Under GST's reverse charge mechanism (RCM), the recipient of a supply, not the supplier, pays the tax. It applies to goods and services notified under section 9(3) of the CGST Act — such as goods transport agency, advocate and director services — and to specified purchases from unregistered persons under section 9(4). The recipient pays RCM tax in cash, issues a self-invoice, and can usually claim it back as input tax credit.
Normally the supplier charges GST on its invoice and pays it to the government. Under the reverse charge mechanism (RCM) the roles flip: the buyer pays the tax directly. This catches many small businesses by surprise — paying a transporter, an advocate or a director can create a GST liability you have to pay in cash.
This guide explains when reverse charge applies, the most common RCM supplies, how to compute and pay it, and how to claim the credit back.
What is the reverse charge mechanism in GST?
Reverse charge means the liability to pay tax falls on the recipient of goods or services instead of the supplier. The law provides for it in two places:
- Section 9(3) of the CGST Act (and section 5(3) of the IGST Act) — the government notifies specific categories of goods and services on which the recipient pays tax, whether the supplier is registered or not.
- Section 9(4) of the CGST Act (and section 5(4) of the IGST Act) — the government can notify specified supplies from unregistered suppliers to specified registered recipients on which the recipient pays tax. This is currently used narrowly, mainly for certain purchases by real estate promoters.
Import of services is also generally taxed under reverse charge, with the Indian recipient paying IGST.
The reasons for RCM are practical: the supplier is often unorganised or outside India, or the government wants to collect tax from the more compliant party.
Which services are covered under reverse charge?
The list is in the services rate notifications and is amended from time to time. Common entries that small businesses meet include:
| Service | Supplier | Recipient who pays under RCM |
|---|---|---|
| Goods transport agency (GTA) service, where GTA has not opted to pay tax itself | GTA | Specified recipients such as factories, companies, firms, registered persons |
| Legal services | Individual advocate or firm of advocates | Business entity |
| Services as a director | Director of a company or body corporate | The company / body corporate |
| Sponsorship services | Any person | Body corporate or partnership firm |
| Security services (supply of security personnel) | Person other than a body corporate | Registered person (with exclusions) |
| Renting of a motor vehicle designed to carry passengers, where cost of fuel is included | Person other than a body corporate not charging appropriate GST | Body corporate |
| Services by an insurance agent | Insurance agent | Insurance company |
| Services by a recovery agent | Recovery agent | Banking company / financial institution / NBFC |
| Renting of residential dwelling | Any person | Registered person |
| Renting of immovable property (other than residential) | Unregistered person | Registered person (with exclusions notified later) |
| Services by government or local authority (with many exclusions) | Government / local authority | Business entity |
On the goods side, notified items include certain raw cashew nuts, bidi wrapper leaves, tobacco leaves, silk yarn and used vehicles or seized goods sold by the government, among others.
Always check the current notification before relying on this list — entries and exclusions change, and the renting-of-property entries in particular have been amended more than once.
How does RCM work step by step?
- Identify the RCM supply when you book the purchase — the supplier's invoice should say "tax payable on reverse charge: Yes".
- Determine the time of supply under the reverse-charge rules (below).
- Issue a self-invoice if the supplier is unregistered, and a payment voucher when you pay them (section 31).
- Compute the tax at the applicable rate on the value of supply — CGST+SGST or IGST based on the place of supply.
- Report it in GSTR-3B, Table 3.1(d) (inward supplies liable to reverse charge).
- Pay the tax in cash from the electronic cash ledger. ITC cannot be used to pay RCM liability.
- Claim the ITC in GSTR-3B Table 4A(3), in the same month, if the supply is used for business and not blocked.
What is the time of supply under reverse charge?
Under section 12(3) (goods) and section 13(3) (services) of the CGST Act, tax is due at the earliest of:
| Goods under RCM | Services under RCM |
|---|---|
| Date of receipt of goods | Date of payment |
| Date of payment | Date immediately after 60 days from the supplier's invoice |
| Date immediately after 30 days from the supplier's invoice | — |
If none of these can be determined, the date of entry in the recipient's books applies. For imports of services from associated enterprises, special rules apply. More on this in time of supply under GST.
Worked example: a Pune manufacturer pays a transporter and an advocate
A Pune manufacturer (a private limited company, registered in Maharashtra) has two RCM purchases in July:
1. GTA freight — ₹40,000. The transporter has not opted to pay tax itself, so RCM applies at the rate notified for GTA under reverse charge (5% in this example). The transport is within Maharashtra.
- CGST 2.5% = ₹1,000; SGST 2.5% = ₹1,000; total ₹2,000.
2. Advocate's fees — ₹60,000 from a Mumbai advocate, at 18%.
- CGST 9% = ₹5,400; SGST 9% = ₹5,400; total ₹10,800.
