Definition
Reverse Charge Mechanism (RCM)
Under the reverse charge mechanism, the recipient of a supply, rather than the supplier, is liable to pay GST to the government.
Normally the supplier collects GST and pays it to the government. Under RCM, that liability shifts to the buyer for specified categories — such as supplies from unregistered dealers, certain notified goods and services, and imports of services. The recipient pays the tax directly and can usually claim it back as input tax credit.
RCM helps the government capture tax in sectors where suppliers are hard to track or are unregistered. Businesses must self-assess and discharge RCM liability in cash, then claim credit, which adds a compliance step and cash-flow consideration.
Related terms
- Input Tax Credit (ITC)Input Tax Credit lets a GST-registered business offset the tax it has already paid on purchases against the GST it collects on sales, so tax is levied only on value added.
- GST Registration ThresholdThe GST registration threshold is the annual turnover above which a business must register for GST, with different limits for goods, services and special-category states.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.