Reverse Charge Mechanism (RCM) in GST – Complete Practical Guide with Examples, Journal Entries & Tally (2026 Updated)

Reverse Charge Mechanism (RCM) in GST 

(This article has been fully updated in 2026 with latest GST rules, examples, and Tally entries)Reverse Charge Mechanism (RCM) is one of the most important yet confusing topics in GST. Many students, business owners, and even beginners in accounting struggle to understand when and how it applies.If you are searching for a simple and practical explanation of reverse charge mechanism in GST, this guide will help you understand it step by step using real-life examples, accounting entries, and Tally concepts.

What is Reverse Charge Mechanism in GST? (Quick Answer)

Reverse Charge Mechanism (RCM) is a GST system where the buyer pays tax instead of the seller. It applies to specific goods and services or when purchasing from unregistered suppliers. Under RCM, the buyer calculates GST and pays it directly to the government.

Simple ExplanationUnder normal GST system: 👉 Seller collects GST and pays to governmentUnder RCM: 👉 Buyer pays GST directly to government

In One Line:

RCM shifts tax responsibility from seller to buyer

Why Government Introduced RCM

Understanding the reason helps you remember the concept forever.

Main Objectives:

• To include unregistered suppliers in tax system
• To reduce tax evasion
• To ensure tax collection in service sectors

👉 Especially useful in:

• Transport
• Legal services
• Small vendors

Legal Provision of RCM 

RCM is covered under:

• Section 9(3) of CGST Act → Specified goods/services
• Section 9(4) of CGST Act → Unregistered purchases

👉 Adding this increases credibility (important for Google)

Types of Reverse Charge Mechanism

RCM is not just one type—it has two main categories.

1. RCM on Specified Goods and Services

Government has notified certain services where RCM is compulsory.

Important Examples

Service	Supplier	Who Pays GST
Legal service	Advocate	Client
GTA (Transport)	Transporter	Business
Security service	Agency	Receiver

2. RCM on Unregistered Dealer (URD)

If a registered person buys from an unregistered supplier, RCM may apply.👉 Example: A shop owner hires a local labourer who is not registered under GST.👉 The shop owner must pay GST.How to Activate RCM Feature in Tally:Goto Gateway of Tally -> Press F11 -> Enable Goods and Services TaxIn the GST Details screen, set Enable tax liability on reverse charge to Yes.

Real-Life Practical Examples 

Example 1: Transport Service (GTA)

A business hires a transporter for ₹5,000.

• GST Rate: 5%
• GST: ₹250

👉 Transporter does NOT charge GST 👉 Business pays ₹250 under RCM

Example 2: Legal Service

A company pays ₹20,000 to a lawyer.👉 Lawyer does not charge GST 👉 Company pays GST under RCM

Example 3: Local Vendor (Small Town Scenario)

In Joginder Nagar, a shop buys goods from an unregistered supplier.👉 Buyer must calculate and pay GST

RCM Calculation (Step-by-Step)

Let’s take a clear example:

• Purchase Value = ₹10,000
• GST Rate = 18%

👉 GST = ₹1,800

Under RCM:

• Supplier gets ₹10,000
• Buyer pays ₹1,800 to government

Accounting Entries for RCM 

You can also learn detailed accounting entries in our article on Tally GST accounting entries for beginners.

Step 1: Purchase Entry

Purchase A/c Dr.      To Supplier A/c

Step 2: GST Liability Entry

CGST A/c Dr.  SGST A/c Dr.      To RCM Payable A/c

Step 3: Payment Entry

RCM Payable A/c Dr.      To Bank A/c

Step 4: ITC Claim Entry

Input CGST A/c Dr.  Input SGST A/c Dr.      To CGST A/c      To SGST A/c

How to Record RCM in Tally Prime 

To understand practical GST accounting, read our complete guide on Tally Prime GST course with real examples and job scope.

Step-by-Step Process

1. Enable GST in Tally
2. Activate Reverse Charge option
3. Create supplier ledger
4. Record purchase entry
5. Use correct GST rate

Practical Tip

Always check:

• GST classification
• Voucher type
• Tax applicability

👉 These mistakes are very common in real jobs.

Input Tax Credit (ITC) Under RCM

Under RCM:👉 You MUST pay GST first 👉 Then claim ITC

Conditions for ITC

• GST must be paid
• Invoice must be available
• Proper accounting entry required

Important Rule

If you don’t pay GST: 👉 You cannot claim ITC

RCM vs Normal GST 

Feature	Normal GST	RCM
Tax Paid By	Seller	Buyer
Invoice	Includes GST	No GST
ITC	Direct	After payment
Complexity	Low	Medium

Compliance Under RCM (Very Important)

Businesses must:

• Pay GST on time
• File returns properly
• Maintain records

👉 Non-compliance leads to penalties.

