Reverse Charge Mechanism In GST: Meaning, Implications, Regulations And Compliance

Reverse Charge mechanism in GST is a quite difficult concept to understand. Now, if you face the same problem the recipient of the goods and services becomes liable to pay the tax.

The main objective of shifting the burden for GST Payments to all the recipients is to widely open the tax burden.It provides the exemption to some specific classes of suppliers in order to tax import of services.

Only certain types of business entities can be subject to reverse mechanisms. You have to find out the complete constitution of the GST Number using all the GST search tools.

What Is Reverse Charge Mechanism In GST?

The Reverse Charge Mechanism in GST (Goods and Services Tax) is a system where the recipient of goods or services will pay the GST instead of the supplier. This is contrary to the usual practice where the supplier pays the tax. This mechanism is applicable in specific cases under the GST law in India to ensure tax compliance. Especially for certain transactions or unregistered suppliers.

Key Features Of Reverse Charge Mechanism:

1. Recipient Pays GST: The buyer or recipient of goods/services calculates and pays the GST directly to the government. The supplier cannot collect or remit it.

2. Applicability: RCM applies in specific scenarios, as defined under the GST Act, such as:

• Services from Unregistered Suppliers: If a registered person receives goods or services from an unregistered supplier, the registered person must pay GST under RCM (subject to certain exemptions, e.g., transactions below ₹5,000 per day, as per notifications).
• Specified Services: Certain services listed under GST law, like legal services, transportation of goods by road, or sponsorship services, attract RCM.
• Import of Services: When you import services from outside India, the recipient in India pays GST under RCM.
• Government-Notified Goods/Services: Specific goods (e.g., cashew nuts, tobacco leaves) or services (e.g., security services) are notified for RCM.

3. Input Tax Credit (ITC): The recipient can make claim ITC on the GST paid under RCM, provided the goods/services are used for business purposes and comply with ITC rules.

4. Compliance: The recipient must issue a self-invoice for transactions with unregistered suppliers and report RCM transactions in their GST returns (e.g., GSTR-3B and GSTR-1).

When Reverse Charge Mechanism GST Is Applicable?

The Reverse Charge Mechanism in GST (Goods and Services Tax) in India is applicable in specific scenarios where the recipient of goods or services will pay the GST instead of the supplier.

When Is RCM Applicable?

RCM is applicable under the following circumstances:

1. Receipt of Goods/Services from Unregistered Suppliers (Section 9(4) of CGST Act):

• Condition: When a registered person purchases goods or services from an unregistered supplier, the registered person must pay GST under RCM.
• Exemption: As per Notification No. 8/2017-Central Tax (Rate), this does not apply if the aggregate value of such supplies from unregistered persons is less than ₹5,000 per day (subject to amendments).
• Example: A registered business buys stationery worth ₹10,000 from an unregistered vendor. The business calculates and pays GST on this transaction.

2. Specified Goods and Services (Section 9(3) of CGST Act):

• The Central Board of Indirect Taxes and Customs (CBIC) declares that some  specific goods and services where RCM applies, regardless of the supplier’s registration status. Examples include:
  • • Goods (Notification No. 4/2017-Central Tax (Rate)):
      • Cashew nuts (not peeled or shelled).
      • Bidi wrapper leaves (tendu).
      • Tobacco leaves.
      • Raw cotton supplied by agriculturists.
    • Services (Notification No. 13/2017-Central Tax (Rate)):
      • Goods Transport Agency (GTA) services (if GTA opts for RCM).
      • Legal services by advocates or law firms.
      • Sponsorship services.
      • Security services (e.g., manpower supply for security).
      • Director services (remuneration to a director of a company).
      • Services by an insurance agent to an insurance company.
  • Example: A company receiving legal advice from an advocate pays GST under RCM, as advocates are exempt from charging GST.

3. Import of Services:

• When a person in India receives services from a supplier located outside India (e.g., consultancy, software services), the recipient pays GST under RCM.
• Example: An Indian company hiring a foreign consultant for marketing services must pay GST on the service fee.

