Reverse charge mechanism accounting: India’s Ultimate RCM Guide

Key takeaways

• Reverse Charge Mechanism shifts GST liability to the recipient, plan cash flows since RCM must be paid in cash before ITC can be claimed
• Correct service mapping and rates are critical, validate RCM applicability for legal, arbitral tribunal, director, GTA, security, sponsorship, government renting, and import of services
• ITC on RCM is available only after cash payment, Section 16 conditions apply, blocked credits still apply
• Set up robust ledgers for RCM Output, RCM Input, and Deferred ITC, and follow a consistent accounting approach
• Report taxable value and tax in Table 3.1(d), claim ITC paid in cash in Table 4(A)(3) in GSTR-3B
• Build a vendor wise RCM tracker with notification references, rate mapping, payment and ITC status, and documentation links
• Common pitfalls include wrong rates, missing self-invoices, premature ITC, place of supply errors, missed accruals, and poor documentation
• A strong month-end checklist and automation with tools like AI Accountant reduces errors and speeds up close

Introduction

Reverse Charge Mechanism under GST in India flips the tax flow, the recipient pays GST on notified supplies. This influences cash flow, compliance workload, and period close, especially for SMEs and CA firms that work with unregistered suppliers, notified services, and complex ITC rules. Handled well, RCM becomes routine, not a fire drill.

Think of RCM as pay first, claim later, your processes must prove receipt, payment, and eligibility, every month.

In this guide, you will map services and rates, execute cash payment and ITC, post month-end entries, report correctly in GSTR-3B, and run a vendor wise RCM tracker. Practical examples and checklists help you operationalize immediately.

When RCM Applies, Service Mapping and Rates

RCM depends on the notified nature of supply under Section 9(3), supplier and recipient types including Section 9(4) for unregistered suppliers to registered recipients, registration status, and place of supply which drives tax heads. For a quick overview, see the Reverse Charge Mechanism overview, the 20 toughest RCM FAQs, and the ClearTax reverse charge guide.

Common RCM Services for SMEs and CA Firms

Legal services by advocates or law firms to business entities attract 18 percent RCM, even if the lawyer is registered.

Arbitral tribunal services to business entities, 18 percent RCM.

Director services to companies or LLPs, 18 percent RCM on sitting fees and professional charges.

Goods Transport Agency services, 5 percent RCM for specified recipients when GTA has not opted forward charge, if GTA opts forward charge, they charge 12 percent normally, always obtain the GTA option declaration.

Security services supplied by non body corporates to registered persons, 18 percent RCM.

Motor vehicle renting by non body corporates to body corporates, specific cases under RCM at 5 percent subject to provider option.

Sponsorship services to body corporates or partnerships, 18 percent RCM.

Government or local authority renting of immovable property to registered persons, 18 percent RCM.

Import of services always under IGST RCM at the applicable rate, no threshold exemptions.

Real estate specific items like development rights and certain cement purchases from unregistered suppliers, follow sector rules carefully.

Ocean freight RCM on CIF imports was struck down by courts, monitor CBIC updates for any changes before booking liabilities.

RCM Payment, Time of Supply, and ITC Eligibility

Time of supply for services is the earliest of the payment date, sixty days from supplier invoice date, or the date of booking in your books. Once triggered, your liability is due in cash, then ITC can be claimed subject to conditions.

Payment requirements

RCM must be paid in cash through the electronic cash ledger, ITC cannot be used to offset RCM liability. To use the credit in the same month, pay before you file GSTR-3B, refer to the GSTR-3B due date calendar for planning.

ITC eligibility conditions

Section 16 conditions apply, you need a valid supplier invoice or a self invoice for unregistered suppliers, goods or services must be received, and the use must be for business. The 180 day payment rule does not apply to RCM vendor payments, see this explainer on ITC reversal automation. Blocked credits under Section 17(5) remain blocked under RCM too.

Documentation requirements

Self invoices for unregistered suppliers are mandatory, include GSTIN, supplier details, description, taxable value, and tax. Payment vouchers should be raised on vendor payment. Maintain cash ledger challans and return acknowledgments for audit.

