Reverse charge mechanism
Also written RCM
The GST rule under which the recipient of a service — not the supplier — pays the tax directly to the government, applied to AMCs paying GST on commissions to unregistered mutual fund distributors.
In plain language
Ordinarily, GST works the way most people assume it does: the supplier of goods or services collects the tax from the customer and pays it to the government. The reverse charge mechanism flips that for certain specified transactions — instead of the supplier, the recipient of the goods or services pays the tax directly to the government.
How it works
Goods and Services Tax became applicable from July 2017, payable by anyone supplying taxable goods or services whose annual turnover exceeds Rs 20 lakh. For certain specified supplies, the government requires the recipient, rather than the supplier, to pay the tax — the reverse charge mechanism.
For mutual fund distribution specifically: a distributor registered under GST raises an invoice for their commission and pays GST on it in the ordinary way. But under section 9(4) of the CGST Act and section 5(4) of the IGST Act, a registered recipient is liable to pay GST on procurements from unregistered suppliers under reverse charge. Since a distribution commission is a procurement by the AMC from the distributor, AMCs or mutual funds must pay GST under reverse charge on commissions paid to unregistered distributors.
A worked example
Girijan Mutual Fund pays commission to two distributors in a month:
| Distributor | GST-registered? | Commission | Who pays GST, and how |
|---|---|---|---|
| Distributor A (large, multi-state operation) | Yes | Rs 4,00,000 | Distributor A raises an invoice including GST; A collects and remits it in the normal way |
| Distributor B (small, individual agent, turnover well under Rs 20 lakh) | No | Rs 60,000 | No GST on B's invoice; the AMC itself pays GST under reverse charge on this Rs 60,000, direct to the government |
Distributor B never registers for GST, never charges it, and never remits it — the entire GST obligation on that Rs 60,000 commission shifts to Girijan Mutual Fund, precisely because B is unregistered. Had B instead been GST-registered, the normal forward-charge process in the Distributor A row would have applied instead.
Why NISM asks about it
Chapter 6, section 6.5.4 (Applicability of GST on distributors' commission). Expect the reverse charge mechanism tested on who ends up paying the tax (the recipient — here, the AMC), and specifically on why it applies to distributor commissions (because many individual distributors fall below the registration threshold and remain unregistered).
Common exam traps
- Reverse charge shifts who pays, not whether GST is payable at all. The tax is still due; the recipient, not the supplier, remits it.
- It applies specifically to commissions paid to unregistered distributors. A registered distributor charges GST in the ordinary (forward-charge) way — reverse charge does not apply to that invoice.
- The Rs 20 lakh turnover threshold determines registration, and registration status is what triggers reverse charge — a distributor below the threshold who has nonetheless voluntarily registered would not trigger reverse charge on their commission.
- Do not confuse this GST mechanism with the withdrawal of upfront commission and transaction charges — two separate, unrelated changes to distributor compensation covered in the same part of the chapter.