Reverse Charge Mechanism Under GST with Examples

Under the reverse charge mechanism under GST, the recipient of a supply pays the tax to the government instead of the supplier. It flips the normal chain for specific goods and services, purchases from certain unregistered persons and imports of services. Many small businesses miss reverse charge liability because no GST appears on the supplier's bill, yet the law expects the buyer to compute it, pay it in cash and report it. This guide explains when reverse charge applies, how to calculate and pay it, the documents you must issue and worked examples for the most common cases.

Forward charge versus reverse charge

Point	Forward charge	Reverse charge
Who pays tax to government	Supplier	Recipient
GST shown on supplier's invoice	Yes, charged to buyer	No tax charged; invoice states reverse charge applies
How tax is paid	Credit ledger or cash	Cash only
Buyer's ITC	Claimed after supplier reports	Claimed by the buyer after paying the RCM tax, if eligible
Reported in	Supplier's GSTR-1 and GSTR-3B	Recipient's GSTR-3B Table 3.1(d)

When reverse charge applies

1. Notified services under section 9(3)

The government has notified services where the recipient pays tax. The most common for businesses:

Service	Supplier	Recipient liable
Goods transport by road	Goods Transport Agency (GTA) that has not opted to pay tax itself	Specified recipients such as companies, firms, registered persons, factories
Legal services	Advocate or firm of advocates	Business entity
Sponsorship	Any person	Body corporate or partnership firm
Director services	Director	The company
Insurance agent and recovery agent services	Agent	Insurer, bank or NBFC
Security services	Supplier other than a body corporate	Registered person (with some exclusions)
Renting of residential dwelling	Any person	Registered person
Renting of commercial property	Unregistered person	Registered person (excluding composition taxpayers)
Services by government	Government or local authority	Business entity (with exclusions)

2. Notified goods

Reverse charge also applies to specific goods, such as cashew nuts not shelled or peeled, bidi wrapper leaves, tobacco leaves, raw cotton, silk yarn and used vehicles or seized goods sold by government, and to metal scrap supplied by unregistered persons to registered persons. Check the current notification for your trade.

3. Import of services

When a registered business in India buys services from a supplier outside India, such as cloud software, advertising or consulting, IGST is payable by the recipient under reverse charge.

4. Section 9(4) purchases from unregistered persons

Section 9(4) applies only to notified classes of registered persons and supplies, mainly in the real estate sector. It does not apply generally to all purchases from unregistered suppliers.

5. E-commerce operators under section 9(5)

For certain services, such as passenger transport, accommodation and restaurant services supplied through e-commerce operators, the operator pays the tax as if it were the supplier. This is technically separate from reverse charge but works on the same principle.

Time of supply under reverse charge

The date on which RCM liability arises decides the month in which you must pay.

Type	Time of supply is the earliest of
Goods	Date of receipt of goods; date of payment; date immediately after 30 days from the supplier's invoice
Services	Date of payment; date immediately after 60 days from the supplier's invoice
Services from unregistered supplier	Linked to the date of the self-invoice issued by the recipient, under amended rules

Documents: self-invoice and payment voucher

When you buy RCM goods or services from an unregistered supplier, you must issue a self-invoice under section 31(3)(f). Rules now require the self-invoice within 30 days of receiving the supply. When you pay the supplier, you also issue a payment voucher. For registered suppliers covered under RCM, the supplier's invoice itself states that tax is payable on reverse charge, and you do not need a self-invoice.

Worked examples

Example 1: legal fees

A private limited company in Bengaluru receives legal services from an advocate in Bengaluru for ₹1,50,000. The advocate's bill shows no GST and mentions reverse charge.

• RCM at 18% intra-state: CGST 9% = ₹13,500 and SGST 9% = ₹13,500. Total ₹27,000.
• The company pays ₹27,000 in cash through PMT-06 and reports it in Table 3.1(d) of GSTR-3B.
• It claims ITC of ₹27,000 in Table 4A(3) of the same return, since legal services for business are not blocked.
• Net cash effect over time: the ₹27,000 cash outflow is recovered as credit against future output tax.

Example 2: goods transport agency

A Ludhiana manufacturer pays a GTA ₹40,000 for transporting goods within Punjab, and the GTA has not opted to pay tax itself. RCM applies at 5% (2.5% CGST + 2.5% SGST): ₹1,000 + ₹1,000 = ₹2,000, paid in cash. The manufacturer can claim the ₹2,000 as credit. If the GTA had opted for forward charge, it would charge GST on its invoice and the manufacturer would not pay RCM. Check the current rate options for GTA.

Example 3: imported software subscription

A Noida design studio pays a US company for a software subscription equivalent to ₹84,000. RCM IGST at 18% is ₹15,120, paid in cash and reported in Table 3.1(d). The studio then claims ₹15,120 ITC in Table 4A(2) as import of services. Exchange rate conversion should follow the rate applicable on the date of supply.

