Reverse Charge Mechanism in GST: When It Applies

TL;DR

Reverse charge (Section 9(3) and 9(4) of the CGST Act) makes the recipient of supply liable to pay GST instead of the supplier.

Under reverse charge, the recipient of a supply pays GST instead of the supplier. The mechanism is set out in Section 9(3) and Section 9(4) of the CGST Act, and the list of notified supplies is in Notification 13/2017-CT(R) (as amended). Reverse charge applies across categories — services from advocates, goods transport from unregistered agencies, rent from unregistered landlords, import of services, security services, and a handful of specific goods. This post walks through every category, the working-capital impact, and the procedural steps.

Section 9(3) — Specified Categories

Section 9(3) lists supplies on which reverse charge applies. The most-used categories:

1. Services by an advocate or a firm of advocates to any business entity

• Who pays GST: The business entity (recipient).
• Rate: 18% (CGST 9% + SGST 9%, or IGST 18% if the advocate is outside the state).
• When: Every invoice raised by the advocate for legal services.
• Invoice: The recipient must self-invoice the advocate (no supplier invoice is available, so the recipient raises an invoice in the supplier’s name). The recipient declares the reverse-charge tax in GSTR-3B Table 3.1(d).

2. Services by a Goods Transport Agency (GTA) where the supplier is an individual, HUF, or unregistered firm

• Who pays GST: The consigner / consignee / recipient of transport services.
• Rate: 5% (CGST 2.5% + SGST 2.5%, or IGST 5%).
• When: Every GTA invoice.
• Threshold: If the GTA is registered and charges GST on a forward charge basis, reverse charge does not apply. If the GTA is unregistered, the recipient pays reverse charge.
• Invoice: Self-invoice by the recipient. E-way bill must be generated by the recipient for movement of goods.

3. Renting of a motor vehicle to a body corporate

• Who pays GST: The body corporate (recipient).
• Rate: 5% if the supplier is an individual / HUF; 18% if the supplier is a registered entity.
• When: Every lease / rent invoice.
• Threshold: If the supplier is a registered entity and has opted for forward charge, the 5% reverse charge does not apply — the supplier charges 18% with ITC for the recipient.

4. Security services supplied by any person to a registered person

• Who pays GST: The registered recipient.
• Rate: 18%.
• When: Every invoice from the security services provider.
• Threshold: None. Every security services invoice, regardless of supplier’s registration status.

5. Services by way of renting of residential dwelling to a registered person

• Who pays GST: The registered person (recipient).
• Rate: 18% (less GST paid on property tax, if any).
• When: Every rent invoice.
• Threshold: If the landlord is registered, the landlord can charge GST on forward charge. Reverse charge applies only when the landlord is unregistered.

6. Services by way of providing accommodation in any hotel, inn, guest house, club or campsite, by whatever name called

• Who pays GST: Any business entity registered under GST that books the unit. (Unregistered persons cannot be charged GST on reverse charge; the registered recipient pays.)
• Rate: 18% on the accommodation tariff. There is no per-unit-day threshold — the rate applies to the full value of the unit booked.
• Threshold: Only when the supplier provides accommodation service to a registered person. Tariff value is the declared or published tariff; the GST component declared by the supplier is payable additionally.

7. Supply of goods or services by the Central Government, State Government, Union Territory, or local authority to a registered person

• Who pays GST: The registered recipient.
• Rate: As applicable to the supply.
• Threshold: Specific supplies notified (e.g., renting of immovable property, certain services).

8. Supply of services by way of transfer of a going concern, or part thereof

The transfer of a going concern (whole or part) is treated under Schedule III of the CGST Act as neither a supply of goods nor a supply of services. No GST is charged by either party. There is no reverse-charge liability for this entry.