4. E-Commerce Operators:

• Certain services provided through e-commerce platforms (e.g., cab services like Ola/Uber) may require the e-commerce operator to pay GST under RCM.
• Example: Ola pays GST on behalf of drivers for cab services provided through its platform.

Who Should Pay GST Under RCM?

Under the Reverse Charge Mechanism (RCM) in India’s GST (Goods and Services Tax) framework, the recipient of goods or services is responsible for paying the GST directly to the government instead of the supplier.

1. GST-Registered Persons Receiving Supplies from Unregistered Suppliers:

• Who: Any individual or business registered under GST.
• When: When they procure goods or services from an unregistered supplier (not registered under GST).
• Exemption: Transactions below ₹5,000 per day from unregistered suppliers are exempt, as per Notification No. 8/2017-Central Tax (Rate), subject to amendments.
• Example: A registered company purchasing stationery from an unregistered vendor pays GST under RCM

2. Recipients Of Specified Goods or Services:

• Who: GST-registered persons receiving specific goods or services notified under Section 9(3) of the CGST Act by the CBIC.
• Examples of Goods (Notification No. 4/2017-Central Tax (Rate)):
  • Raw cotton supplied by agriculturists.
  • Cashew nuts (not peeled or shelled).
  • Tobacco leaves or bidi wrapper leaves.
• Examples of Services (Notification No. 13/2017-Central Tax (Rate)):
  • Legal services by advocates or law firms.
  • Goods Transport Agency (GTA) services (if GTA opts for RCM).
  • Sponsorship services.
  • Security services (e.g., manpower supply).
  • Director services to a company.
  • Insurance agent services

3. Importers of Services:

• Who: Any person or business in India (typically GST-registered, but unregistered persons may also be liable) receiving services from a supplier outside India.
• When: For imported services like consultancy, software, or digital services.
• Example: An Indian company receiving IT services from a U.S. provider pays GST under RCM.

4. E-Commerce Operators:

• Who: E-commerce platforms facilitating certain services (e.g., cab services like Ola or Uber).
• When: For specific services provided through their platform, as notified.
• Example: Ola pays GST under RCM on behalf of drivers for cab services facilitated through its platform.

When A GST Registered Dealer Purchases From The Unregistered One?

When a GST-registered dealer purchases goods or services from an unregistered dealer in India, the Reverse Charge Mechanism (RCM) under GST applies to them.

Applicability (Section 9(4) of CGST Act):

• A GST-registered dealer must pay GST under RCM when they procure goods or services from an unregistered dealer (a supplier not registered under GST).
• Exemption: As per Notification No. 8/2017-Central Tax (Rate), RCM does not apply if the aggregate value of supplies from unregistered dealers is less than ₹5,000 per day (subject to amendments). If the total value exceeds this threshold, GST is payable on the entire amount.

Who Pays GST:

• The GST-registered dealer (recipient) calculates and pays the GST directly to the government, instead of the unregistered supplier charging it.

Key Responsibilities:

• Self-Invoicing: The registered dealer must issue a self-invoice for the purchase, as the unregistered supplier cannot issue a GST-compliant invoice.
• GST Payment: The dealer calculates the applicable GST rate (e.g., 5%, 12%, 18%, or 28%) on the purchase value and pays it through their GST returns (e.g., GSTR-3B).
• Reporting: Report the transaction in:
  • GSTR-1: Under the relevant section for RCM supplies.
  • GSTR-3B: Reflect the GST liability under RCM and pay the tax.
• Input Tax Credit (ITC): The registered dealer can claim ITC on the GST paid under RCM, provided the goods/services are used for business purposes and comply with ITC rules.

Example:

• A GST-registered retailer buys ₹10,000 worth of stationery from an unregistered vendor in a day.
• The retailer calculates GST (e.g., 18% = ₹1,800), issues a self-invoice, pays ₹1,800 to the government via GSTR-3B, and claims ITC if eligible.
• If the purchase is ₹4,000 (below ₹5,000/day), no RCM applies due to the exemption, unless other RCM conditions are met.

