Reverse Charge Under GST: When The Recipient, Not The Supplier, Pays Tax

Summary: Reverse Charge Mechanism (RCM) under GST shifts the statutory liability to pay tax from the supplier to the recipient in specifically notified circumstances. Sections 9(3) and 9(4) of the CGST Act, together with corresponding IGST provisions and notifications, determine when RCM applies; consequently, a purchase from an unregistered supplier does not automatically attract reverse charge. The framework covers specified transactions such as legal services, GTA services, director’s services, certain commercial rentals and metal scrap supplies, while amendments have altered the treatment of areas such as sponsorship services. RCM also creates significant compliance consequences: liability generally has to be discharged through the electronic cash ledger before eligible ITC can be claimed, the GST Portal now tracks RCM liability against corresponding ITC, and common RCM-related input-service credit may interact with the mandatory ISD framework. The article examines these rules alongside Union of India v. Mohit Minerals Pvt. Ltd., Reliance Jio Infocomm Ltd. v. Union of India and Sona Enterprises v. State of A.P., and concludes with suggestions for improving RCM compliance and credit administration.

Reverse Charge Under GST: RCM Liability, ITC, Notifications and Compliance

The conventional GST transaction follows a familiar sequence: a supplier makes a taxable supply, issues a tax invoice, collects the applicable tax from the recipient and remits it to the Government. Reverse Charge Mechanism (“RCM”) alters this sequence by transferring the statutory liability to pay tax from the supplier to the recipient. Section 2(98) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) recognises this reversal of liability in the circumstances contemplated under Sections 9(3) and 9(4), together with the corresponding provisions of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”). RCM, therefore, is not a consequence of an omitted tax amount on an invoice; it is a liability created by statute and operationalised through the notified framework.

What makes RCM particularly significant today is that the recipient’s responsibility does not necessarily end with payment of the tax. Under the present framework, RCM liability has to be discharged through the electronic cash ledger, after which eligible input tax credit may be claimed in accordance with the statutory conditions. CBIC has accordingly described RCM as a cash-payment mechanism followed, where legally permissible, by corresponding ITC.

A. The Statutory Framework of RCM under GST

The legal basis of Reverse Charge Mechanism (“RCM”) is found principally in Sections 9(3) and 9(4) of the Central Goods and Services Tax Act, 2017 (“CGST Act”), read with the corresponding provisions of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”).

Section 2(98) of the CGST Act defines “reverse charge” as the liability to pay tax by the recipient instead of the supplier in the circumstances specified under these provisions. Thus, RCM is not created merely because the supplier has not collected GST; it arises only where the statute, read with the applicable notification, places that liability upon the recipient.

Section 9(3) empowers the Central Government, on the recommendations of the GST Council, to notify categories of goods or services or both on which tax shall be paid by the recipient.

The principal notification for services is Notification No. 13/2017-Central Tax (Rate), dated 28 June 2017, while specified goods are covered through Notification No. 04/2017-Central Tax (Rate). The notification does not operate through a general rule; it identifies the particular supply and, depending upon the entry, the supplier and recipient whose transaction is brought within RCM.

This makes the notification an essential part of the legal test. For example, the RCM entry relating to legal services cannot be understood simply as “services provided by lawyers are under reverse charge.” The notified entry specifies the relevant legal services and the recipient, namely a business entity in the taxable territory. The GST Council itself clarified, during the initial implementation of GST, the scope of legal services covered by the notification.

Illustration: Where a company engages an advocate for a legal service covered by the notified entry, the company not the advocate becomes liable to discharge the applicable GST. The same conclusion cannot be drawn merely from the fact that the service provider is an advocate; the transaction must satisfy the conditions of the notification.

The corresponding provision for inter-State supplies is Section 5(3) of the IGST Act, under which notified categories of supply are taxable on reverse charge basis. Notification No. 10/2017-Integrated Tax (Rate) gives effect to this mechanism for specified services.

B. Why “Unregistered Supplier = RCM” Is No Longer the Rule

Section 9(4) the original provision broadly imposed RCM on taxable supplies received by a registered person from an unregistered supplier, however that framework was subsequently replaced, and the substituted provision, effective from 1 February 2019, permits the Government to notify a class of registered persons who will be liable to tax in respect of specified categories of goods or services received from an unregistered supplier.

