Reverse Charge Mechanism (RCM): When Freelancers Must Pay GST Themselves

The short version: for a specific, government-notified list of purchases — most commonly importing a service from outside India — you, the buyer, have to calculate and pay GST directly to the government, instead of your supplier collecting it from you. This is the reverse charge mechanism (RCM), and it catches freelancers and small businesses off guard most often when they pay for an overseas SaaS subscription, a freelance service, or a consulting engagement from abroad.

What is reverse charge, exactly?

Under GST's normal arrangement, the supplier charges GST on the invoice, collects it from the buyer, and remits it to the government. Reverse charge flips this: for certain notified categories of supply, the recipient is legally responsible for the GST instead. The supplier doesn't charge GST on their invoice at all in these cases — the buyer separately calculates the tax, self-invoices for it, and pays it directly.

When does this apply to freelancers and small businesses?

The category that trips up freelancers and small business owners most often is import of services — paying a supplier located outside India for something. If you're GST-registered and you pay for a service from abroad (a freelance designer in another country, a software subscription billed from overseas, an international consultant), you generally have to self-invoice and pay IGST under reverse charge on that payment, even though the foreign supplier isn't GST-registered in India and didn't charge you anything on their invoice.

A few other notified domestic categories also fall under RCM — for example, certain legal services provided by an advocate or firm of advocates to a business entity, and Goods Transport Agency (GTA) services under specified conditions. These lists are set by government notification and are genuinely narrow and specific, not a general rule about "services from unregistered suppliers" — confirm the current notified list on the GST portal or with a tax professional before assuming a particular purchase is or isn't covered.

How does paying tax under reverse charge actually work?

Instead of receiving a GST-inclusive invoice from your supplier, you as the recipient:

1. Issue a self-invoice (and, where the supplier isn't registered, a payment voucher) recording the transaction.
2. Calculate the applicable GST yourself — for an import of services, this is typically IGST at the applicable rate on the value paid.
3. Pay that GST amount directly to the government in cash, through your regular GST return filing.
4. Claim it back as input tax credit in the same or a later return, if you're otherwise eligible — see our Input Tax Credit basics guide.

Is this a real cost, or does it net out?

For a fully taxable business making eligible purchases, RCM is broadly cash-flow-neutral over a return cycle: you pay the tax in cash, then claim an equivalent credit back. It isn't free, though — you can't offset the RCM liability against existing input tax credit balance (it must be paid in cash), and there's a genuine compliance step (the self-invoice and the return entries) that a normal purchase invoice doesn't require. For a business that makes exempt supplies, or isn't otherwise eligible for full ITC, the RCM amount can be a real, non-recoverable cost.

Common mistakes

• Assuming RCM only applies to large businesses — it applies based on the category of purchase, not the size of the buyer.
• Forgetting to self-invoice at all because the foreign supplier's invoice looks "complete" and doesn't mention GST.
• Not claiming back the ITC the RCM payment is eligible for, effectively paying the tax twice in practice.
• Treating every unregistered-supplier purchase as automatically RCM — the notified list is specific, not a blanket rule.

Once you've worked out whether a purchase is RCM, calculating the actual liability uses the same CGST/SGST/IGST logic as any other GST transaction — see our CGST vs SGST vs IGST guide for how that split works.