GST and input tax credit
What Is Reverse Charge Mechanism Under GST?
Direct answer
Reverse Charge Mechanism, or RCM, shifts GST payment responsibility from the supplier to the recipient for notified supplies or specified recipient classes. The recipient identifies the supply, determines time and value, pays the tax through the cash ledger, reports the liability and separately evaluates input tax credit. Accurate vendor, document and expense classification controls are essential.
Acronym: RCM. Also known as: GST reverse charge, recipient-paid GST.
Key takeaways
- RCM applies because the Act and a current notification identify the supply or recipient class, not merely because a vendor is unregistered.
- Input tax credit cannot be used to discharge reverse-charge liability; payment is made in cash.
- Tax paid under RCM can be input tax, but credit still depends on eligibility and blocked-credit tests.
- Maintain a document-level bridge from source expense through cash payment to any later ITC claim.
When reverse charge applies
Section 9(3) of the CGST Act authorises the Government to notify categories of goods or services for which the recipient pays tax as if it were the person liable. Notification No. 13/2017-Central Tax (Rate), as amended, lists service categories and identifies the supplier and recipient conditions. Goods have their own notification framework.
Section 9(4) is narrower than the early GST-era shorthand “all purchases from unregistered persons.” Its current text permits notification of a class of registered persons receiving specified categories from an unregistered supplier. The real-estate notification is one example. A modern AP rule must therefore test current notification conditions rather than charging RCM on every unregistered-vendor invoice.
Common review populations include notified legal services, specified goods transport agency services, director services, certain government or local-authority services and import of services under the IGST framework. Labels are not enough: identify supplier status, recipient class, exact service, contractual capacity, place of supply and any forward-charge option. Use the current consolidated notification before deciding.
RCM applicability decision table
| Question | Evidence | Decision risk |
|---|---|---|
| Is there a supply under GST? | Contract, invoice, import agreement and business facts. | Paying RCM on a non-supply or missing a taxable import. |
| Which section applies? | Section 9(3), section 9(4), or IGST Act equivalent. | Using an obsolete broad unregistered-purchase rule. |
| Is the category currently notified? | Current rate notification and amendments. | Relying on a vendor’s invoice label alone. |
| Do supplier and recipient conditions match? | GST registration, legal status, service role and option declaration. | Applying RCM where supplier has valid forward-charge treatment. |
| What tax, time and value apply? | Contract, payment date, supplier document, books and valuation rules. | Wrong period, head, rate or taxable base. |
| Can tax paid become ITC? | Business use, prescribed document, receipt and section 17 analysis. | Automatically claiming blocked or non-business tax. |
Record the notification entry and version used. A generic “RCM vendor” flag is useful for screening but cannot replace transaction-level analysis.
Tax payment and ITC flow
- Identify liability. Screen each expense against current notified categories and recipient conditions.
- Determine time of supply. For goods, section 12(3) uses the earliest of receipt, payment entry or bank debit, or the day after 30 days from supplier invoice, with a fallback. For services, section 13(3) generally uses payment or the day after 60 days, with special associated-enterprise treatment for overseas suppliers.
- Calculate tax. Apply classification, place-of-supply, valuation and rate rules to determine CGST and SGST or IGST.
- Create required documents. Where section 31(3)(f) applies to a notified supply from an unregistered supplier, issue a recipient invoice; issue the prescribed payment voucher when making payment under reverse charge.
- Pay in cash. The GST Portal states ITC cannot discharge RCM liability.
- Report the liability. Reconcile the RCM register to GSTR-3B liability and cash-ledger utilisation.
- Assess credit separately. After payment, claim only if section 16 and section 17 requirements are satisfied, using the appropriate document and period.
Documents and control evidence
- Current notification extract identifying category, supplier, recipient and any conditions or exceptions.
- Supplier invoice, contract, statement of work and proof of service or goods receipt.
- Vendor GST status and any forward-charge option or declaration relevant to the category.
- Recipient self-invoice where required by section 31(3)(f) and the invoice rules.
- Payment voucher where required, connected to the bank entry and supplier settlement.
- Time-of-supply calculation showing invoice, receipt and payment dates.
- Place-of-supply and tax-head analysis, particularly for cross-border or cross-state services.
- RCM register containing taxable value, rate, tax, return period, challan and electronic cash-ledger reference.
- ITC eligibility workpaper linking cash payment to business purpose, receipt, document and blocked-credit review.
- Monthly reconciliation to expense ledgers, GSTR-3B liability, cash payment and electronic credit ledger.
CBIC’s accounts-and-records rules require true and correct records for reverse-charge supplies with relevant documents. Keep corrections as auditable reversals and repostings instead of overwriting the original assessment.