The present legal position therefore does not support the common proposition that every purchase from an unregistered supplier attracts RCM. Unregistered status is a condition of the transaction, but it is not by itself the source of liability. The recipient must fall within the notified class and the supply must correspond with the specified category. The real-estate sector is a prominent example of this targeted application, with Notification No. 07/2019-Central Tax (Rate) prescribing specified RCM obligations for promoters.

Illustration: A registered business purchases an ordinary office supply from an unregistered local vendor. The absence of GST on the vendor’s invoice does not, by itself, transfer the tax liability to the purchaser. RCM will arise only if the transaction is covered by the specific statutory and notification framework.

C. RCM also Carries Compliance Consequences

Once the recipient becomes liable under RCM, the consequence is not confined to payment of tax. Section 24(iii) specifically includes persons required to pay tax under reverse charge within the compulsory-registration framework, subject to the exemptions and conditions prescribed under the GST law.

The invoicing mechanism likewise recognises the altered allocation of responsibility. Under Section 31(3)(f), where a registered recipient receives a taxable supply from an unregistered supplier and is liable to pay tax under Section 9(3) or 9(4), the recipient is required to issue the prescribed invoice. Rule 47A of the CGST Rules prescribes a period of thirty days from receipt of the supply for issuance of such invoice. The time of supply must also be determined under the specific RCM provisions; for services, Section 13(3) provides a distinct rule where tax is payable under reverse charge.

Judicial Perspective: The Supreme Court’s decision in Union of India v. Mohit Minerals Pvt. Ltd., (2022) 10 SCC 700, provides an important judicial qualification to the RCM framework

• Mohit Minerals imported non-coking coal into India on a Cost, Insurance and Freight (“CIF”) basis. Under a CIF arrangement, the foreign exporter contracted with the foreign shipping line and bore the ocean-freight liability. Despite the importer not separately contracting for or paying the ocean-freight service, the Government, through Notification No. 10/2017-Integrated Tax (Rate), sought to levy IGST on the ocean-freight component from the Indian importer under the reverse-charge mechanism.
• The dispute principally involved Sections 5(1), 5(3) and 5(4) of the IGST Act, 2017, read with Section 2(93) of the CGST Act defining the “recipient” of a supply, Section 2(30) defining “composite supply”, and Section 8 governing the tax treatment of composite supplies. The validity and scope of the notification issued under the reverse-charge provisions were therefore directly in issue.
• Whether the Indian importer in a CIF transaction could legally be treated as the recipient of the ocean-freight service and consequently made liable to pay IGST under RCM, even though the importer had not contracted with the shipping line and the freight service formed part of the overall CIF transaction.
• The Supreme Court held that the importer could not be made liable for a separate IGST levy on the ocean-freight service under RCM in a CIF transaction. The CIF contract constituted a composite supply, and the importer was already liable to pay IGST on the import of goods in accordance with the statutory framework. A separate levy on the transportation service would therefore be inconsistent with Sections 2(30) and 8 of the CGST Act.
• The Court recognised that the Government possesses statutory authority to prescribe categories of supplies for reverse charge under Section 5(3) of the IGST Act, but that delegated power must remain within the substantive scheme of the parent legislation. A notification cannot create a taxable liability in a manner that is inconsistent with the statutory concept of the supply, recipient or composite supply.
• Decision: The Supreme Court dismissed the Union Government’s appeals and upheld the Gujarat High Court’s conclusion that the impugned levy of IGST on ocean freight in the CIF import arrangement could not be sustained.

D. Which Transactions Actually Attract Reverse Charge?

Reverse charge cannot be identified merely from the absence of GST on an invoice. Its applicability is determined by the precise statutory entry governing the transaction. In practice, four questions assume significance: what is the supply, who has supplied it, who has received it, and does the applicable notification place the liability upon that recipient?

Notification No. 13/2017-Central Tax (Rate), issued under Section 9(3) of the CGST Act, follows this supplier–service–recipient structure. The result is that RCM is neither universal nor automatic; it operates only where the factual transaction corresponds with a notified category.

1. Legal Services

Specified legal services supplied by an individual advocate, including a senior advocate, or a firm of advocates to a business entity are subject to RCM under the notified framework. The notification defines legal services broadly enough to encompass advice, consultancy, assistance in any branch of law and representational services before courts, tribunals and authorities.