List Of Goods Under The Reverse Charge Mechanism In GST

The following goods are notified under RCM, meaning the recipient (typically a GST-registered person) is liable to pay GST when these are supplied by specified suppliers (e.g., agriculturists or unregistered persons):

What Is The Reverse Charge Mechanism In GST Act

The Reverse Charge Mechanism in GST Act in India is a provision where the recipient of goods or services will pay GST directly to the government instead of the supplier, reversing the usual tax payment process. This mechanism is designed to ensure tax compliance, curb evasion, and cover specific transactions, particularly involving unregistered suppliers or certain notified goods/services.

Legal Basis:

• Section 9(3) of CGST Act, 2017: RCM applies to specific goods and services notified by the Central Board of Indirect Taxes and Customs (CBIC). The government lists these items to ensure tax collection in high-risk or exempt supplier scenarios.
• Section 9(4) of CGST Act, 2017: RCM applies when a GST-registered person procures goods or services from an unregistered supplier, subject to exemptions (e.g., transactions below ₹5,000/day as per Notification No. 8/2017-Central Tax (Rate)).
• Inter-State Transactions: For services, Section 5(3) of the IGST Act, 2017, applies RCM similarly.
• Notifications: CBIC issues notifications listing specific goods (e.g., Notification No. 4/2017-Central Tax (Rate)) and services (e.g., Notification No. 13/2017-Central Tax (Rate)) under RCM.

What Are Registration Rules Under RCM?

The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) in India shifts the responsibility of paying GST from the supplier to the recipient of goods or services in specific cases. The registration rules under RCM are primarily governed by Section 24 of the Central Goods and Services Tax (CGST) Act, 2017.

1. Mandatory GST Registration:

• As per Section 24(iii) of the CGST Act, 2017, any person liable to pay tax under the Reverse Charge Mechanism must mandatorily register under GST, regardless of their annual turnover. This overrides the standard threshold exemption limits for GST registration, which are:
  • ₹40 lakh for suppliers of goods (₹20 lakh in special category states).
  • ₹20 lakh for suppliers of services (₹10 lakh in special category states).
• Example: A sole proprietor receiving legal services from an advocate (notified under RCM) must register under GST to pay tax under RCM, even if their turnover is below ₹20 lakh.

2. Applicability To Specific Entities  

• Businesses Liable for RCM: Any individual or entity receiving goods or services specified under RCM (as per Section 9(3) or 9(4) of the CGST Act or Section 5(3) or 5(4) of the IGST Act) must register under GST, irrespective of their turnover.
• E-commerce Operators: E-commerce platforms facilitating services or goods liable to RCM (e.g., transportation services like Ola or Uber) must register under GST, regardless of turnover, as per Section 9(5) of the CGST Act. caclubindia.comrefrens.com
• Persons Receiving Supplies from Unregistered Dealers: If a registered person purchases goods or services from an unregistered supplier, and the transaction is subject to RCM (under Section 9(4)), the recipient must be registered to comply with tax payment obligations.

3. Exemption From Registration In Specific Cases   

• As per Section 23(1)(a) of the CGST Act, a person engaged exclusively in the supply of goods or services that are not liable to tax or are wholly exempt from tax is not required to register, even if they receive RCM-applicable services. However, if their business involves any taxable supply (partially or fully), they must register if they receive goods or services liable to RCM.
• Example: A business exclusively dealing in exempt supplies (e.g., certain agricultural produce) is not required to register under GST, even if it receives RCM-applicable services. But if the business also provides taxable services (e.g., coaching) and receives RCM services, registration is mandatory.taxguru.in

4.Threshold Exemption Not Applicable:

The standard GST registration threshold (₹20 lakh or ₹40 lakh, depending on the nature of supply and state) does not apply to persons liable to pay tax under RCM. This ensures compliance in transactions involving unregistered suppliers or notified goods/services.

5. Special Cases:

• Input Service Distributors (ISDs): An ISD cannot directly purchase goods or services liable to RCM. If an ISD wishes to claim Input Tax Credit (ITC) on RCM transactions, it must register as a regular taxpayer.tax2win.in
• Casual Taxable Persons and Interstate Suppliers: Businesses supplying goods across state boundaries or casual taxable persons (occasionally supplying goods/services without a fixed place of business) must register for GST, regardless of turnover, if they are liable under RCM.

