Reverse charge mechanism (RCM) is a GST mechanism where the liability to pay tax shifts from the supplier to the recipient of goods or services, reversing the normal charge where the supplier collects and remits the tax. Under Indian law, RCM is governed by Section 9(3) and Section 9(4) of the Central Goods and Services Tax Act, 2017, applying to notified categories of supplies and to supplies received from unregistered persons.
Legal definition
The CGST Act, 2017 provides two distinct bases for reverse charge:
Section 9(3): "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."
Section 9(4): "The Central 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."
Corresponding provisions exist in the IGST Act (Section 5(3) and 5(4)) for inter-state supplies and the UTGST Act (Section 7(3) and 7(4)) for union territories.
How courts have interpreted this term
Union of India v. VKC Footsteps India Pvt. Ltd. [(2022) 2 SCC 603]
While primarily addressing ITC refunds under inverted duty structures, the Supreme Court examined the interplay between RCM and ITC. The Court upheld Rule 89(5) which restricts ITC refund computation to "inputs" only, excluding "input services." This ruling impacts businesses paying GST under RCM on services, as the ITC on such services cannot be included in refund claims under the inverted duty structure.
Mohit Minerals Pvt. Ltd. v. Union of India [(2022) 2 SCC 314]
The Supreme Court struck down the levy of IGST on ocean freight under reverse charge mechanism. The Court held that when IGST is already levied on the composite supply of goods under CIF (Cost, Insurance, and Freight) contract, imposing a separate IGST on the ocean freight component under reverse charge amounts to double taxation. This ruling clarified that RCM cannot be invoked to levy tax on a component that is already part of a taxed composite supply.
Types of reverse charge under GST
RCM operates in two distinct categories:
- RCM under Section 9(3) — Notified supplies: The government notifies specific categories of goods and services on which RCM applies, regardless of whether the supplier is registered. Key notified services include: services by an advocate, services by a goods transport agency (GTA), sponsorship services, services by a director to a company, and import of services.
- RCM under Section 9(4) — Supplies from unregistered persons: Specified classes of registered persons must pay GST on reverse charge basis for specified categories of goods or services received from unregistered suppliers. This provision was initially suspended and later renotified with effect from 1 October 2019 for specified categories.
Why this matters
The reverse charge mechanism serves dual objectives: it ensures tax collection in sectors where suppliers are small, unorganised, or exempt from registration (such as individual advocates, goods transport agencies, and small service providers), and it widens the tax base by bringing into the GST net transactions that might otherwise escape taxation.
For businesses, RCM creates a self-assessment obligation. When a supply falls under RCM, the recipient must: determine the applicable GST rate, pay the tax through their electronic cash ledger (ITC cannot be used for payment of RCM liability), report the RCM transaction in their GSTR-3B return, and subsequently claim ITC on the tax paid under RCM (subject to Section 16 conditions). The requirement to pay through the cash ledger means that RCM has a working capital impact even though the tax is ultimately recoverable as ITC.
For practitioners, the critical compliance challenge is identifying which supplies attract RCM. The list of notified supplies under Section 9(3) is updated periodically through GST Council recommendations and government notifications. Common errors include failure to identify RCM applicability on legal services, GTA services, director sitting fees, and import of services — leading to interest and penalty exposure.
Related terms
Parent concept:
Related mechanisms:
Frequently asked questions
Can ITC be claimed on tax paid under reverse charge?
Yes. The recipient who pays GST under reverse charge mechanism is entitled to claim input tax credit on such payment, subject to the conditions under Section 16 of the CGST Act. However, the ITC can only be claimed after the tax has been paid through the electronic cash ledger and the transaction has been reported in the GST return.
Who pays GST under reverse charge for advocate services?
When an advocate or firm of advocates provides legal services to a business entity, GST is payable under reverse charge by the recipient (the business entity) under Section 9(3). Individual advocates and law firms are exempt from collecting GST on such services. The recipient must pay GST at 18% on the value of legal services received.
Is reverse charge applicable on all purchases from unregistered dealers?
No. Section 9(4) has been amended to apply only to specified classes of registered persons for specified categories of goods or services received from unregistered suppliers. It does not apply universally to all purchases from unregistered dealers. The current notifications specify limited categories, including certain real estate transactions and specific goods.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.