ITC timing and cross utilization

Once cash is paid, ITC becomes available immediately in the same tax period if payment precedes filing, else it shifts to the next period. IGST credit can be utilized against IGST, then CGST, then SGST in that order, while CGST and SGST follow their permitted cross utilization rules.

For a plain language refresher on RCM fundamentals, see the Aditya Birla Capital guide, the Bajaj Finserv explainer, the DMI Finance overview, and the ICA Job Guarantee blog.

Accounting Treatment and Month End Entries

Create separate ledgers for RCM Output Liability by IGST, CGST, SGST, RCM Input Credit by IGST, CGST, SGST, Deferred RCM ITC, and service expense ledgers by type. This structure simplifies reconciliation and audits.

Two accounting approaches

Conservative approach, ITC recognized after cash payment

• When booking the invoice: Debit Service Expense, Credit RCM Output Liability, Credit Vendor
• On cash payment of RCM: Debit RCM Output Liability, Credit Bank
• On ITC availment: Debit RCM Input Credit, Credit RCM ITC Deferred

Immediate recognition approach, ITC booked upfront with reclassification if payment delays

• When booking the invoice: Debit Service Expense, Debit RCM Input Credit, Credit RCM Output Liability, Credit Vendor
• On cash payment of RCM: Debit RCM Output Liability, Credit Bank
• If payment misses return date: Reclassify RCM Input Credit to Deferred until payment

Month end entries

Accrue unbilled RCM services where time of supply has triggered. Example entry, Debit Expense, Credit RCM Output Liability, Credit Accrued Expenses. Reconcile RCM Output with GSTR-3.1(d) values, reconcile RCM Input with 4(A)(3) for paid credits, compute interest for delays, and reclassify deferred ITC to available where paid. For faster close, see period end closing automation.

Many teams use AI Accountant to auto flag RCM transactions from Tally or Zoho Books, reconcile ledgers, and prepare month end reports with an audit trail. For background reading, review the ICA RCM explainer and the Aditya Birla Capital guide.

Reporting in GSTR-3B

Table 3.1(d), Inward supplies liable to reverse charge

Report taxable value and tax amounts by IGST, CGST, SGST. Interstate services draw IGST, intrastate split into CGST and SGST. Avoid reporting gross values that include tax, keep interstate and intrastate separate.

Payment through cash ledger

Ensure adequate balance in your cash ledger before filing, pay via the portal using approved modes, the payment immediately credits your ledger for filing.

Table 4(A)(3), ITC on reverse charge

Claim only the ITC for RCM that is actually paid in cash for the period, split by tax head consistent with your liability reporting.

Common reporting pitfalls

Watch for double reporting, premature ITC claims, and place of supply errors that misclassify tax heads. Since suppliers do not report your RCM transactions, GSTR-2B will not auto populate, your books are the single source of truth. For a concise refresher, see the DMI Finance RCM guide.

Vendor Wise RCM Tracker

Essential tracker fields

• Vendor identification, GSTIN, legal name, trade name, entity type
• Service details, description, SAC, notification reference, applicable rate
• Transaction data, invoice number and date, taxable value, place of supply, interstate or intrastate
• RCM determination, Yes or No with legal basis and notes
• Payment tracking, RCM tax, payment date, challan, cash ledger reference
• ITC management, eligibility, Section 17 restrictions, claim date, return period
• Documentation links, self invoices, payment vouchers, GTA options, exemption certificates

Control mechanisms

• Maker checker reviews before close
• Aging alerts at thirty, fifteen, and seven days to due date
• 3B reconciliation formulas against ledgers
• Version history and change logs for audit trails

Automation opportunities

AI Accountant integrates with accounting systems to auto identify RCM lines, compute liability, and maintain vendor wise records, learn more at AI Accountant. QuickBooks, Xero, FreshBooks, and Tally also offer GST features that reduce manual work.