How The Reverse Charge Mechanism Works In GST?

The Reverse Charge Mechanism in (GST) framework in India shifts the responsibility of paying GST from the supplier to the recipient of goods or services in specific scenarios.

1. Concept of RCM:

• Under normal GST rules, the supplier of goods or services is responsible for collecting and paying GST to the government.
• In RCM, the recipient of the goods or services is liable to pay GST directly to the government, as per Section 9(3) and 9(4) of the CGST Act and Section 5(3) and 5(4) of the IGST Act.

2.When RCM Applies:

• Notified Goods and Services (Section 9(3)): The government specifies certain goods and services where RCM is mandatory. Examples include:
  • Services: Legal services by advocates, transportation services by Goods Transport Agencies (GTA), sponsorship services, director services to a company, and insurance agent services.
  • Goods: Cashew nuts (not shelled or peeled), bidi wrapper leaves, tobacco leaves, silk yarn, and used vehicles seized and confiscated by the government.
• Purchases from Unregistered Suppliers (Section 9(4)): If a registered person purchases goods or services from an unregistered supplier, the recipient must pay GST under RCM. However, this is subject to exemptions:
  • RCM does not apply if the aggregate value of such supplies is below ₹5,000 per day.
  • As of October 10, 2017, RCM on purchases from unregistered suppliers was suspended for most transactions, except for specific cases like real estate (e.g., cement purchases for construction).
• E-commerce Operators (Section 9(5)): For certain services (e.g., transportation, housekeeping) provided through e-commerce platforms like Uber or UrbanClap, the platform is liable to pay GST under RCM.

3. Mechanism of RCM:

• Tax Payment by Recipient: The recipient calculates the GST liability based on the applicable rate (e.g., 5%, 12%, 18%, or 28%) and pays it directly to the government through the electronic cash ledger. Input Tax Credit (ITC) cannot be used to offset RCM liabilities.
• Self-Invoicing: If the supplier is unregistered, the recipient must issue a self-invoice under Section 31(3)(f) of the CGST Act for the goods or services received. This invoice serves as the basis for GST payment under RCM.
• Reporting in GST Returns:
  • Recipients report RCM transactions in Table 3.1(d) of GSTR-3B (inward supplies liable to RCM) and pay the tax.
  • Suppliers (if registered) report RCM-applicable outward supplies in Table 4B of GSTR-1.
  • Recipients can claim ITC on the GST paid under RCM, provided the goods/services are used for business purposes and compliance is met.

4. Input Tax Credit (ITC):

• The recipient can make claim ITC, subject to Section 16(4) of the CGST Act, which requires filing returns by the due date (e.g., November 30 of the next financial year or the annual return filing date, whichever is earlier).
• Recent Update (June 26, 2024): CBIC Circular No. 211/5/2024-GST clarified that the financial year for calculating the ITC time limit is the year in which the self-invoice is issued.

Section 9(3) CGST

Section 9(3) of the Central Goods and Services Tax (CGST) Act, 2017 pertains to the Reverse Charge Mechanism in GST framework in India. It empowers the Central Government to specify categories of goods or services where the tax liability is shifted from the supplier to the recipient. Below is a clear and concise explanation of Section 9(3) and its implications:

Explanation of Section 9(3)

• Provision: Section 9(3) of the CGST Act states that the Central Government, on the recommendations of the GST Council, may notify specific categories of supply of goods or services where the GST liability is to be paid by the recipient of such goods or services under the Reverse Charge Mechanism, instead of the supplier.
• Purpose: This provision ensures tax compliance in sectors where suppliers may be unorganized, unregistered, or exempt, or where it is more practical for the recipient to handle tax obligations (e.g., imports, professional services).

Section 9(4) CGST or Section 5/4(Under IGST)

The two sections of the Reverse charge mechanism in GST are quite crucial in the process of tax calculation. You must go through details of it to have a clear insight to it.

