The Tax Was Always Due — The ITC Was Always Available and CBIC Has Just Given You a Second Chance — But Only If You Stop Using DRC-03 and Start Using the Right GSTR Form.
Let me begin with a situation that is far more common than most tax payers care to admit. A registered taxpayer has been paying royalties to the Government on mining rights or to an individual author or to an inventor for years. Or perhaps renting a warehouse from a local landlord who never bothered to take GST registration. Or receiving management support services from a foreign holding company where, frankly, nobody sat down to figure out whether GST was payable at all. The payments went through, the business ran but the GST was either overlooked, misunderstood or quietly ignored.
Then came the GST Audit or a fresh circular from CBIC or a Court ruling that clarified what the law always meant but nobody applied correctly. And suddenly, the taxpayer is sitting across the table of the Adjudicating Officer with a list of unaccounted RCM liabilities going back three, four or sometimes five financial years.
The next question, almost always is “Can I just pay it through DRC-03 and close the matter?”
The answer is no. And if your consultant is telling you otherwise, this article is worth sharing with him.
Where This Problem Typically Arises
Before getting into the mechanics, it is worth naming the transactions where this non-compliance most frequently surfaces, because these are not obscure or exotic arrangements, they are everyday business transactions that registered taxpayers enter into routinely without appreciating the GST consequences.
Royalties paid to Government or to unregistered IP owners. Authors, musicians, inventors, artists — many of these individuals receive royalty income but are either below the registration threshold or simply unregistered. Royalties are paid to Government for obtaining mining or other rights.
Rent from unregistered landlords. This is perhaps the most widespread gap in the system. A business occupying office space or a godown rented from an individual who is not registered under GST is liable to discharge GST under RCM on that rent. The landlord does not charge GST. The tenant assumes, not unreasonably, that since the invoice has no GST component, there is nothing to account for on the GST side.
Import of services, including from related parties. This is where things got genuinely complicated and the discussion is most directly relevant. Consider a scenario where an Indian subsidiary receives management services, technical know-how or brand support from its foreign parent.
Legal fees paid to individual advocates. Individual advocates and senior advocates providing legal services to business entities fall under RCM.
Director’s fees and sitting fees. Where a director is not an employee of the company — particularly independent directors and non-executive directors — the remuneration paid to them is subject to GST under RCM.
Freight paid to unregistered goods transport agencies. The GTA provisions under GST are notoriously confusing. Where the GTA is unregistered and the recipient is a registered business, the RCM obligation is on the recipient. Misclassification of transport arrangements and assumptions about the registration status of small transporters, have left many taxpayers with unaccounted RCM on freight for multiple years.
What all these situations have in common is the tax authorities, during scrutiny or audit or the taxpayer himself, upon receiving a fresh clarification or Court ruling, later realized that GST under RCM was payable on these transactions and was never paid. The question then becomes, what is the legally correct way to remedy this?
Is payment through DRC-03 the Wrong Answer:
When a tax liability is discovered late — whether self-discovered or pointed out during audit — the natural instinct is to make a voluntary payment through Form GST DRC-03. It feels like the responsible thing to do. Acknowledge the liability, pay up with interest and move on, with a self satisfaction that no penalty will be levied as no proceedings under section 73/74 had been initiated. The department often encourages it as well, since it results in a cash collection without the need to go through the entire adjudication process.
The problem is that DRC-03 is a payment mechanism, it is not a return. And RCM ITC is available only when the tax is paid through the return cycle, supported by a valid self-invoice issued by the recipient under Section 31(3)(f) of the CGST Act, 2017.
Section 16(2)(a) of CGST Act, 2017 requires possession of a tax invoice or other prescribed tax-paying document as a precondition for ITC.
Rule 36(1)(b) of the CGST Rules, 2017 specifies that for RCM supplies from unregistered persons, the invoice that entitles the recipient to ITC is the invoice issued by the recipient himself under Section 31(3)(f).
Without that self-invoice, the ITC chain does not exist. A DRC-03 payment is simply a payment, it does not create the document trail required for ITC availment and the credit is lost permanently.
Think about what this means in practical terms. The taxpayer who pays RCM tax through DRC-03 ends up paying tax twice in economic terms — once as a cash outflow through DRC-03 and once effectively again because he cannot recover that tax as ITC. For supplies used in the course or furtherance of business, where ITC would have been fully available, this represents a significant and entirely avoidable financial loss.
The only way to discharge the RCM liability and preserve the ITC entitlement is through the return mechanism.
The Correct Path: Self-Invoice, Then GSTR-3B, Then Claim ITC
The legal framework provides a clear and workable procedure for correcting past non-compliance.
The first step is the issuance of a self-invoice under Section 31(3)(f) of the CGST Act, 2017. Where the supplier is unregistered and the recipient is liable to pay GST under RCM, the obligation to issue the invoice lies entirely with the recipient. This invoice must be issued even if it is being issued belatedly, years after the original supply. It must bear all the particulars required under a valid GST invoice and must be maintained in the recipient’s records. This self-invoice is not a formality — it is the foundational document that creates the legal basis for both the tax liability and the ITC claim.