Total RCM liability: ₹12,800, paid in cash through GSTR-3B for July.
The company then claims ₹12,800 as ITC in the same GSTR-3B (assuming no block). Its net cost is nil, but it needs ₹12,800 cash in the ledger on the due date and must report correctly — or risk interest on the unpaid tax and loss of the credit.
If the company had instead been a small proprietorship not covered by the specified-recipient list for GTA, the RCM liability might not apply at all. The recipient category matters.
How should an RCM invoice look?
From a registered RCM supplier (e.g. a GTA or advocate): the supplier's tax invoice shows the taxable value, rate and the statement that tax is payable on reverse charge. It does not collect tax.
Self-invoice by the recipient (unregistered supplier): includes your details as recipient, the supplier's name and address, a serial number, date, description, HSN/SAC, value, rate and tax, place of supply and your signature. Many businesses keep a separate number series for self-invoices.
Billing Software by Betterwork can mark purchase entries as reverse charge, generate the self-invoice and include the liability and credit in GSTR-3B reports, so the cash requirement is visible before the due date.
What about purchases from unregistered suppliers?
When GST launched, a broad reverse charge on all purchases from unregistered suppliers was announced and then deferred. Today, section 9(4) is used only for specifically notified supplies, mainly in the real estate sector where promoters must meet a minimum share of purchases from registered suppliers or pay tax under reverse charge on the shortfall, and for certain items such as cement bought from unregistered persons by those promoters. Ordinary businesses buying tea, stationery or minor repairs from an unregistered local vendor do not pay RCM merely because the vendor is unregistered.
The question to ask is always: is this specific supply notified for reverse charge, and is my business the type of recipient named? If not, there is no RCM liability, even if the supplier has no GSTIN.
How is import of services taxed under RCM?
Most services received from a supplier outside India are an import of services, and the Indian recipient pays IGST under reverse charge.
Example. A Bengaluru startup pays a foreign design platform USD 1,000 for a business subscription. At an exchange rate of ₹84 per dollar, the value is ₹84,000. IGST at 18% = ₹15,120, paid in cash through GSTR-3B and claimed back as credit in the same return, if it relates to taxable business supplies.
Two practical points: the exchange rate is taken as prescribed in the valuation rules, and import of services between related persons or distinct persons without consideration can still be taxable in specified cases. Keep the foreign invoice, bank remittance advice and your self-invoice together.
How should you set up RCM in your books?
A little set-up at the start of the year prevents most reverse charge errors:
- Tag vendors. Mark transporters, advocates, sponsors and similar suppliers whose services usually fall under RCM, so every bill from them is flagged on entry.
- Keep a self-invoice series. Use a separate numbering series for self-invoices on purchases from unregistered suppliers, so they are not mixed with your sales invoices.
- Track the 30/60-day clock. Add the supplier's invoice date to every RCM entry and set a reminder: if you have not paid by day 30 (goods) or day 60 (services), the liability arises anyway.
- Fund the cash ledger. Because RCM tax cannot be paid from credit, deposit the cash before the GSTR-3B due date.
- Reconcile monthly. Compare RCM liability paid with RCM credit claimed; the two should normally match unless the credit is blocked.
Example. A Pune manufacturer receives a GTA bill dated 5 June for ₹30,000 and pays it on 20 August. The 60-day trigger falls first, so the time of supply is the day after 60 days from 5 June, in early August — not 20 August. The RCM tax goes into August's GSTR-3B, and paying it in September would attract interest.
Common mistakes with reverse charge
- Missing RCM entirely on director fees, legal fees and freight.
- Paying RCM tax from the credit ledger. It must be paid in cash.
- Allowing the supplier to charge GST on a notified RCM service, then also paying RCM — or paying neither.
- Wrong time of supply — booking the liability when you pay, although 60 days from the invoice has already passed.
- Forgetting to claim the credit after paying, which turns a timing difference into a real cost.
- Composition dealers assuming RCM does not apply. It does, at normal rates, without credit — see composition scheme under GST.
- Not registering. A person liable to pay tax under reverse charge must register regardless of the threshold limit.
Key takeaways
- Under RCM, the recipient pays GST instead of the supplier, for notified goods and services, specified purchases from unregistered persons, and most imports of services.
- Common RCM services: goods transport agency, advocates, directors, sponsorship, security and certain renting services.
- RCM tax is paid in cash and reported in GSTR-3B Table 3.1(d); credit is claimed in Table 4A(3).
- Time of supply follows special earliest-of rules (30 days for goods, 60 days for services from invoice).
- Issue self-invoices and payment vouchers for purchases from unregistered suppliers.
This guide is general information, not tax advice. Rules last checked on 20 October 2026; confirm with your tax professional for your situation.