Forward vs. Reverse Charge in GST: FCM and RCM Rules Explained

The Goods and Services Tax (GST) framework in India distributes the responsibility of tax payment using two primary mechanisms: the **Forward Charge Mechanism (FCM)** and the **Reverse Charge Mechanism (RCM)**.

While Forward Charge is the standard process for most commercial transactions, Reverse Charge transfers the compliance burden to the buyer. Navigating when to apply RCM and how to record these entries in TallyPrime is essential for corporate accountants to avoid audit penalties. In this comprehensive guide, we compare FCM and RCM, list notified RCM items, explain self-invoicing rules, and outline bookkeeping entries.

FCM vs. RCM: Core Comparison

The table below highlights the primary operational differences between FCM and RCM:

Notified Services Under RCM: Section 9(3)

Section 9(3) of the CGST Act lists specific categories of services that are subject to reverse charge. The most common commercial services are:

1. Goods Transport Agency (GTA): If the GTA has not opted to pay under FCM (at 12% or 5%), the business recipient must pay 5% GST under RCM.
2. Legal Services: Services provided by individual advocates, senior advocates, or firms of advocates to any business entity are subject to 18% GST under RCM.
3. Director Services: Fees, commissions, or remunerations paid by a company or body corporate to its directors (excluding salaries subject to TDS u/s 192) are subject to 18% GST under RCM.
4. Sponsorship Services: If a business sponsors an event, the sponsorship service fees paid are subject to 18% GST under RCM.
5. Government Services: Services provided by the Central Government, State Governments, or local authorities to a business (such as allocation of spectrum, licenses, or space leasing) are subject to RCM (excluding renting of immovable property, speed post, and transport services).
6. Residential Property Renting: Renting a residential dwelling to a registered person for business use attracts 18% GST under RCM.

Self-Invoicing and Payment Vouchers under RCM

Under GST regulations, when purchasing goods or services subject to RCM from an unregistered supplier, the recipient must adhere to two invoicing requirements:

• Self-Invoice (Section 31(3)(f)): The recipient must issue a self-invoice on the date of receipt of the goods or services. This self-invoice acts as the primary document supporting the payment of RCM and the subsequent claim of ITC.
• Payment Voucher (Section 31(3)(g)): The recipient must issue a payment voucher at the time of making the payment to the unregistered supplier.

RCM Rules for Composition Dealers

A common compliance error is assuming that taxpayers registered under the GST Composition Scheme (who are exempt from standard tax collections) do not have to pay RCM. Under GST rules, composition dealers **are fully liable to pay GST under reverse charge** on any GTA, legal, or other RCM purchases. Furthermore, composition dealers are **not eligible to claim Input Tax Credit (ITC)** on the RCM paid, turning the tax payment into a direct business expense.

Bookkeeping Entries for RCM in TallyPrime

Accounting for RCM requires three distinct steps: recording the expense, recording the liability, and booking the ITC after cash payment.

Step 1: Record the Purchase Invoice

Create a ledger for the service (e.g. GTA Expenses) and select **GST Applicable**. Set **Is Reverse Charge Applicable** to Yes.

Debit: GTA Expenses A/c                   -- ₹50,000 Credit: Transporter Ledger A/c            -- ₹50,000

Step 2: Book the RCM Tax Liability

Record a Journal Voucher (F7) with the **Stat Adjustment** settings (GST > Increase of Tax Liability > Inward Supplies liable to Reverse Charge):

Debit: Tax on RCM Clearing A/c            -- ₹2,500 Credit: CGST Output (RCM) A/c (2.5%)      -- ₹1,250 Credit: SGST Output (RCM) A/c (2.5%)      -- ₹1,250

Step 3: Book the Input Tax Credit

After paying the monthly GST liability in cash, record the corresponding ITC using a journal voucher:

Debit: CGST Input A/c (2.5%)              -- ₹1,250 Debit: SGST Input A/c (2.5%)              -- ₹1,250 Credit: Tax on RCM Clearing A/c            -- ₹2,500

Primary Focus: TrulyInvoice Purchase Automation

Accurately managing GST RCM liabilities on transport bills, legal services, and monthly vendor bills requires matching invoices with clean purchase ledgers. If tax splits or voucher entries contain typing errors, you risk underpaying RCM liabilities or missing out on eligible input tax credit claims during audits.

To eliminate these errors, use **TrulyInvoice**. TrulyInvoice reads your supplier bill PDFs and scanned invoice images using layout-aware OCR. The platform automatically extracts line items, tax rates, and HSN codes, and syncs formatted F9 purchase vouchers directly into Tally Prime. This eliminates manual data entry mistakes for a flat subscription of **plans starting at ₹399/month**, ensuring your purchase books remain accurate.