Practical Examples

Example 1, Legal services to a Private Limited Company

Invoice value ₹1,00,000 without GST, 18 percent RCM applies.

• Booking: Debit Legal Expense 1,00,000, Credit CGST RCM Output 9,000, Credit SGST RCM Output 9,000, Credit Vendor 1,00,000
• RCM payment: Debit CGST RCM Output 9,000, Debit SGST RCM Output 9,000, Credit Bank 18,000
• ITC availment: Debit CGST RCM ITC 9,000, Debit SGST RCM ITC 9,000, Credit RCM ITC Deferred 18,000
• GSTR-3B: Table 3.1(d) taxable value 1,00,000 and tax split, Table 4(A)(3) credit claimed for paid tax

Example 2, GTA freight services at 5 percent RCM

Freight ₹50,000, GTA has not opted forward charge, you are a specified recipient.

• Booking: Debit Freight Expense 50,000, Credit CGST RCM Output 1,250, Credit SGST RCM Output 1,250, Credit Vendor 50,000
• Then pay RCM in cash and claim ITC once paid

Example 3, Director sitting fees

Fees ₹20,000, time of supply triggers on earlier of payment or sixty days from approval, if unpaid at month end, accrue.

• Accrual: Debit Director Sitting Fees 20,000, Credit CGST RCM Output 1,800, Credit SGST RCM Output 1,800, Credit Accrued Expenses 20,000

Cross border service import

Import consulting of ₹82,000, IGST RCM at 18 percent, flexible utilization order for IGST credit.

• Booking: Debit Consulting Expense 82,000, Credit IGST RCM Output 14,760, Credit Foreign Vendor 82,000

For additional reading on fundamentals and edge cases, see the Aditya Birla Capital primer, the DMI Finance explainer, and these tough RCM FAQs.

Common Mistakes and How to Avoid

Wrong service mapping and rates

GTA rate or option errors are common, and confusion between legal services which are under RCM, and other professionals which are typically not, can cause misclassification. Maintain a current notification tracker and seek advice when uncertain.

Missing self invoice requirements

Self invoices for unregistered suppliers are mandatory, missing documents can invalidate ITC, implement templates and training.

Premature ITC claims

Do not claim ITC until cash is paid, build system checks that block claims without challan reference.

Place of supply errors

Misclassifying interstate as intrastate flips tax heads, automate place of supply determination and verify addresses.

Missed month end accruals

Unbilled services that triggered time of supply still need accruals, maintain service receipt registers and recurring service calendars.

Inadequate documentation

Poor trails lead to ITC denial, create digital audit files with invoices, vouchers, challans, and reconciliations. For further guidance, review the Aditya Birla Capital guide, the ICA RCM article, the DMI Finance summary, and these RCM FAQs.

RCM Month End Close Checklist

Pre close preparation

• Review vendor master for entity type and registration, update RCM applicability
• Refresh service mapping against latest notifications and rates
• Validate carry forward items from prior months

Transaction processing

• Identify all RCM services via invoice, payment, and service receipt registers
• Verify taxable value, rate, and tax head for each item
• Issue self invoices for unregistered suppliers with sequential numbering
• Post journals following your chosen approach

Payment and reconciliation

• Compute total RCM liability by IGST, CGST, SGST
• Pay via cash ledger before the filing due date
• Reconcile RCM Output versus 3.1(d), RCM Input versus 4(A)(3)
• Update the vendor tracker with challan and ITC status

GSTR-3B preparation

• Compile 3.1(d) from ledgers, cross verify to source documents
• Compile 4(A)(3) for paid RCM credits only
• Run reconciliation reports and document differences

Documentation and filing

• Archive invoices, self invoices, vouchers, challans, reconciliations
• Share management summaries on compliance status and risks
• File GSTR-3B and store acknowledgments

Conclusion

RCM reshapes tax payment responsibility, yet with the right mapping, controls, and month end routines, it becomes predictable. Establish a clear ledger structure, pay RCM in cash on time, claim ITC accurately, and reconcile to GSTR-3B every month. Build a vendor wise tracker with notification references and documentation links, and automate where possible with AI Accountant for detection, reconciliation, and reporting. Stay current with notifications and embed maker checker reviews, your future audits will thank you.