The second step is to declare the liability and discharge the tax through Form GSTR-3B. RCM inward supplies from unregistered persons are reported in Table 3.1(d) of GSTR-3B — “Inward supplies liable to reverse charge.” This is where the taxable value and the corresponding tax — CGST and SGST for intra-state supplies, IGST for inter-state or import of services — must be declared. Crucially, RCM tax must be paid from the Electronic Cash Ledger. The Electronic Credit Ledger cannot be used for this purpose. This is a hard statutory requirement under Rule 86(2) of the CGST Rules, 2017 and there is no flexibility on this point.
The third step is to claim the ITC in Form GSTR-3B. Table 4 of GSTR-3B allows the recipient to claim ITC on RCM supplies. Provided the supply is used for business purposes and is not blocked under Section 17(5), the full tax paid under RCM is available as ITC in the same tax period. The net cash outflow is therefore zero — the cash paid from the Electronic Cash Ledger flows back into the Electronic Credit Ledger as ITC. This is precisely the cash-neutrality that DRC-03 destroys.
The Question of Section 16(4) and The required Relief
There was, understandably, a serious concern about the time limit under Section 16(4). That provision bars ITC availment after the thirtieth of November following the end of the financial year to which the invoice pertains or the date of filing of the annual return, whichever is earlier. If a supply was received in FY 2020-21 and no self-invoice was issued at that time, a literal reading of Section 16(4) would suggest that the time limit for ITC on that supply has long since expired.
CBIC settles this question conclusively in favour of the taxpayer by clarifying such that where the RCM supplies received from an unregistered person, the relevant financial year for the purpose of Section 16(4) is the financial year in which the recipient issues the self-invoice under Section 31(3)(f) — not the financial year in which the supply was originally received. Since the obligation to issue a self-invoice arises from the act of issuing and since no invoice existed until the recipient created one, the Section 16(4) clock runs from the financial year of that self-invoice, not from the year of the underlying supply.
In plain terms, if a taxpayer who received services in FY 2020-21 issues a self-invoice in FY 2024-25, the ITC may be claimed in FY 2024-25 subject to the Section 16(4) deadline for that year. The lapse of time between the supply and the self-invoice does not extinguish the ITC, provided the tax is paid and the self-invoice is issued in the same financial year in which the ITC is claimed.
Interest and Penalty — Be Prepared, But Do the Math
Correcting past non-compliance through the return mechanism does carry costs and there is no point in understating them. Interest under Section 50 is payable on the delayed tax payment, computed from the original date of supply when the tax first became due. Depending on how far back the liability goes, this can be a substantial sum. Additionally, the delayed issuance of a self-invoice — which was an obligation that arose at the time of supply — may attract penalty under Section 122.
But here is the calculation every taxpayer should do before deciding how to proceed. Compare two scenarios. In the first, the taxpayer pays through DRC-03 with interest — and forfeits the ITC permanently. In the second, the taxpayer pays through GSTR-3B with interest — and recovers the entire tax as ITC in the same return. Where the supply is used for business and ITC is otherwise admissible, the second scenario results in a net cost of interest only. The first scenario results in a net cost of tax plus interest. For any significant RCM liability, that difference is material.
The Circular does not provide immunity from interest or penalty, and it would be wrong to represent it as an amnesty. But it does ensure that a taxpayer who chooses to correct the record through the proper mechanism is not punished twice — once by paying tax that he cannot recover, and again by losing ITC that should have been available to him all along.
What Taxpayers Should Be Doing Right Now
Any registered taxpayer who has been receiving services from unregistered persons — royalties, rent, import of services, advocate fees, director remuneration, freight — should conduct an immediate review of whether all RCM liabilities have been properly discharged through the return mechanism for each year since July 2017. If gaps are found, the correct action is to issue self-invoices now, report the liability in GSTR-3B for the current period, pay the tax in cash with applicable interest and claim the ITC in the same return.
Do not reach for DRC-03. It will solve the department’s problem, they will have their cash but it will not solve yours. The ITC, once lost through the DRC-03 route, cannot be resurrected. The Circular no. 211/5/2024 — GST dated 26.06.2024 issued on the basis of representations from trade and industry, exists precisely because the Board recognised that many taxpayers fell into non-compliance not from dishonesty but from genuine interpretive uncertainty, inadequate guidance or the kind of oversight that accumulates over years of operational complexity. The remedy it offers is a fair one but it requires the taxpayer to use the right instrument.
Use the return. Issue the self-invoice. Pay through GSTR-3B. Claim the ITC. That is the law and that is now, unambiguously, the CBIC’s position as well.
This article is for informational and educational purposes. Readers are advised to take professional advice specific to their facts before initiating any compliance action.
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