Illustration: A company engages an advocate to represent it in a commercial dispute for a professional fee of ₹1,00,000. Where the service falls within the notified entry, the advocate does not discharge GST under forward charge; the company, as recipient, becomes liable under RCM.

2. GTA Services

Transportation of goods by a Goods Transport Agency (GTA) to specified categories of recipients is another significant RCM entry. The notified recipients under the RCM framework include, among others, factories, registered persons, body corporates and partnership firms.

Illustration: A registered manufacturing company receives GTA services for transporting raw material to its factory. Before discharging tax under RCM, the company must ascertain whether the GTA has exercised the permissible forward-charge option and complied with the prescribed conditions. Thus, the same commercial service cannot be classified solely by looking at the freight expense; the applicable statutory option must also be examined.

GTA therefore demonstrates an important feature of GST: RCM may operate alongside an expressly permitted forward-charge mechanism.

3. Director’s Services

Services supplied by a director to the company or body corporate are notified under RCM. However, the expression “director’s remuneration” is not, by itself, sufficient to determine GST treatment. CBIC, through Circular No. 140/10/2020-GST, distinguished remuneration forming part of an employer–employee relationship from remuneration paid in the nature of professional or technical fees.

Illustration: ₹2 lakh paid to a whole-time director as salary under an employment relationship is not converted into an RCM liability merely because the recipient is the company. A separate ₹50,000 professional consultancy fee paid to the same individual may, however, attract RCM where the statutory conditions are satisfied.

4. Commercial Rent

A significant expansion occurred in October 2024. Notification No. 09/2024-Central Tax (Rate) inserted Entry 5AB into Notification No. 13/2017, bringing renting of immovable property other than a residential dwelling by an unregistered person to a registered person within RCM with effect from 10 October 2024. The subsequent Notification No. 07/2025-Central Tax (Rate) excluded a person who has opted for the composition levy from the recipient category covered by Entry 5AB.

Illustration: A registered company rents an office from an unregistered landlord. The landlord’s failure to cross the registration threshold does not by itself create RCM. The liability arises because this specific rental service has been notified under Section 9(3).

5. Metal Scrap

RCM also applies to specified metal-scrap transactions. Notification No. 06/2024-Central Tax (Rate), issued under Section 9(3), inserted specified HSN headings covering metal scrap supplied by an unregistered person to a registered person, effective 10 October 2024.

Illustration: A registered manufacturing unit purchases covered metal scrap from an unregistered supplier for ₹5 lakh. Where the goods fall within the notified tariff headings, the recipient becomes liable for the applicable GST under RCM despite the supplier not charging GST.

The recent treatment of sponsorship services demonstrates that the RCM framework is capable of changing direction. Historically, specified sponsorship services supplied to a body corporate or partnership firm were subject to RCM. However, Notification No. 07/2025-Central Tax (Rate), dated 16 January 2025, amended Entry 4 so that sponsorship services supplied by a body corporate are excluded from the RCM supplier category.

Thus, RCM is not simply a permanent shift of tax liability to the recipient. It is a regulatory instrument whose design can change when the compliance environment, sectoral organisation or input-tax-credit consequences change.

E. RCM and the Changing Framework of Input Tax Credit

Reverse charge was traditionally understood through a single question: who is liable to pay the tax? The post-2025 GST framework adds another layer to that inquiry. Where an RCM transaction involves a common input service received for multiple GST registrations, the issue does not end with payment of tax. It extends to when the resulting input tax credit becomes available and how that credit is distributed among distinct persons.

1. The Cash-versus-Credit Question in RCM

A distinctive feature of the reverse-charge framework is that the liability must first be discharged through cash, even where the tax may subsequently qualify as input tax credit.

Section 49(4) restricts utilisation of the electronic credit ledger to “output tax”, and Section 2(82) expressly excludes tax payable under reverse charge from that expression. CBIC has accordingly clarified that RCM liability cannot be discharged by utilising existing ITC and must be paid by debiting the electronic cash ledger. Once the liability is discharged, the recipient may claim the corresponding input tax credit, subject to the conditions of the GST law.