FAQ

Can we claim ITC in the same month we pay RCM in cash, or do we have to wait for the next period

You can claim ITC in the same month if the cash payment hits your electronic cash ledger before you file GSTR-3B, the credit appears in Table 4(A)(3). If you pay after filing, the ITC shifts to the next period, there is no permanent loss of credit.

Do we need a self invoice when the supplier is registered but the service is notified under RCM

No, for registered suppliers providing notified RCM services, their invoice without GST suffices. Self invoices are required only for unregistered suppliers, raise a payment voucher when you pay them for a complete audit trail.

Does the 180 day vendor payment rule apply to RCM transactions, do we reverse ITC if we delay payment to the vendor

The 180 day rule does not apply to RCM vendor payments. However, ITC is available only after you pay RCM in cash to the government, vendor payment and tax payment are separate requirements.

Which ledgers should I maintain for clean RCM audits in Tally or Zoho Books

Maintain RCM Output Liability by IGST, CGST, SGST, RCM Input Credit by IGST, CGST, SGST, a Deferred RCM ITC account for timing differences, and service expense ledgers by category. This structure aligns with GSTR-3B tables and simplifies reconciliations.

How do I fix prior month RCM under reporting, and how is interest computed

Disclose the missed liability in the current GSTR-3B Table 3.1(d), pay tax and interest at eighteen percent per annum counted from the original due date to actual payment date, then claim ITC in Table 4(A)(3) once paid. Keep a note explaining the correction for audits, AI Accountant can calculate day wise interest and generate a memo.

GTA keeps changing options, how do I prevent wrong rate or wrong charge mechanism during posting

Obtain a fresh written declaration from the GTA each financial year and whenever they change their option, attach it to the vendor master. In your RCM tracker, store a Yes or No flag for forward charge and the effective dates, AI Accountant can enforce validations that block posting without a current declaration.

What is the correct reporting flow for import of services under RCM in 3B

Report the taxable value in Table 3.1(d) under inward supplies liable to reverse charge, pay IGST via cash ledger, then claim the IGST credit in Table 4(A)(3) in the same period if paid before filing. Utilize IGST credit in the standard order, IGST, then CGST, then SGST.

We missed issuing self invoices for a few unregistered consultants, can we still claim ITC after paying RCM

Yes, issue self invoices and payment vouchers now for those periods, ensure all particulars are correct, retain proof of cash payment of RCM, and then claim ITC in a subsequent return if not already claimed. Document the remediation steps, AI Accountant can auto generate backdated self invoice numbers with an exception log.

What are typical month end accruals under RCM that CAs should not miss

Director fees approved but unpaid, legal or professional services rendered but unbilled, GTA freight received near month end, security services for the last week, and government renting. Accrue expense and RCM output, pay RCM in cash to unlock ITC, and reverse or adjust in the next month when invoices arrive.

How do I reconcile RCM Output and Input with GSTR-3B efficiently

Summarize RCM Output by IGST, CGST, SGST and tie to Table 3.1(d). Summarize paid RCM Input by tax head and tie to Table 4(A)(3). Investigate differences for timing, rate, or place of supply errors. AI Accountant produces reconciliation reports with drill down to vouchers and challans.

When using the immediate ITC recognition approach, how do I handle missed cash payment before filing

Reclassify RCM Input Credit to Deferred at month end for the unpaid portion, do not claim it in 4(A)(3). After payment is made, move from Deferred back to Input Credit and claim in that month. This avoids audit issues from premature claims and keeps the P&L clean.

What documents should I keep for RCM audits, and how long

Keep supplier invoices or self invoices, payment vouchers, GTA option declarations, cash ledger challans, GSTR-3B acknowledgments, ledger reconciliations, and your vendor wise RCM tracker. Retain for the statutory record retention period, typically six to eight years depending on assessments, AI Accountant can maintain a searchable archive with links from each voucher.