.g. legal services from an advocate, GTA (goods transport) services, director's services to the company, sponsorship — RCM applies regardless of the supplier's registration.
• Purchases from unregistered suppliers — RCM can apply to specified supplies from unregistered persons.

The foreign-vendor case is the one startups miss most, because paying a US SaaS subscription doesn't feel like a GST event — but it is.

How to handle it

1. Identify RCM purchases each period (foreign services, specified services, relevant unregistered purchases).
2. Pay the GST under RCM in your GSTR-3B — self-assessed, paid in cash (not adjustable against ITC for the payment itself).
3. Claim the input credit for that RCM GST in the same/subsequent period, if it's an eligible, non-blocked credit — so for many businesses it's cash-neutral, but you must still route it correctly.
4. Issue a self-invoice for RCM purchases from unregistered suppliers, as required.

Getting the mechanics wrong — not paying RCM, or wrongly claiming credit on a blocked item — is a common GST notice trigger.

Note: RCM can force registration

If you're liable to pay tax under reverse charge, you may be required to register for GST regardless of turnover — another reason a small startup paying foreign vendors can need registration earlier than expected (see GST compliance for startups).

Don't let RCM slip through

RCM is easy to miss because it's tax on what you bought, not what you sold — and foreign SaaS/consulting spend is exactly where startups get caught. ComplianceStack helps you track your GST obligations including the reverse-charge angle, with everything evidenced. Get your free compliance health check.