The commercial consequence is a cash-first, credit-later model. For example, a company holding ₹20 lakh of eligible ITC may incur an RCM liability of ₹5 lakh on a taxable inward service. It cannot utilise the existing ₹5 lakh credit to discharge that RCM liability; the tax must first be funded through the cash ledger. The same ₹5 lakh may subsequently become available as ITC, subject to eligibility. Thus, although the tax may ultimately be creditable, the intervening cash requirement can create a working-capital cost for the recipient.

2. The RCM Liability OR ITC Statement:

A significant compliance development was introduced on the GST Portal in August 2024, that the statement tracks the RCM liability reported in Table 3.1(d) of GSTR-3B against the corresponding ITC claimed in Tables 4(A)(2) and 4(A)(3).

GSTN subsequently introduced validation to restrict ITC claims beyond the available RCM balance. From the December 2025 portal update, taxpayers having a negative RCM Liability/ITC balance are required to either pay the additional RCM liability or reduce the corresponding ITC claim before the return can be filed.

The significance of this development lies in its transformation of RCM from a liability recorded in a return into a digitally reconciled liability-credit relationship.

Illustration: A company reports ₹2 lakh of RCM liability and pays it in the relevant return. It subsequently claims ₹2 lakh of corresponding RCM ITC. If, due to an earlier excess claim, the RCM statement reflects an insufficient balance, the portal may require the taxpayer to correct the mismatch before GSTR-3B can be filed. RCM compliance, therefore, increasingly requires periodic reconciliation of tax paid and credit claimed, rather than merely a year-end accounting exercise.

3. RCM and the Mandatory ISD (Input Service Distributor) Framework

With effect from 1 April 2025, the amended Section 2(61) of the CGST Act expressly brought invoices relating to specified input services liable to tax under Sections 9(3) and 9(4) within the ISD framework. Section 20 was correspondingly amended to provide for distribution of credit relating to such services. The Finance Act, 2025 further clarified the inclusion of inter-State RCM transactions covered by Sections 5(3) and 5(4) of the IGST Act. Rule 39 was correspondingly amended to provide the mechanism for dealing with RCM-related credit.

The change is particularly relevant to enterprises having several GST registrations under the same PAN.

Illustration: A company has its head office in Maharashtra and operational registrations in Delhi, Karnataka and Tamil Nadu. A common legal or consultancy service is received by the head-office function and is taxable under RCM, but the service relates to the business operations of several registrations. After the 1 April 2025 mandatory ISD framework, the relevant common input-service credit can fall within the statutory ISD mechanism, subject to the conditions governing availment and distribution.

Judicial Perspective: In Reliance Jio Infocomm Ltd. v. Union of India, 2026:MHC:925, decided by the Madras High Court on 5 March 2026: –

• The challenge concerned Rule 39(1)(a), which required an ISD to distribute ITC available for distribution in a particular month. The controversy was whether the relevant month was simply the month of the invoice or the month in which the recipient actually became legally entitled to ITC under Section 16.
• The Court expressly held that what is available for distribution is the ITC, not the tax invoice itself. Mere issuance or receipt of an invoice does not mean that the credit has already become legally available.
• The Court reasoned, what is available for distribution is ITC, not the invoice; the conditions under Section 16(2) must be satisfied; and Rule 39(1)(a) should be interpreted harmoniously with Sections 16 and 20 rather than declared ultra vires.

Judicial Perspective: Sona Enterprises v. State of A.P., W.P. No. 31510 of 2024, decided on 27 April 2026 (Andhra Pradesh High Court)

• The petitioner, a registered dealer engaged in trading ferrous waste and scrap, purchased scrap from Indian Railways on which GST was payable by the purchaser under RCM. During audit, it was found that the taxpayer had deposited the RCM amount in cash into the electronic ledger but had not made the corresponding debit for appropriation towards Government dues. The taxpayer had also availed the corresponding ITC before such appropriation.
• The Court examined the effect of Section 49(1) of the CGST Act read with Rule 87(6) and Rule 87(7) on the question whether mere credit of money into the taxpayer’s electronic ledger constitutes discharge of GST liability.
• The Court held that mere deposit of the amount into the electronic ledger does not constitute payment of GST. The amount has to be appropriated towards the Government exchequer through the requisite debit.

For businesses, the lesson is precise: entry of money into an electronic ledger, discharge of statutory tax liability and availment of ITC must not be treated as one and the same event.

