GST Reverse Charge: Section 9(4) Abeyance, Amendment and Revival

Reverse Charge Mechanism Under GST: The Complete Story — From Section 9(3) to the Abeyance and Revival of Section 9(4)

Summary: Reverse Charge Mechanism (RCM) under GST shifts the responsibility for payment of tax from the supplier to the recipient in specified circumstances. Section 9(3) of the CGST Act, 2017 empowers the Government to notify specific categories of goods or services for RCM irrespective of the supplier’s registration status, whereas Section 9(4) has undergone a significant legislative transformation. Originally, Section 9(4) imposed RCM on every taxable supply received by a registered person from an unregistered supplier. After an initial ₹5,000-per-day exemption, the provision was kept in abeyance from October 2017 through successive notifications because of substantial compliance difficulties. Parliament subsequently substituted Section 9(4) through the Central Goods and Services Tax (Amendment) Act, 2018, replacing the blanket mechanism with a targeted system applicable only to notified classes of registered persons receiving specified goods or services from unregistered suppliers. The substituted provision came into force from 1 February 2019 and was given practical effect for the real estate sector through Notification No. 7/2019-Central Tax (Rate), dated 29 March 2019. Promoters are consequently subject to specific RCM requirements relating to cement, capital goods and shortfall from the prescribed 80% procurement threshold. Cement purchased from unregistered suppliers attracts compulsory RCM separately, while other inward supplies are governed by the annual 80% registered-procurement test.

Introduction

Under the GST framework, the levy and collection of tax are governed primarily under Chapter-III through Section 9 of the CGST Act, 2017 (and Section 5 of the IGST Act, 2017).

By default, GST operates under the Forward Charge Mechanism (FCM), but in specific statutory exceptions, it operates under the Reverse Charge Mechanism (RCM).

Under the normal system of taxation — known as the Forward Charge Mechanism (FCM) — the supplier of goods or services charges GST on the invoice, collects it from the recipient, and deposits it with the government. This is how the overwhelming majority of transactions work.

Reverse Charge Mechanism (RCM) reverses this responsibility: the recipient of the goods or services, not the supplier, becomes liable to calculate and pay the tax directly to the government. RCM exists in the law for two distinct situations, dealt with under two separate sub-sections of Section 9 of the CGST Act, 2017 — sub-section (3) and sub-section (4). These two provisions are often confused with each other, but they operate on entirely different logic, and understanding that difference is essential for both officers and taxpayers.

Section 9(3) — RCM by specific notification, regardless of registration status of supplier

Section 9(3) of the CGST Act, 2017 reads:

The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

This provision has stood unchanged since 2017. It empowers the government to pick specific categories of goods or services — regardless of whether the supplier is registered or not — and shift the tax burden to the recipient. Goods notified under this power appear in Notification No. 4/2017-Central Tax (Rate), dated 28 June 2017 (cashew nuts, tendu leaves, raw cotton, certain scrap sold by government entities, and similar items). Services notified under this power appear in Notification No. 13/2017-Central Tax (Rate), dated 28 June 2017, covering GTA services, legal services by advocates, services of an arbitral tribunal, sponsorship services, director’s services to a company, insurance and recovery agent services, security services, renting of motor vehicles, renting of residential dwelling to a registered person, and import of services, among others. This notification has been amended multiple times — notably by Notification 22/2019, Notification 29/2018, and Notification 5/2022-Central Tax (Rate).

Section 9(4) — The Provision With a Complicated History

This is where the real story lies. Section 9(4), as it stood in the original CGST Act, 2017, read:

“The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

Notice how sweeping this was. Unlike Section 9(3), which targets specific notified goods/services, the original Section 9(4) covered every purchase by a registered person from an unregistered supplier — no exceptions, no thresholds, no specified categories. If a registered shopkeeper bought stationery worth ₹200 from an unregistered roadside vendor, technically he was liable to pay GST on it under RCM and issue himself a self-invoice.