Common Mistakes in RCM 

Mistake	Impact
Ignoring RCM	Penalty
Wrong GST rate	Loss
No ITC claim	Financial loss

Who Should Learn RCM?

• Tally students
• Accountants
• Business owners
• GST practitioners

If you want to explore job opportunities, check our guide on Tally GST career scope and salary in India.

Future Scope of RCM in India

With increasing digital monitoring:

• GST compliance will become stricter
• Demand for skilled accountants will rise
• Automation tools will increase

👉 RCM knowledge will be mandatory skill

Day-to-Day Use of RCM in Real Jobs

An accountant regularly:

• Checks RCM applicability
• Calculates GST
• Passes entries
• Files returns

👉 This is what actually happens in offices. Students searching for practical training can explore our best Tally course in Joginder Nagar with placement support.

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Self Invoicing

Self-invoicing means raising a purchase invoice, which is to be done when you have purchased goods / services from an unregistered dealer AND such purchase of goods or services falls under reverse charge mechanism.Since supplier is unregistered person hence cannot issue a GST-compliant invoice to you, thus you become liable to pay taxes on the supplier’s behalf. Hence, self-invoicing, in this case, becomes necessary.All registered taxpayers are required to pay GST under reverse charge need to register for GST and the threshold of Rs 20 Lakhs does not apply to them.

Exemption Limit

The government has given an exemption limit of Rs. 5,000 per day. If a total purchase is of less than Rs. 5,000 in one day from unregistered person then there is no requirement to pay tax on RCM.

Time of Supply under Reverse Charge Mechanism

• Time Of Supply in case of Goods

The time of supply shall be the earliest of the following dates, when supplying under reverse charge mechanism:

• the date of receipt of goods
• the date of payment
• immediately after 30 days from invoice date issued by the supplier

Still, If it is not possible to determine the time of supply, then it is the date of entry in the books of account of the recipient.

• Time Of Supply in case of Services

The time of supply shall be the earliest of the following dates under reverse charge:

• The date of payment
• immediately after 60 days from the invoice date of the supplier

When the time of supply cannot be determined then it shall be the date of entry in the books of account of the recipient.

Is Input Tax Credit allowed under Reverse Charge?

Tax paid on reverse charge mechanism will be available for input tax credit if such goods and/or services are used, or will be used, for business purpose. The recipient (i.e., who paid reverse tax) is eligible for  input tax credit.

How to Book Reverse Charge Liability and be eligible for Input Tax Credit.

To book Reverse Charge Liability and be eligible for ITC.From the GSTR2 report shown abovego to stat adjustments by pressing Alt+J ->select Increase of Tax Liability & Input Tax Credit  in additional details select Purchase from Un-registered Dealer.

Now a Journal voucher will open with Dr and Cr options. Select CGST with tax percentage of total amount. then again select Dr and repeat the process for  with SGST again.Note: Tax will not be automatically calculated. It needs to be written manuallyNow repeat same process with  Cr options for both CGST and SGST ledgers entries. By crediting CGST and SGST you  have created Tax Liability for your self. Once the Tax Liability has be created, it can be either paid or ITC can be availed for the same.Select Tax as GST -> select Goods / Services as per actual and save the voucher.

Now Reverse charge has been booked so, if you again go to GSTR2 reports then the screen will look like this. The Reverse Charge Mechanism Liability to be booked is zero and B2BUR invoice -4B will show the Total Input Tax Credit available.To know Reverse Charge Liability to be booked go toDisplay -> Statutory Reports -> GST -> GSTR2

Conclusion 

Reverse Charge Mechanism may seem complicated at first, but with practical understanding and examples, it becomes easy. It is an essential concept for anyone learning GST, accounting, or Tally.If you want to build a career in accounting, mastering RCM will give you a strong advantage in jobs and practical work. Reverse Charge Mechanism may seem complicated at first, but with practical understanding and examples, it becomes easy. 📞 Call Now – 9882027366 👉 Learn GST practically with real examples 💬 Book your free demo class on WhatsApp today
Reverse Charge Mechanism in Tally.ERP9 has been explained both practically and theoretically. Pl feel free to comment , like and share the blog.Similar Posts : How to Activate GST in Tally.ERP9 ?  Discounts in Sales Invoices in Tally.ERP9  Order Processing in Tally.ERP 9

Frequently Asked Questions

What is Reverse Charge Mechanism ?