CONCLUSION

RCM has evolved from a tax-liability mechanism into a broader compliance and credit-management framework. While it strengthens tax collection by placing liability on an identifiable recipient, the cash-first requirement, digital reconciliation and multi-GSTIN credit distribution can create avoidable compliance and liquidity pressures. The future of RCM should therefore focus on revenue protection without imposing disproportionate transactional costs on compliant businesses.

SUGGESTIONS

1. Rationalise the cash-only rule: Permit utilisation of eligible ITC against RCM liability where revenue risk is demonstrably low.

2. Strengthen digital reconciliation: Develop the RCM Liability/ITC Statement as a preventive compliance tool rather than merely a post-reporting validation mechanism.

3. Clarify the credit sequence: Clearly distinguish the legal stages of RCM payment, ITC entitlement and ITC distribution to reduce interest and reversal disputes.

4. Simplify multi-GSTIN compliance: Provide clearer rules for attribution and distribution of RCM-related common input-service credit under the ISD mechanism.

5. Improve notification certainty: Consolidate RCM notifications with clear supplier, recipient, supply, effective-date and exception requirements to reduce classification disputes.

References: –

1. The Central Goods and Services Tax Act, 2017, No. 12 of 2017, §§ 2(61), 2(82), 2(98), 9(3)–(4), 13(3), 16–17, 20, 24, 31, 49 (India).

2. The Integrated Goods and Services Tax Act, 2017, No. 13 of 2017, §§ 5(3)–(4) (India).

3. The Central Goods and Services Tax Rules, 2017, rr. 39, 47A, 87 (India).

4. Notification No. 13/2017-Central Tax (Rate), Ministry of Finance, Government of India, June 28, 2017 (notifying specified services taxable under reverse charge).

5. Notification No. 04/2017-Central Tax (Rate), Ministry of Finance, Government of India, June 28, 2017 (notifying specified goods taxable under reverse charge).

6. Notification No. 07/2019-Central Tax (Rate), Ministry of Finance, Government of India, Mar. 29, 2019 (notifying specified supplies received by promoters from unregistered suppliers under § 9(4)).

7. Notification No. 09/2024-Central Tax (Rate), Ministry of Finance, Government of India, Oct. 8, 2024 (amending the specified RCM services, including renting of immovable property).

8. Notification No. 06/2024-Central Tax (Rate), Ministry of Finance, Government of India, Oct. 8, 2024 (notifying specified metal-scrap supplies under reverse charge).

9. Notification No. 07/2025-Central Tax (Rate), Ministry of Finance, Government of India, Jan. 16, 2025 (amending Notification No. 13/2017-Central Tax (Rate), including specified changes concerning RCM).

10. Notification No. 16/2024-Central Tax, Ministry of Finance, Government of India, Aug. 6, 2024 (bringing the Finance Act, 2024 amendments relating to the ISD framework into force from Apr. 1, 2025).

11. Notification No. 12/2024-Central Tax, Ministry of Finance, Government of India, July 10, 2024 (amending Rule 39 concerning distribution of input tax credit by an ISD).

12. Circular No. 140/10/2020-GST, Ministry of Finance, Central Board of Indirect Taxes and Customs, June 10, 2020 (clarification regarding GST on director’s remuneration).

13. Circular No. 172/04/2022-GST, Ministry of Finance, Central Board of Indirect Taxes and Customs, July 6, 2022 (utilisation of electronic credit ledger and electronic cash ledger, including treatment of RCM liability).

14. Goods and Services Tax Council, Minutes of the 55th Meeting of the GST Council, Agenda Item 3(vii)(IV) (discussing inclusion of inter-State RCM supplies within the ISD framework and consequential amendments).

15. Goods and Services Tax Council, GST Council Newsletter, December 2025, RCM Liability/ITC Statement and related GSTN portal validation.

16. Union of India v. Mohit Minerals Pvt. Ltd., (2022) 10 SCC 700 (India).

17. Reliance Jio Infocomm Ltd. v. Union of India, 2026:MHC:925 (Madras High Court, Mar. 5, 2026).

18. Sona Enterprises v. The Assistant Commissioner & Ors., W.P. No. 31510 of 2024 (Andhra Pradesh High Court, Apr. 27, 2026).