What "reverse charge" actually reverses
In the normal GST flow, the supplier charges tax on the invoice, collects it from you, and pays the government. Under the reverse charge mechanism (RCM), the law shifts that liability to the recipient: your supplier bills you without GST, and you compute the tax yourself, pay it in cash through GSTR-3B, and (if eligible) claim it back as input tax credit. The concept exists mainly for supplies where the supplier is hard to tax — small transporters, individual advocates, foreign service providers.
There are two legal routes: notified categories of goods/services where RCM always applies (section 9(3) concept), and purchases from unregistered suppliers in specific notified situations (section 9(4) concept — today confined to particular sectors such as promoters in real estate, not a blanket rule). For the framework in depth, see our reverse charge tutorial.
Example 1: GTA — the freight bill everyone forgets
Your factory in Ludhiana pays a goods transport agency (GTA) ₹8,000 to move a consignment, and the transporter issues a consignment note without GST (GTAs can opt to charge tax themselves — check the invoice; if they charge forward, RCM does not apply).
- You compute GST at the applicable GTA rate (long-standing RCM rate: 5%) → ₹8,000 × 5% = ₹400
- You pay ₹400 in cash in that month's GSTR-3B (RCM liability cannot be set off against ITC)
- Since freight for business is an eligible input service, you claim the same ₹400 back as ITC in the same return — net cost: nil, but the cash-flow and reporting steps are mandatory
Miss it, and an audit later demands the tax with 18% p.a. interest — while your window to claim the matching credit may have lapsed. That is how a "nil-cost" transaction becomes a real expense.
Example 2: Advocate fees
A private limited company pays ₹50,000 to an individual advocate for contract drafting. Legal services from an advocate to a business entity are a classic notified RCM category.
- The advocate bills ₹50,000 with no GST
- The company pays ₹50,000 × 18% = ₹9,000 as RCM in cash via GSTR-3B
- Being a business expense, the ₹9,000 is claimable as ITC, subject to the usual ITC conditions
Similar notified categories you may meet include services of an arbitral tribunal, sponsorship to companies, security services from non-corporates to registered businesses, renting of motor vehicles to companies in certain cases, and director services (sitting fees etc.) to the company. The notified list changes over time — verify the current list on gst.gov.in.
Example 3: Import of services
A Bengaluru startup pays a US company $500 (≈ ₹42,000) per month for design software subscriptions and consulting. The foreign supplier has no Indian GST registration, so the startup must self-assess IGST under RCM.
- IGST = ₹42,000 × 18% = ₹7,560 per month, paid in cash through GSTR-3B
- If used for taxable business activity, the same amount comes back as ITC
- This applies even when the payment goes through a credit card and no one sends you a "tax invoice" — the trigger is the import of the service itself
This is one of the most-missed RCM categories in audits of service companies: cloud tools, overseas freelancers, foreign ad platforms without Indian billing entities — each subscription can be an RCM event.
Example 4: Purchases from unregistered suppliers — the concept
When GST launched, buying anything from an unregistered supplier triggered RCM — a rule so painful it was quickly suspended and then narrowed. Today the unregistered-purchase RCM survives only for notified persons and supplies — the well-known case being real-estate promoters who must pay tax on shortfalls in registered procurement (cement, capital goods, etc.). A regular trader buying stationery from an unregistered shop does not pay RCM on it under the current framework — but because this area has changed more than once, verify the current position for your sector on gst.gov.in.
Quick-reference table
| Inward supply | RCM applies? | Who pays | ITC available? |
|---|---|---|---|
| GTA freight (transporter not charging forward GST) | Yes | Recipient (registered business) | Yes, if for business |
| Individual advocate's legal fees to a business | Yes | Recipient | Yes |
| Import of services (foreign SaaS, freelancers) | Yes | Indian recipient | Yes, if for taxable business use |
| Sponsorship paid to a company/partnership | Yes (notified) | Recipient body corporate/firm | Yes |
| Routine purchase from an unregistered local vendor | Generally no (only notified sectors) | — | — |
The compliance mechanics: five things to get right
- Pay RCM in cash. The liability goes in Table 3.1(d) of GSTR-3B and must be discharged through the cash ledger — ITC cannot be used to pay it. See the GSTR-3B guide for where it sits in the form.
- Raise a self-invoice when the supplier is unregistered (advocate, foreign supplier), and a payment voucher on payment — these are your documents for claiming the credit.
- Claim the ITC in the same or a later period, within the normal time limits, and report it in the RCM-ITC row of 3B.
- Registration matters: liability to pay RCM makes registration compulsory regardless of turnover — a point many small firms discover late.
- Composition dealers beware: they must pay RCM at full rates and get no credit — a genuine cost.
Practical tip: keep a monthly "RCM checklist" — freight, legal, foreign payments, sponsorship, security services — and scan your expense ledger against it before filing 3B. Ten minutes a month prevents the most common audit finding in small-business GST.