Example 4: commercial rent from an unregistered landlord

A registered Chennai trader rents a shop from an unregistered individual for ₹50,000 per month. RCM at 18% applies: CGST ₹4,500 and SGST ₹4,500 each month, paid in cash, with a self-invoice. The trader then claims ₹9,000 credit. A composition taxpayer renting the same shop would not be liable under the current exclusion.

Why RCM must be paid in cash

Section 49(4) and the rules allow the electronic credit ledger to be used only for output tax. RCM liability is technically your own liability as recipient, but the law requires it to be paid in cash so that the government actually receives the tax. You then take credit of that cash payment. If you try to offset RCM using your credit balance, the portal will not allow it.

RCM in GSTR-3B: step by step

1. List all RCM transactions for the month from your purchase and expense registers.
2. Compute tax by rate and tax head based on place of supply.
3. Enter taxable value and tax in Table 3.1(d).
4. Deposit cash through PMT-06 if the cash ledger is short.
5. Enter eligible RCM credit in Table 4A(2) for import of services or 4A(3) for other RCM.
6. Offset RCM liability from the cash ledger and file.

The portal now provides an RCM liability and ITC statement to help track RCM paid and credit claimed across periods. For the full return walkthrough, see how to file GSTR-3B.

Accounting entries for reverse charge

Booking RCM correctly in the ledger makes the monthly return and the annual reconciliation straightforward. Using Example 1 (legal fees of ₹1,50,000):

1. On receiving the bill: debit legal expenses ₹1,50,000; credit advocate ₹1,50,000. The advocate is paid only the fee, because no GST is charged.
2. On recognising RCM liability: debit Input CGST (RCM) ₹13,500 and Input SGST (RCM) ₹13,500; credit RCM CGST payable ₹13,500 and RCM SGST payable ₹13,500.
3. On paying through the cash ledger: debit RCM CGST payable and RCM SGST payable; credit electronic cash ledger (or bank) ₹27,000.
4. On utilising the credit later: the Input CGST and Input SGST balances are used against output tax like any other credit.

Keeping separate RCM payable and RCM input ledgers lets you tie the books directly to Table 3.1(d) and Table 4A of GSTR-3B every month, and to the RCM statement on the portal.

Monthly RCM review checklist

1. Scan expense ledgers for legal fees, freight paid to GTAs, director remuneration billed as services, security services, sponsorship and rent.
2. Scan foreign currency payments for imported services such as software, cloud hosting, online advertising and consulting.
3. Check purchases of notified goods such as metal scrap from unregistered sellers.
4. Confirm whether each GTA or security agency has opted for forward charge on its invoice.
5. Issue self-invoices where the supplier is unregistered.
6. Compute RCM liability and confirm the cash ledger balance.
7. Claim eligible credit in the same return and exclude blocked items.

Common RCM mistakes

• Not paying RCM on legal fees because the advocate's bill has no GST.
• Paying RCM through the credit ledger.
• Forgetting RCM on imported software, cloud and advertising services.
• Paying GST twice when a GTA has opted for forward charge and also charged tax.
• Not issuing self-invoices for purchases from unregistered persons where RCM applies.
• Claiming RCM credit on blocked items, such as rent-a-cab for employees' personal use. See our blocked credits guide.

How Fininvo helps

Fininvo ERP lets you define reverse charge rules in its tax rate master and applies them based on transaction type and location, so RCM bills are flagged when they are recorded. GST invoices also carry the reverse charge field. Learn more on tax compliance, invoicing and pricing.

General information, not tax advice. The list of RCM supplies changes through notifications; consult your CA for your transactions.

Frequently Asked Questions

Is ITC available on tax paid under reverse charge?

Yes, if the goods or services are used for business and are not blocked under section 17(5). You claim it in the same return in which you pay the RCM tax.

Does a composition dealer pay reverse charge?

Yes. Composition taxpayers must pay tax on RCM supplies at normal rates and cannot claim credit, though some RCM entries, such as commercial rent from unregistered landlords, currently exclude them.

Is RCM applicable on all purchases from unregistered suppliers?

No. Only on notified goods and services, and under section 9(4) for notified classes of recipients, mainly in real estate. General purchases from unregistered small suppliers are not under RCM.

What if I forgot to pay RCM in an earlier month?

Pay it in the next GSTR-3B or through DRC-03 with interest from the original due date, and claim the credit subject to the time limits. Consult your CA on the period to report.

Who issues the invoice under reverse charge?

A registered supplier issues the invoice mentioning reverse charge. Where the supplier is unregistered, the recipient issues a self-invoice.