Reverse Charge Mechanism (RCM) in Procurement

The Reverse Charge Mechanism (RCM) is the GST provision under which the buyer (recipient) of certain goods or services pays GST directly to the government, rather than paying it to the supplier and relying on the supplier to remit it. In government procurement, RCM applies to specific transaction categories, affecting how invoices are raised and payments processed.

What is RCM in government procurement?

Under the standard GST mechanism (forward charge), the supplier charges GST to the buyer, collects it, and deposits it with the government. Under RCM, the liability to deposit GST shifts to the recipient, the government department or contractor receiving the supply.

In Indian government procurement, RCM applies in two main scenarios:

Specific supplies from unregistered persons: If a registered business procures goods or services from an unregistered supplier (a small vendor not registered under GST), the registered business must pay RCM on that purchase. For government departments procuring from local unregistered vendors (common for small construction materials), RCM creates a compliance obligation.

Specified services listed under RCM: Section 9(3) of the CGST Act lists specific services where RCM always applies regardless of the supplier's registration status. In government procurement, the most relevant is GTA (Goods Transport Agency) services, government departments using transporters pay GST under RCM on transportation charges.

For contractors subcontracting to unregistered labour contractors or small unregistered service providers, RCM applies on the sub-contracting payment. The contractor must calculate and pay RCM, and can then claim ITC on the RCM payment.

When RCM applies, the supplier should not charge GST in the invoice, charging GST in an RCM situation creates a double-tax problem. The supplier issues an invoice without GST, and the buyer (recipient) pays the GST separately to the government under RCM. Government departments processing vendor payments must identify RCM-applicable transactions and ensure separate RCM payments are made.

Why it matters for bidders

Contractors who subcontract work to unregistered sub-vendors face an RCM compliance obligation they often overlook. Paying an unregistered labour contractor Rs 10 lakh triggers RCM on the applicable services rate (18 percent for construction services, though specific exemptions may apply for pure labour). Failing to pay RCM on time attracts interest at 18 percent per annum plus penalties.

On the other side, contractors are entitled to ITC on RCM payments they make. Correctly accounting for RCM outflows and the corresponding ITC credits is part of GST compliance that directly affects net tax liability.

Government departments processing contractor invoices must also identify when RCM applies to procurement from unregistered vendors and ensure their accounting systems capture and discharge the RCM liability.

Example

A CPWD contractor is building a government guesthouse. The contractor hires a local unregistered mason contractor for plastering work and pays Rs 4.5 lakh. The unregistered mason contractor is not registered under GST. Under RCM, the CPWD contractor must pay GST (18 percent of Rs 4.5 lakh = Rs 81,000) directly to the government. The mason contractor's invoice does not include GST. The CPWD contractor pays Rs 4.5 lakh to the mason and Rs 81,000 to the government under RCM. The contractor then claims Rs 81,000 as ITC in their next GSTR-3B filing, effectively recovering the RCM payment.

Key rules / thresholds

• RCM applies to supplies from unregistered persons when the recipient is a registered entity.
• Specified services under Section 9(3) always attract RCM regardless of supplier registration status.
• Supplier must NOT charge GST when RCM applies, the recipient pays GST directly.
• ITC is available on RCM payments made (unlike some blocked credits).
• RCM must be paid by the 20th of the month following the month of the supply.
• Failure to pay RCM attracts 18 percent interest per annum on the unpaid amount plus a potential penalty.