Accounting treatment and reconciliations
At invoice booking, record the underlying expense or asset and supplier payable according to the commercial document. If RCM applies, accrue the tax liability by tax head without adding it to supplier payable. On cash payment through the GST return, clear the RCM liability against bank or electronic cash ledger. Recognise recoverable ITC only when the accounting policy and GST eligibility conditions are satisfied; otherwise charge tax to expense or asset as appropriate.
Use separate accounts for RCM liability, eligible RCM credit, ineligible RCM tax and timing differences. This avoids falsely netting the liability and credit in the same entry before cash payment. A monthly bridge should begin with screened expenses, add missed accruals, subtract non-RCM and reverse prior estimates, then agree to declared liability. A second bridge should move from cash-paid tax to eligible credit, blocked tax and deferred evidence.
For imports of services, reconcile foreign-payable and bank-remittance data as well as the expense ledger. For recurring domestic categories, compare vendor master flags to general-ledger text and supplier GST treatment. Sample “not RCM” decisions because false negatives often disappear from a liability-only report.
Review recurring journals when rates, notification entries or vendor options change. A rule that was correct last year can become wrong without any change in invoice description. Keep an effective-from date on tax rules and reprocess open invoices when master data changes, rather than applying the newest rule blindly to historical periods.
Worked reverse-charge example
A GST-registered company receives a ₹1,00,000 professional service from an individual advocate for a business contract dispute. The team checks the applicable entry in Notification No. 13/2017-Central Tax (Rate), its amendments and corrigendum, the advocate and business-entity conditions, place of supply, and the current rate table for legal services. On the stated facts, the combined rate is 18%, comprising 9% central tax and 9% state tax. The supplier invoice is dated 5 August; payment is entered and debited on 20 August, before the 60-day backstop for service time of supply.
The company accrues ₹18,000 of RCM liability for August, pays it through the electronic cash ledger and reports it in GSTR-3B. It does not use existing ITC to settle the liability. The legal service is received for taxable business activity, the documents are complete, and no section 17 restriction is identified, so the tax team separately includes ₹18,000 in its eligible-credit assessment after payment.
If the same advice related solely to a blocked personal purpose, cash liability could still arise while ITC would fail the business-use test. If the supplier’s capacity or the recipient conditions fell outside the applicable notification entry, the RCM conclusion could change. The example demonstrates why liability, cash payment and credit are three separate control decisions rather than one net journal.
Frequently asked questions
What does reverse charge mean under GST?
It means the recipient, rather than the supplier, is liable to pay GST for a category or recipient class specified under the Act and current notifications.
Does every purchase from an unregistered supplier attract RCM?
No. Current section 9(4) enables notifications for specified registered-person classes and specified categories. Apply the current notification; do not rely on the original broad shorthand.
Can input tax credit pay an RCM liability?
No. The GST Portal’s utilisation principles state that ITC cannot be used for reverse-charge liability, so it must be discharged through the electronic cash ledger.
Can GST paid under reverse charge be claimed as ITC?
It can form input tax, but the recipient must first pay the liability and then separately satisfy business-use, document, receipt, time-limit and blocked-credit requirements.
Is a self-invoice always required for RCM?
Section 31(3)(f) requires the recipient document for notified supplies received from an unregistered supplier in the circumstances it specifies. A registered supplier’s own invoice is handled differently.
How should RCM be reconciled?
Reconcile screened expense and import populations to the RCM register, GSTR-3B liability and cash payment, then separately reconcile tax paid to eligible, ineligible or deferred ITC.
Why is a vendor-level RCM flag insufficient?
Applicability can depend on the exact supply, supplier capacity, recipient class, option and effective notification. Use the vendor flag to screen transactions, then document the transaction-level conclusion.
Sources and further reading
- India Code: CGST Act section 9: levy and reverse-charge authorityVerified Jul 25, 2026
- India Code: CGST Act section 12: time of supply of goodsVerified Jul 25, 2026
- India Code: CGST Act section 13: time of supply of servicesVerified Jul 25, 2026
- India Code: CGST Act section 16: eligibility and conditions for ITCVerified Jul 25, 2026
- India Code: CGST Act section 17: apportionment and blocked creditsVerified Jul 25, 2026
- India Code: CGST Act section 31: tax invoice and recipient documentationVerified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Notification No. 13/2017-Central Tax (Rate): reverse-charge servicesVerified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Corrigendum to Notification No. 13/2017-Central Tax (Rate)Verified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Legal services by advocates under reverse chargeVerified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Notification No. 11/2017-Central Tax (Rate): service ratesVerified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Current GST rate table for legal services under heading 9982Verified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Tax invoice and payment-voucher rulesVerified Jul 25, 2026
- Goods and Services Tax Network: Utilization of electronic cash and input tax credit ledgerVerified Jul 25, 2026
- Central Board of Indirect Taxes and Customs: Accounts and records rules for reverse-charge suppliesVerified Jul 25, 2026
Educational disclaimer: This material is general information, not legal, tax, or accounting advice. Check current official guidance and your facts with a qualified professional.
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