Reverse Charge Mechanism

Reverse Charge Mechanism (RCM) flips the standard GST equation — instead of the supplier collecting and paying tax, the recipient discharges the GST liability. In 2026, RCM applies to two distinct buckets under Section 9(3) and 9(4) of the CGST Act: notified supplies of goods/services, and supplies from unregistered persons in specified situations. This guide unpacks the framework, lists key notified items, and shows the compliance checklist every taxpayer should run monthly.

Statutory basis for RCM

Section 9(3) of the CGST Act empowers the Government to notify specific goods and services on which GST is paid by the recipient on a reverse charge basis. Section 9(4) provides for RCM where a registered person receives supplies from an unregistered person — currently restricted to specified categories (real estate, in particular). The corresponding provisions in the IGST Act apply to inter-State supplies and imports of services.

Notified services under Section 9(3) RCM

• GTA services (where forward charge option not exercised in Annexure V) — recipient categories pay 5% RCM.
• Services by an individual advocate or firm of advocates / arbitral tribunal — registered business entity pays.
• Sponsorship services to body corporate or partnership — recipient pays.
• Services from a director of a company (other than as an employee) — company pays.
• Renting of motor vehicle (by non-body-corporate to body corporate) at 5% — recipient pays.
• Security services (other than by body corporate) to a registered person — recipient pays.
• Renting of residential dwelling to a registered person (effective 18 July 2022) — registered tenant pays.
• Services supplied by Recovery Agents to a banking company / NBFC — recipient pays.
• Services of overseeing Committee Members to RBI — RBI pays.

Notified goods under Section 9(3) RCM

• Cashew nuts not shelled / not peeled supplied by agriculturist — registered buyer pays.
• Bidi wrapper leaves (tendu) — registered buyer pays.
• Tobacco leaves — registered buyer pays.
• Silk yarn — registered buyer pays.
• Raw cotton supplied by agriculturist — registered buyer pays.
• Used vehicles, seized and confiscated goods, old and used goods, waste and scrap supplied by Central/State Government/local authority to a registered person — registered buyer pays.
• Priority Sector Lending Certificate supplied by RRB/Scheduled Bank to another bank — recipient bank pays.

Imports of services and RCM

Under Section 5(3) of the IGST Act, any import of service by a person in India for consideration in the course of business attracts RCM. The Indian recipient pays IGST at the applicable rate (typically 18%) and claims ITC subject to Section 16. Common examples: foreign SaaS, advertising on Google and Meta, consultancy from overseas firms, legal services from foreign counsel.

Time of supply and ITC under RCM

1. Time of supply for goods under RCM: earlier of date of receipt of goods, date of payment, or 30 days from invoice date.
2. Time of supply for services under RCM: earlier of date of payment or 60 days from invoice date; for associated enterprises abroad, date of book entry.
3. RCM tax is paid through Electronic Cash Ledger — cannot be set off against existing ITC.
4. ITC of the RCM tax paid is available in the same month, subject to Section 16 conditions and Section 17(5) blocks.

Documentation requirements

• Self-invoice under Section 31(3)(f) when the supplier is unregistered.
• Payment voucher under Section 31(3)(g) when paying the supplier.
• Maintain register of all RCM-applicable inward supplies for the period.
• Disclose under Table 3.1(d) of GSTR-3B and Table 4(A)(3) for ITC of RCM in the same month.

Common compliance failures

Missing RCM on imports of services, GTA, and director remuneration is the single largest source of GST audit additions. Many companies also miss RCM on residential rent paid by a registered person — a relatively new provision from July 2022. Always reconcile your top expense ledgers (legal fees, professional fees, advertising, GTA, security, rent) against the RCM table every month.

Building an RCM checklist for monthly GST close

An effective RCM compliance routine has five pillars. First, scan top 20 expense ledgers each month — legal, professional, advertising, security, rent, freight, foreign software, director remuneration — and flag each transaction against the RCM master list. Second, raise self-invoices on the same day as the underlying invoice or expense booking, with serial numbering distinct from regular sales invoices. Third, generate payment vouchers when supplier is paid. Fourth, compute and pay RCM tax via the Electronic Cash Ledger by the 20th of the following month, with separate UTR for traceability. Fifth, claim ITC of the RCM tax in the same month's GSTR-3B Table 4(A)(3), subject to Section 17(5) checks. Document the entire process in a written RCM Standard Operating Procedure shared with the AP and tax teams. Run quarterly internal review with the auditors to catch any missed RCM items — for instance, services from an unregistered consultant, or a foreign advertising spend on Meta/Google not booked as import of service. Discipline here translates directly into audit-clean books and minimal Section 50 interest exposure.

Conclusion

RCM is not a one-off oddity — it is a structural feature of GST that captures supplies from unregistered or unincorporated entities, and from specified service categories. In 2026, build an RCM checklist as part of your monthly GST close: scan AP ledger, identify RCM heads, raise self-invoices, pay through cash ledger, claim ITC same month. The discipline turns a frequent audit weakness into a routine, low-effort compliance.