Section 9(4) 

Section 9(4) of the Central Goods and Services Tax (CGST) Act, 2017 and Section 5(4) of the Integrated Goods and Services Tax (IGST) Act, 2017 pertain to the Reverse Charge Mechanism in GST framework in India. These sections address scenarios where the recipient of goods or services will  pay GST when the supplier is unregistered.

Provision:

Section 9(4) states that when a registered person receives goods or services from an unregistered supplier, the registered person (recipient) is liable to pay GST on such supplies under the Reverse Charge Mechanism (RCM), as if they were the supplier.

Scope:

• Applies to intra-state supplies of goods or services where the supplier is not registered under GST.
• The recipient must be a registered person under GST to be liable for RCM under this section.

Exemptions and Suspensions:

• Threshold Exemption: RCM under Section 9(4) does not apply if the aggregate value of supplies from unregistered persons is ₹5,000 or less per day (as per Notification No. 8/2017-Central Tax (Rate)).
• Suspension: Effective October 13, 2017, the applicability of Section 9(4) was suspended for most transactions through various notifications (e.g., Notification No. 38/2017-Central Tax (Rate)). It was reintroduced in specific cases, such as:

Section 5(4) of the IGST Act, 2017

Provision:

Section 5(4) of the IGST Act mirrors Section 9(4) of the CGST Act but applies to inter-state supplies. It mandates that when a registered person receives goods or services from an unregistered supplier in an inter-state transaction, the recipient is liable to pay IGST under RCM.

Scope:

• Applies to inter-state supplies (e.g., goods or services supplied from one state to another) where the supplier is not registered under GST.
• The recipient must be a registered person under GST.

Time Of Supply Under RCM

Under RCM, the recipient is liable to pay GST instead of the supplier, as per Section 9(3) (notified goods/services) or Section 9(4) (supplies from unregistered persons) of the CGST Act, and Section 5(3) or 5(4) of the IGST Act for inter-state supplies. The TOS rules differ for goods and services under RCM.

Time of Supply for Goods Under RCM (Section 12(3))

For goods supplied under RCM, the TOS is the earliest of the following dates:

• Receipt of Goods Date: The date on which the recipient actually receives the goods.
• Date of Payment: The date on which the recipient makes payment to the supplier (either in full or part) or the date when payment entry is done in the recipient’s books of accounts, whichever is earlier.
•  Invoice Date  + 30 Days: The date immediately following 30 days from the date of issue of the invoice (or similar document) by the supplier.

Default Rule:

• If none of the above dates can be determined (e.g., no invoice is issued by an unregistered supplier), the TOS is the date of entry in the recipient’s books of accounts.

Entries For Reverse Charge Mechanism In GST

There are some of the crucial journal entries for the reverse charge mechanism in GST that you must be well aware of. Some of the key factors to know here are as follows

1.For the purchase of goods and services under RCM 

When goods or services are received under RCM, the recipient records the purchase and the GST liability.

Format Of Journal Entry 

Example 

A registered business in Maharashtra receives legal services worth ₹1,00,000 from an unregistered advocate (RCM applicable under Section 9(3), GST rate: 18%).

• CGST: ₹9,000 (9%)
• SGST: ₹9,000 (9%)

Step-1 (At the time of expense booking)

Legal Service A/C ……………………….Dr.                  Rs.1,00,000
              To Supplier (Advocate) A/C				Rs. 1,00,000

(Being legal expenses booked for service received from unregistered advocate)

Step-2 (At the time of Reverse Charges Liability booking)

Input CGST A/C………….………….Dr.
Rs.9,000



Input SGST A/C……………………….Dr.
Rs.9,000



To CGST Under RCM A/C

Rs.9,000


To SGST Under RCM A/C

Rs.9,000

(Being GST Liability accounted under RCM and Input Credit Claimed)

2. Payment Of GST Under RCM 

The GST liability under RCM must be paid through the electronic cash ledger (not ITC) and reported in GSTR-3B.

Example 

The business pays ₹18,000 GST to the government.