Why It Was Kept in Abeyance

This blanket provision created an administrative nightmare almost immediately. Small and medium businesses across the country found it nearly impossible to track every single purchase from unregistered persons, self-invoice each one, and discharge tax in cash. Trade bodies flagged this as one of the biggest compliance burdens of the early GST years. The government responded in stages:

1. Notification No. 8/2017-Central Tax (Rate), dated 28 June 2017 — gave partial relief by exempting RCM liability under Section 9(4) where the aggregate value of such supplies received by a registered person from all unregistered suppliers did not exceed ₹5,000 in a single day.

2. Notification No. 38/2017-Central Tax (Rate), dated 13 October 2017 — went much further and suspended the entire operation of Section 9(4) (removing even the ₹5,000/day cap) up to 31 March 2018, in the exercise of powers under Section 11(1) of the CGST Act (power to exempt).

3. This suspension was then repeatedly extended: by Notification No. 10/2018-Central Tax (Rate) dated 23 March 2018 (extended to 30 June 2018), Notification No. 12/2018-Central Tax (Rate) dated 29 June 2018 (extended to 30 September 2018), and finally Notification No. 22/2018-Central Tax (Rate) dated 6 August 2018 (extended to 30 September 2019).

So, from October 2017 onward, Section 9(4) in its original blanket form was never actually collected in practice — it remained on the statute book but its operation was continuously deferred through these executive notifications, a device permitted under Section 11(1) rather than a formal amendment of the Act itself.

Through Which Amendment Was It Formally Revived (In Changed Form)?

While the notifications kept deferring the old provision, Parliament separately decided to rewrite Section 9(4) itself, because the government had concluded the original blanket design was unworkable even in principle, not merely difficult to enforce for the time being.

This rewrite came through the Central Goods and Services Tax (Amendment) Act, 2018 (Act No. 31 of 2018). Section 4 of this Amendment Act substituted the old sub-section (4) of Section 9 with an entirely new one:

“(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.”

The difference is fundamental. The old sub-section made RCM automatic and universal for all registered persons buying from unregistered suppliers. The new sub-section makes it **conditional on two things happening together:

(i) the government must notify a specific class of registered persons, and

(ii) that notification must specify particular categories of goods or services.

Unless both conditions are notified, no RCM liability arises under Section 9(4) at all. This is a targeted, opt-in design rather than a blanket rule.

Corresponding parallel amendments were made to Section 5(4) of the IGST Act, 2018 through the IGST (Amendment) Act, 2018, using identical language for inter-state transactions.

When Did This Amendment Come Into Force?

The CGST (Amendment) Act, 2018 was brought into force with effect from 1 February 2019, through Notification No. 2/2019-Central Tax, dated 29 January 2019 (issued under Section 1(2) of the Amendment Act itself). On the same date, the government issued Notification No. 1/2019-Central Tax (Rate), rescinding the earlier Notification No. 8/2017-Central Tax (Rate) (and its amendments), since the old exemption-and-deferment mechanism was no longer needed — the newly substituted Section 9(4) itself did not apply to anyone until a fresh notification specified a class of persons and goods/services.

For a period after 1 February 2019, Section 9(4) existed on the statute in its new form but was dormant— no class of registered persons or goods/services had yet been notified under it.

Through Which Notification Was Section 9(4) Actually Revived (Given Practical Effect)?

The government exercised its power under the new Section 9(4) about two months later, through Notification No. 7/2019-Central Tax (Rate), dated 29 March 2019, issued specifically for the real estate sector, alongside the broader GST rate restructuring for under-construction residential projects effective 1 April 2019 (the 5%/1% concessional-rate-without-ITC scheme brought in by Notification 3/2019-Central Tax (Rate) and related notifications).

What Goods and Services Are Covered Under Section 9(4) Today —

Notification No. 7/2019-Central Tax (Rate) identifies promoters of residential real estate projects as the notified “class of registered persons,” and covers the following categories:

1. Cement falling under Chapter heading 2523 of the Customs Tariff Act, 1975 — if a promoter purchases cement from any unregistered supplier, GST must be paid under RCM at the applicable rate, compulsorily, in the very month the cement is received. There is no threshold or exemption for cement; even a single unregistered purchase attracts RCM.

