This guide explains what reverse charge is, the legal basis for it, the full list of goods and services currently covered, how input tax credit works on RCM, the self-invoicing and time-of-supply rules, and the compliance steps a registered person must follow.
What is Reverse Charge Mechanism in GST?
Reverse charge is defined in Section 2(98) of the CGST Act, 2017 as the liability to pay tax by the recipient of supply of goods or services (or both) instead of the supplier, where such liability is cast on the recipient under the law.
In a forward-charge transaction, the supplier raises a tax invoice, collects GST from the customer and deposits it. In a reverse-charge transaction, the supplier does not charge GST; the registered recipient self-assesses the tax, pays it to the government in cash, and (where eligible) claims it back as input tax credit.
| Feature | Forward Charge | Reverse Charge (RCM) |
|---|---|---|
| Who pays the tax | Supplier | Recipient |
| Tax shown on supplier’s invoice | Yes | No (supplier issues invoice without GST, or recipient self-invoices) |
| How liability is discharged | Supplier’s cash/credit ledger | Recipient’s cash ledger only |
| ITC | Claimed by recipient on the supplier’s invoice | Claimed by recipient on the tax it has itself paid |
| Compulsory registration | On crossing threshold | Recipient must register irrespective of turnover |
The purpose of RCM is to widen the tax net and improve compliance in sectors where the supplier is often unorganised or unregistered (transport, scrap, small landlords, individual professionals), and to collect tax on imports of service where the supplier is outside India and cannot be brought under the Indian tax administration.
Legal Basis: The Three Sources of RCM
RCM liability can arise only where the law specifically imposes it. There are three distinct sources:
- Section 9(3) of the CGST Act / Section 5(3) of the IGST Act — the government notifies categories of goods and services on which the recipient must pay tax. This is the most important and most frequently litigated category.
- Section 9(4) of the CGST Act / Section 5(4) of the IGST Act — supplies of notified goods/services received by a notified class of registered persons from unregistered suppliers.
- Section 5(3) of the IGST Act read with Section 7(1)(b) — import of services, where the recipient in India pays IGST under reverse charge.
The two key rate notifications to keep on hand are:
- Notification No. 13/2017 – Central Tax (Rate) (and the parallel 10/2017 – Integrated Tax (Rate)) for services under RCM — verify the latest version on CBIC; and
- Notification No. 04/2017 – Central Tax (Rate) for goods under RCM.
Both notifications have been amended several times. Any RCM determination should be tested against the latest amended version of the relevant notification, not a static list, because entries are added and modified at almost every GST Council meeting.
RCM on Goods (Section 9(3))
A registered recipient must pay GST under reverse charge on the notified goods listed in Notification No. 04/2017-CTR (as amended). The commonly encountered entries include:
- Cashew nuts (not shelled or peeled) supplied by an agriculturist
- Bidi wrapper leaves (tendu) and unmanufactured tobacco leaves supplied by an agriculturist
- Silk yarn supplied by manufacturers of silk yarn from raw silk or silk worm cocoons
- Raw cotton supplied by an agriculturist
- Supply of lottery (by State Government/Union Territory/local authority to a lottery distributor or selling agent)
- Used vehicles, seized and confiscated goods, old and used goods, waste and scrap supplied by Central/State Government, Union Territory or a local authority to a registered person
- Priority Sector Lending Certificates supplied between banks
- Metal scrap (Chapters 72 to 81 of the Customs Tariff) supplied by an unregistered person to a registered person — added with effect from 10 October 2024
The metal-scrap entry is the most significant recent addition to the goods list and is discussed under “Recent Changes” below.
RCM on Services (Section 9(3)) — The Working List
This is the category most businesses deal with day to day. The principal services notified under RCM (Notification No. 13/2017-CTR, as amended) are set out below. Treat this as a working list to be verified against the current notification before you act on any specific entry.