 CGST Under RCM A/C……………….Dr.                  Rs. 9000

 SGST Under RCM A/C…………………Dr,                  Rs. 9000

                          To Bank A/C                                   Rs. 18,000

(Being SGST and CGST under RCM Paid through Bank)

3. Claiming Input Tax Credit 

If the goods/services are used for taxable business purposes, the recipient can make claim ITC on the GST paid under RCM, subject to Section 16(4) (ITC must be claimed by November 30 of the next financial year or the annual return date).

Journal Entry: No separate entry is required for claiming ITC, as it is already recorded in the “Input CGST/SGST/IGST A/c” during the purchase. The ITC is utilized to offset output tax liability when filing GSTR-3B.

Example: The business uses the ₹9,000 CGST and ₹9,000 SGST as ITC to offset its output tax liability in GSTR-3B (Table 4).

4. Payment To Supplier 

If the supplier is unregistered, the recipient settles the payment for the goods/services (excluding GST, as GST is paid directly to the government).

Example:- 

The business pays ₹1,00,000 to the unregistered advocate.

 Supplier A/c—-----------  Dr.                          Rs. 1,00,000

               To Bank A/c—-------------- Cr                               Rs. 1,00,000

5. Supplies From Unregistered Supplier 

For supplies from unregistered suppliers (e.g., under Section 9(4)), the recipient issues a self-invoice to document the transaction. The accounting entries remain the same as above, but the self-invoice serves as the basis for GST liability and ITC.

Example:- 

A manufacturer purchases raw materials worth ₹2,00,000 from an unregistered supplier (RCM applicable, GST rate: 12%).

• CGST: ₹12,000 (6%)
• SGST: ₹12,000 (6%)

Entry:-

Journal Entry for Purchase Booking

Purchase A/c               Dr.                       2,00,000

Input CGST A/c             Dr.                       12,000

Input SGST A/c             Dr.                       12,000

                         To Supplier A/c                                      2,00,000

                         To GST Payable (RCM) A/c                             24,000

Journal Entry for GST Payment under RCM

GST Payable (RCM) A/c      Dr.                        24,000

                         To Bank A/c                                           24,000

Journal Entry for Supplier Payment

Supplier A/c               Dr.                       2,00,000

                         To Bank A/c                                          2,00,000

Tax Invoice Format For Reverse Charge GST

What Is Self-Invoicing?

Self-invoicing in the context of the Goods and Services Tax (GST) in India is a mechanism where a registered recipient of goods or services issues an invoice on behalf of the supplier, primarily under the Reverse Charge Mechanism (RCM) when the supplier is unregistered. This is mandated under Section 31(3)(f) of the CGST Act, 2017, and is critical for ensuring proper documentation, tax payment, and Input Tax Credit (ITC) claims under RCM.

What Is Input Tax Credit Under RCM?

• Definition: ITC under RCM is the GST paid by the recipient on transactions covered under RCM (as per Section 9(3) or 9(4) of the CGST Act, 2017, or Section 5(3) or 5(4) of the IGST Act, 2017), which can be credited to offset the GST liability on taxable supplies, provided certain conditions are met.
• Legal Basis: Governed by Section 16 (eligibility and conditions for ITC) and Section 17 (apportionment and restrictions) of the CGST Act, along with the CGST Rules, 2017.
• Purpose: Allows businesses to recover GST paid under RCM, ensuring tax is levied only on the value added and avoiding double taxation.

Final Takeaway

Hence, these are some of the key factors that you must keep in mind while making the Reverse Charge mechanism in GST.  You must get through the details of it while reaching your goals with complete ease.

You can share your views and comments in our comment box as this will help you to meet your goals with complete ease. The more you share your feedback with us the better we can understand your take on this matter.

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Subhankar Chakraborty

Qualification: B. Com (Hons), MBA (Finance)
Organization: Corporate Trainer – Accounts & Finance at “ICA Edu Skills Pvt. Ltd".

Industry Experience - A seasoned Accounts and Finance professional with over 20 years of experience, specializing in end-to-end financial operations. Proficient in Tally ERP, GST compliance, Income Tax planning, and Payroll Management, with a strong focus on accuracy, statutory compliance, and strategic financial growth.

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• Reverse Charge Mechanism In GST: Meaning, Implications, Regulations And Compliance - July 18, 2025