Reverse Charge Under GST - Check When is Reverse Charge Applicable

Introduction

In the standard world of taxation, the logic is usually straightforward. You buy a product, you pay the tax to the seller, and the seller deposits that tax with the government. This is known as the Forward Charge mechanism.

But under the Goods and Services Tax regime, there is a twist called the Reverse Charge Mechanism or RCM. As the name suggests, the flow of responsibility is reversed here. The seller does not collect the tax. Instead, you—the buyer—must calculate the tax, pay it directly to the government, and then claim it back as credit.

Why does this exist? It is primarily designed to capture tax from unorganized sectors like goods transport or legal services where collecting tax from thousands of small suppliers is administratively difficult. For businesses, however, RCM is a compliance minefield. In fact, missing an RCM payment is one of the most common triggers for tax notices today. In this guide, we will break down the latest 2025 rules, including the critical updates on sponsorship services and the new deadlines for self-invoicing.

Table of Contents

1. What is the Reverse Charge Mechanism (RCM)?
2. When is RCM Applicable? (Section 9(3) vs 9(4))
3. List of Goods & Services Under RCM (2025 Updated)
4. The Critical Renting Update (Commercial vs Residential)
5. Time of Supply & New Self-Invoicing Rules (Rule 47A)
6. How to Claim Input Tax Credit (ITC) on RCM
7. Who Must Register for RCM?
8. Penalties for Non-Compliance
9. FAQs

What is the Reverse Charge Mechanism (RCM)?

Under RCM, the liability to pay tax shifts from the supplier of goods or services to the recipient.

In a Normal Charge scenario, the Supplier supplies goods, the Buyer pays the value plus tax, and the Supplier deposits the tax.

In a Reverse Charge scenario, the Supplier supplies goods, the Buyer pays only the value to the supplier, and the Buyer deposits the tax directly to the Government.

This mechanism ensures that tax is collected even when the supplier is unregistered or belongs to a hard-to-track sector.

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When is RCM Applicable? (Section 9(3) vs 9(4))

The GST Act classifies RCM into two main buckets:

1. Specified Goods and Services (Section 9(3))

The government has notified a specific list of goods and services. If you deal in these, RCM is mandatory, regardless of whether the supplier is registered or not. Examples include Goods Transport Agency (GTA), Legal Services, and Security Services.

2. Supply from Unregistered to Registered Persons (Section 9(4))

This applies only to specific classes of registered persons. Originally, it was meant for all unregistered purchases, but that was suspended. Currently, it largely applies to the Real Estate Sector (promoters buying cement/capital goods from unregistered dealers) and, more recently, Renting of Commercial Property.

List of Goods & Services Under RCM (2025 Updated)

Keeping track of this list is essential for your accounts team. Here are the most common items affecting businesses in 2025.

A. Services (Key Items)

• Goods Transport Agency (GTA): If the GTA does not pay tax at 12% (Forward Charge), the recipient business entity must pay tax at 5% under RCM.
• Legal Services: Services provided by an individual advocate or a firm of advocates to a business entity.
• Security Services: Provided by any person (other than a body corporate) to a registered person.
• Renting of Motor Vehicles: Provided by any person (other than a body corporate) to a body corporate, where the cost of fuel is included.
• Directors' Services: Services provided by a Director to the company.
• Sponsorship Services (Important 2025 Update): Previously, all sponsorship services were under RCM. Under the new rule, if the sponsor (supplier) is a Body Corporate, they must charge GST under Forward Charge. RCM now applies only if the sponsorship service is provided by an individual or partnership firm to a body corporate.

B. Goods (Key Items)

• Cashew nuts (not shelled/peeled)
• Bidi wrapper leaves
• Silk yarn
• Used vehicles, seized and confiscated goods, old and used goods, waste and scrap (when sold by Govt)

The Critical Renting Update (Commercial vs Residential)

The rules for renting immovable property have seen major shifts recently.

1. Residential Dwelling

If rented for Residential Use to a registered person, RCM applies (the tenant must pay the tax).

If rented for Personal Use to an unregistered person, it is Exempt.

2. Commercial Property (New Amendment)

Previously, if an unregistered person rented a commercial office to a registered person, it was often confused with forward charge limits.

Current Rule: If an Unregistered Person rents out commercial property to a Registered Person, the registered tenant MUST pay GST under RCM.

Exception: This does not apply if the tenant is registered under the Composition Scheme.

Time of Supply & New Self-Invoicing Rules (Rule 47A)

When do you actually have to pay the RCM liability?

For Services:

The liability arises on the earliest of the date of payment or the date immediately following 60 days from the date of invoice.

Mandatory Self-Invoicing (Rule 47A)

If you buy from an unregistered supplier (like a landlord or small transporter), they cannot give you a GST invoice. You must issue a Self-Invoice to yourself.

New Deadline: As per the recent introduction of Rule 47A, you must issue this self-invoice within 30 days from the date of receipt of the supply. Failure to do so is now a specific compliance breach that can attract penalties.

Did You Know?

If you fail to pay RCM, you not only pay the tax later but also 18% interest. And the worst part? You cannot claim Input Tax Credit on the interest portion. It is a straight loss to your business.

How to Claim Input Tax Credit (ITC) on RCM

A common misconception is that RCM is a cost. It is not. It is just a liquidity crunch.

1. Payment: You must pay the RCM liability in Cash (via the Electronic Cash Ledger). You cannot use your existing ITC balance to pay RCM liability.
2. Claiming Credit: Once you have paid the amount in cash and filed your GSTR-3B, you can claim that exact amount back as Input Tax Credit (ITC) in the same month (provided you are eligible for ITC generally).

Who Must Register for RCM?

Section 24 of the CGST Act mandates Compulsory Registration for anyone required to pay tax under Reverse Charge.

Even if your turnover is ₹5 Lakh (well below the ₹20 Lakh/₹40 Lakh threshold), if you take a service covered under RCM (e.g., you hire a GTA for transport), you must register for GST to discharge that liability. This specific rule catches many small businesses off guard.

Penalties for Non-Compliance

Ignoring RCM is dangerous because the government tracks it via the counterparty (e.g., The Advocate declares they provided services to you in their return).

• Interest: 18% per annum on the delayed payment amount.
• Penalty: 100% of the tax amount or ₹10,000, whichever is higher (under Section 122).
• Loss of ITC: If you pay RCM after a significant delay (beyond the time limit for claiming ITC for that financial year), you might be allowed to pay the tax but denied the credit, making it a permanent cost.