| Service | Supplier | Recipient who pays under RCM |
|---|---|---|
| Goods Transport Agency (GTA) services (where GTA has not opted for forward charge) | GTA | Specified recipients — factory, registered society, co-operative society, registered person, body corporate, partnership firm, casual taxable person |
| Legal services | Individual advocate, senior advocate or firm of advocates | Any business entity |
| Services of an arbitral tribunal | Arbitral tribunal | Any business entity |
| Sponsorship services | Any person | Body corporate or partnership firm |
| Services supplied by Central/State Government, UT or local authority (excluding specified services) | Government / local authority | Any business entity |
| Services of a director | Director of a company / body corporate | The company or body corporate |
| Services of an insurance agent | Insurance agent | Person carrying on insurance business |
| Services of a recovery agent | Recovery agent | Banking company / financial institution / NBFC |
| Copyright / supply by author, music composer, photographer, artist, etc. | Author / artist | Publisher, music company, producer (with the option for the author to pay under forward charge in specified cases) |
| Security services (supply of security personnel) | Any person other than a body corporate | Registered person (with carve-outs for composition taxpayers and certain government entities) |
| Renting of a motor vehicle designed to carry passengers (where the supplier charges 5% and does not pass on ITC) | Any person other than a body corporate | Body corporate |
| Renting of residential dwelling to a registered person | Any person | Registered person |
| Renting of any property other than a residential dwelling (commercial/immovable property) | Unregistered person | Registered person — entry 5AB, effective 10 October 2024 |
Several of these entries carry conditions and exclusions (for example, GTA’s forward-charge option, the body-corporate carve-out for security and motor-vehicle renting, and composition-taxpayer exclusions). The exact wording of the entry decides liability, so the notification — not a summary table — is the operative document.
RCM on Supplies from Unregistered Persons (Section 9(4))
The original Section 9(4) imposed RCM on all purchases of goods or services by a registered person from any unregistered person. That blanket provision was suspended in October 2017 and subsequently replaced. The current Section 9(4) is narrow: it applies only to a notified class of registered persons receiving notified supplies from unregistered persons.
The principal notified case is real estate — under Notification No. 07/2019-CTR, a promoter must pay tax under RCM on the shortfall where it fails to procure the prescribed minimum percentage (80%) of inputs and input services from registered suppliers, and on cement and specified capital goods procured from unregistered suppliers.
Note that the two recent additions — metal scrap and commercial property renting by unregistered persons — operate through Section 9(3) entries in the rate notifications, not through the general Section 9(4) route. This distinction matters when drafting a reply to a notice, because the enabling provision and notification must be cited correctly.
Import of Services under RCM
Where a person in India receives a service from a supplier located outside India, and the supply is in the course of business, it is treated as a supply under Section 7(1)(b) of the CGST Act and the recipient pays IGST under reverse charge (Section 5(3) of the IGST Act). Common examples include foreign software subscriptions, management or consultancy fees paid to a foreign group company, and online advertising services from overseas platforms.
Two points to watch:
- OIDAR services supplied to a registered person are taxed under RCM in the hands of the recipient. Where such services are supplied to a non-taxable online recipient (e.g. an individual consumer), the overseas supplier is itself required to register and pay tax — RCM does not apply.
- Import of services from a related person or establishment of the same entity, even without consideration, can be deemed a supply under Schedule I and attract RCM, with the time of supply determined accordingly.
Input Tax Credit (ITC) on RCM
Two rules cause most of the errors:
- RCM liability must be paid in cash. It cannot be discharged by utilising the electronic credit ledger. The tax has to be deposited through the electronic cash ledger.
- ITC of the RCM tax can be claimed by the recipient in the same or a subsequent return, after the liability has been paid, provided the recipient is otherwise eligible (the inward supply is used in the course of business and is not blocked under Section 17(5)).
So a registered recipient on an eligible RCM supply effectively follows a two-step flow: pay the tax in cash, then take credit of it. The cash outflow is temporary for a fully eligible supply, but it is permanent where the recipient is a composition taxpayer or where the inward supply is used for exempt/personal purposes, because no ITC is available in those cases.
Compliance Checklist for RCM Transactions
A registered person dealing with RCM supplies should ensure:
- Compulsory registration. Under Section 24(iii), a person required to pay tax under reverse charge must register, with no threshold exemption.
- Self-invoice. Under Section 31(3)(f), where the supplier is unregistered, the recipient must issue an invoice to itself for the inward supply. With effect from 1 November 2024, Rule 47A requires this self-invoice to be issued within 30 days of receiving the goods or services, and the time of supply is linked to it.