2. Capital goods — falling under any chapter of the Customs Tariff Act, supplied to a promoter for construction of a project taxed at the residential real estate rates specified in Notification 11/2017-Central Tax (Rate) (as amended). If capital goods are received from an unregistered supplier, RCM applies in full, again without any threshold.

3. Other inward supplies of goods and services (input goods and input services generally used in construction — sand, steel, bricks, tiles, paints, architect/design services, and similar items) — other than services by way of grant of development rights, long-term lease of land against upfront premium/salami, or FSI (including additional FSI), which are dealt with separately under Notification 6/2019-Central Tax (Rate). For this residual category, RCM applies only on the shortfall from a mandatory threshold: the promoter must procure at least 80% of the value of these inputs and input services from GST-registered suppliers in a financial year (or part-year up to completion certificate/first occupation, whichever is earlier). If registered-supplier procurement falls short of 80%, GST is payable under RCM at 18% on the shortfall amount.

Illustration (based on the Annexure to Notification 11/2017-Central Tax (Rate)

A promoter procures sand, cement, steel, bricks, tiles and architect services from registered suppliers, amounting to 80% of total procurement, while paints, aluminium windows, plywood and commercial wood — the remaining 20% — come from unregistered dealers. Since the 80% threshold is met, no RCM liability arises on the shortfall (cement, if any part of it was from an unregistered source, would still separately attract RCM as explained above, since cement has no threshold protection).

If, instead, registered-supplier procurement comes to only 65% of the total, the promoter must pay RCM at 18% on the 15% shortfall value, in addition to compulsory RCM on any cement received from an unregistered person during the year — the two computations are kept separate under the Explanation to the notification.

Procedural Requirements

• The promoter must maintain a project-wise account of inward supplies from registered and unregistered suppliers, and compute the shortfall at the end of the financial year.
• The resulting RCM liability on the shortfall (other than cement) must be added to output tax liability and paid by the month of June following the end of the financial year.
• RCM on cement, however, must be paid in the month cement is received, not deferred to year-end. Input Tax Credit not availed on account of these purchases must be reported monthly as ineligible credit in GSTR-3B, Table 4(D)(2).

The Underlying Rules and Sections That Support This Structure

• Section 9(4), CGST Act, 2017 (as substituted by Section 4 of the CGST Amendment Act, 2018) — the enabling power itself.
• Section 31(3)(f), CGST Act, 2017— requires the recipient to issue a self-invoice for supplies received from an unregistered supplier on which tax is payable under reverse charge.
• Rule 36(1)(b), CGST Rules, 2017 — allows the recipient to claim Input Tax Credit on the basis of the self-invoice and payment challan, once tax is actually paid.
• Notification No. 6/2019-Central Tax (Rate), dated 29 March 2019 — separately governs the RCM liability of a promoter for development rights, long-term lease premium/salami, and FSI received from a landowner, kept outside the Section 9(4)/Notification 7/2019 mechanism.

A Practical Takeaway for Officers and Promoters:

The history of Section 9(4) illustrates a broader pattern in GST law: a provision drafted too broadly at inception (2017), suspended repeatedly through executive notification because it proved unworkable, then formally re-legislated through a Parliamentary amendment (2018) to be narrow and targeted, and finally activated for a specific sector (real estate, 2019) where the compliance mechanism could realistically be monitored — through builder-side accounting of registered versus unregistered procurement. For officers scrutinising real estate promoters, the two checks to apply are distinct and must not be merged: cement — always check for RCM on any unregistered purchase; other inputs — check only the annual 80% threshold and shortfall computation. Getting this distinction right avoids both under-assessment and unwarranted demands based on a misreading of the notification.

Aijaz Hussain Malik, JKAS, State Taxes Officer, Circle-C, Srinagar writes about GST compliance.