Reverse Charge Mechanism (RCM) is the GST regime where the recipient of certain supplies pays the tax to the government instead of the supplier. The most common RCM scenario for foreign-owned Indian subsidiaries: services imported from the foreign parent — management fees, software licensing, advisory, technical support, intercompany SaaS. The parent doesn't pay Indian GST; your Indian subsidiary does.
When does RCM apply to imports
Under Section 5(3) of the IGST Act 2017, the recipient of an import of services is liable to pay IGST on RCM basis when the supplier is located outside India and the recipient is located in India. There's no threshold for RCM on imports — it applies from the first rupee of imported services.
- Management fees paid to the foreign parent for shared services.
- Software licensing and SaaS subscriptions from non-resident providers.
- Advisory, consulting and technical services from overseas firms.
- Royalty payments to the foreign parent for IP licensing.
- Marketing and lead-generation services performed outside India.
- Online advertising services by foreign platforms (Google, Meta, LinkedIn) — until equalisation levy / OIDAR mechanics apply (see below).
What's the GST rate
Most imported services attract 18% IGST under RCM. Some categories carry different rates — financial services 18%, royalties 18%, certain software 18% (some categories taxed at 12% historically; verify against current notifications).
RCM calculation + reclaim run by your consultant
FastLegal's tax consultant categorises each payment to your foreign parent / vendors, applies RCM where required, generates the self-invoice, deposits the IGST as RCM, and claims input credit in the same return. You see the net impact — usually zero cash on a steady-state intercompany basis.
The self-invoice mechanism
Under RCM, your Indian subsidiary issues a self-invoice on behalf of the foreign supplier, treating itself as the deemed supplier for that transaction. The self-invoice is a recipient-issued tax invoice that captures the value of the imported service and the IGST liability.
- Receive the foreign supplier's invoice (in USD or other foreign currency).
- Convert to INR using the GST-prescribed exchange rate (typically the buyer's bank's rate on the date of invoice).
- Issue a self-invoice with sequential numbering, your GSTIN, the foreign supplier's name/address, value in INR, and IGST at 18%.
- Pay IGST to the government via GST PMT-06 challan with the GSTR-3B filing.
- Claim Input Tax Credit (ITC) in the same GSTR-3B return — the IGST paid under RCM is creditable.
Input tax credit — net zero impact
The clean point: IGST paid under RCM is fully creditable as ITC, subject to the normal conditions (intended use for taxable supplies in India, GST registration etc.). For a foreign-owned subsidiary running an Indian GST-registered tech operation, the IGST paid on imported services is offset by ITC claim — the net cash impact is zero.
Where the cash impact is real: if your subsidiary's GST output is dominated by exports (which are zero-rated), you accumulate ITC that you must claim as refund from the government. Refunds take 60-90 days. The IGST you paid on RCM is part of this refund pool.
OIDAR and equalisation levy — alternatives to RCM
Two adjacent regimes that change the RCM picture in specific cases:
- OIDAR — Online Information and Database Access or Retrieval services from foreign platforms to Indian B2B / B2C. Big platforms (Google, Meta, LinkedIn, AWS etc.) typically register under OIDAR in India and charge IGST on their invoice directly. In that case, no RCM applies — you pay GST to them, they remit. Verify whether your foreign vendor is OIDAR-registered.
- Equalisation levy — applies to digital advertising and e-commerce services. The Indian payer withholds 6% (for advertising) or 2% (for e-commerce) and remits to the government. This is in lieu of income tax, not GST. Both RCM IGST and Equalisation Levy can apply simultaneously on the same payment.
Common mistakes
- Ignoring RCM because 'the foreign vendor's invoice has no GST'. The whole point of RCM is the vendor doesn't charge — you self-assess.
- Paying RCM but forgetting to issue a self-invoice. The self-invoice is what supports your ITC claim. Without it, the IGST you paid is leaked.
- Using the wrong exchange rate. GST rules prescribe the rate at the date of invoice — not the date of payment.
- Failing to claim ITC in time. ITC must be claimed within the prescribed window (typically by November of the following financial year). Miss the window and the credit is lost.
- Misclassifying intercompany cost-reimbursements as services. Pure cost reimbursements with no markup may not attract RCM (depending on the structure); markup definitely does.
Frequently asked questions
Does our US parent need to register for GST in India to invoice us?+
No — for B2B services to an Indian GST-registered recipient under RCM, the foreign supplier doesn't register. You self-assess and pay. For OIDAR services to Indian consumers, foreign providers register under simplified OIDAR registration.
Can we delay paying RCM?+
RCM must be paid with the GSTR-3B for the month in which the service is received. Delays attract interest at 18% p.a. plus a late-filing penalty.
What if our US parent invoices us in USD?+
Convert to INR at the GST-prescribed exchange rate (typically the bank's selling rate on the date of invoice). The self-invoice and the RCM IGST are in INR.
Are exports zero-rated under GST?+
Yes — exports of services are zero-rated. You either pay GST and claim refund, or you furnish a Letter of Undertaking (LUT) and supply without payment of GST. Most tech subsidiaries that export to the foreign parent prefer the LUT route to avoid cash flow tied up in refund claims.
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