What is Reverse Charge Mechanism (RCM)?

Reverse Charge Mechanism (RCM) is a provision in GST law where the liability to pay GST is shifted from the supplier to the recipient of the goods or services. In normal cases, the supplier collects GST from the buyer and pays it to the government. Under RCM, the buyer pays the GST directly to the government.

Why it Matters for Startups:

Startups often encounter RCM when they receive legal services from a lawyer or import services from a foreign company (like paying for Google Ads or AWS). In these cases, the startup is responsible for calculating the GST on the transaction, paying it to the government in cash, and then claiming it back as Input Tax Credit. It's a critical compliance step that is often missed.

Example:

A startup in India pays a US-based SaaS company $100 for a software subscription. The startup must calculate the GST on this amount (18% of the Rupee equivalent), pay it to the Indian government, and then claim it as ITC in its next GST return.