- Payment voucher. Under Section 31(3)(g), the recipient issues a payment voucher at the time of making payment to the supplier.
- Time of supply. For goods (Section 12(3)), it is the earliest of the date of receipt of goods, the date of payment, or 30 days from the invoice date. For services (Section 13(3)), it is the earlier of the date of payment or 60 days from the invoice date. Where it cannot be determined, the date of entry in the recipient’s books applies.
- Return reporting. RCM liability is declared in Table 3.1(d) of GSTR-3B, the tax is paid in cash, and the corresponding ITC (where eligible) is taken in Table 4. Inward supplies under RCM are also captured for reconciliation against GSTR-2B.
Recent Changes to Reverse Charge Mechanism in GST (FY 2024–25 onwards)
Three developments have materially expanded the RCM footprint and should be reflected in every client’s compliance setup:
- Metal scrap (effective 10 October 2024). Notification No. 06/2024-CTR brought supplies of metal scrap (Customs Tariff Chapters 72 to 81) by an unregistered supplier to a registered recipient under RCM at 18%. A separate TDS provision was introduced for metal-scrap supplies between registered persons. The combined effect is that scrap buyers must now operate both an RCM workflow (for unregistered suppliers) and a TDS workflow (for registered suppliers).
- Renting of commercial / immovable property (effective 10 October 2024). Notification No. 09/2024-CTR inserted entry 5AB in Notification No. 13/2017, making the renting of any property other than a residential dwelling by an unregistered person to a registered person liable to GST under RCM at 18%. The registered tenant pays the tax and, where the premises are used for taxable business, claims ITC. Composition taxpayers were subsequently excluded from this entry, and the intervening period was regularised on an “as is where is” basis.
- Rule 47A (effective 1 November 2024). A self-invoicing time limit of 30 days was prescribed for inward supplies from unregistered persons under RCM, tightening the time-of-supply determination and the related ITC timing.
Note on currency of the list: The RCM entries for goods and services are amended frequently — almost every GST Council meeting changes one or more entries, conditions, or rates. The lists above are a working reference. Before relying on any specific entry in a filing, reply, or advice note, confirm it against the latest amended text of Notification No. 04/2017-CTR (goods) and Notification No. 13/2017-CTR (services), and the corresponding IGST notifications.
Worked Example
A registered manufacturer in Bengaluru engages an individual advocate for litigation support and pays a fee of ₹1,00,000. Because legal services by an advocate to a business entity fall under RCM:
- The advocate raises an invoice for ₹1,00,000 without GST.
- The manufacturer issues a self-invoice, computes GST at 18% (₹18,000), and pays it in cash through the electronic cash ledger, reporting it in Table 3.1(d) of GSTR-3B.
- Since the legal services are used for the manufacturer’s taxable business, it claims ₹18,000 as ITC in Table 4 of the same (or a later eligible) return.
Net cash impact for a fully eligible supply is nil over the cycle, but the liability had to be discharged in cash first.
Frequently Asked Questions on Reverse Charge Mechanism in GST
What does reverse charge mechanism in GST mean in simple terms?
It means the buyer pays GST to the government instead of the seller. The seller issues an invoice without GST, and the registered buyer self-assesses and deposits the tax.
Can RCM be paid using input tax credit?
No. Tax payable under reverse charge must be paid in cash through the electronic cash ledger. ITC cannot be used to discharge an RCM liability. The tax so paid can then be claimed as ITC where the recipient is eligible.
Is registration compulsory if I only have RCM liabilities?
Yes. Section 24(iii) requires any person liable to pay tax under reverse charge to register, regardless of turnover.
Does RCM apply to all purchases from unregistered suppliers?
No. The blanket Section 9(4) charge was withdrawn. RCM on unregistered supplies now applies only to notified categories (such as real-estate promoters), and to specific Section 9(3) entries like metal scrap and commercial property renting.
Who pays GST on rent of commercial property from an unregistered landlord?
With effect from 10 October 2024, the registered tenant pays GST at 18% under RCM and may claim ITC where the premises are used for taxable business.
Is the reverse charge mechanism in GST applicable on import of services?
Yes. The Indian recipient pays IGST under reverse charge on services imported in the course of business, subject to the OIDAR carve-out for supplies to non-taxable online recipients.