9. Specified goods supplied by specified suppliers

Notified categories include:

• Cashew nuts (notified category under Section 9(3))
• Bidi wrapper leaves
• Raw cotton
• Silk yarn
• Tendu leaves

For these, reverse charge applies on the recipient (typically a registered dealer who uses the goods for further supply or manufacture). The recipient is liable to pay GST on reverse charge; the supplier does not charge GST on the invoice. The recipient must self-invoice, declare in Table 3.1(d), and pay in Table 6.1 of GSTR-3B, and can claim ITC if eligible.

Section 9(4) — All Supplies from Unregistered Persons to Registered Persons

Section 9(4) was the original catch-all — every supply from an unregistered person to a registered person was under reverse charge. This has been significantly diluted by Notification 7/2019-CT(R), which exempts intra-state supplies of goods from unregistered to registered persons from reverse charge. The current position is:

• Intra-state supply of goods from unregistered to registered: Reverse charge does not apply. The registered recipient pays no reverse-charge tax on these goods.
• Inter-state supply of goods from unregistered to registered: Reverse charge applies. However, unregistered persons making inter-state supplies are generally required to register first; where registration is required and not obtained, the recipient pays IGST under 9(4).
• All supplies of services from unregistered to registered persons: Reverse charge applies (subject to specific exemptions in Notification 7/2019-CT(R)).
• Imports of services (i.e., supplies received from a person outside India by a resident in India): treated as reverse-charge under Section 9(4) read with Section 5 of the IGST Act; the recipient pays IGST. Imports of goods are not a 9(4) supply — they are governed by the Customs Act, 1962, and IGST is paid at the customs port.

For most small businesses, this means reverse charge on goods purchases from local unregistered vendors is no longer a concern. Reverse charge on services is still active.

The Working Capital Impact

Reverse charge is paid in cash in Table 6.1 of GSTR-3B. ITC on reverse-charge payments is available:

• For registered suppliers, ITC is reflected in GSTR-2B (auto-generated by the 14th of the next month), and claimed in Table 4(A)(1) of GSTR-3B.
• For unregistered suppliers (rent, certain services), ITC is claimed in Table 4(A)(2) of GSTR-3B on a self-assessment basis. There is no GSTR-2B entry because the supplier has no GSTIN; the supporting documents (self-invoice, payment proof) must be retained for verification.

For a service business with significant reverse-charge liabilities (legal, GTA, security), the cash flow impact is meaningful. Three mitigations:

1. Prefer registered suppliers. If the landlord is registered and has opted for forward charge, you pay 18% on rent to the landlord and claim ITC — no cash-out under reverse charge.
2. For GTA, use only registered transporters. A registered GTA charges 5% GST on forward charge. Either way, the tax is in the supplier’s books, not your reverse-charge block.
3. Track reverse charge in your books. A reverse-charge liability accrues the moment the supplier’s invoice is raised, not when the payment is made. Your books must reflect the liability, the cash payment, and the ITC eligibility separately.

Practical Examples

Example 1 — A consultancy paying rent to an unregistered landlord

The consultancy pays ₹2,00,000 per month in office rent to an individual landlord. The landlord is unregistered. The consultancy must pay 18% reverse-charge tax = ₹36,000 per month in cash. The ITC is available on a self-assessment basis (no GSTR-2B match). The consultancy declares the rent under Table 3.1(d) of GSTR-3B.

If the landlord registers and opts for forward charge, the landlord charges 18% GST on the rent invoice. The consultancy pays the GST along with the rent. The consultancy claims ITC based on the landlord’s GSTR-1 (via GSTR-2B). No reverse-charge cash-out.

Example 2 — A manufacturer hiring unregistered transporters

The manufacturer ships goods through a Goods Transport Agency that is an unregistered proprietorship. The freight is ₹50,000 per consignment. Reverse charge at 5% = ₹2,500 per consignment in cash. The manufacturer self-invoices the GTA and declares the reverse charge in GSTR-3B. The ITC is available on self-assessment.

If the manufacturer shifts to a registered GTA, the GTA charges 5% GST on forward charge. The manufacturer pays 5% on the freight and claims ITC on the GTA’s GSTR-1. No reverse-charge block.

Example 3 — A tech company importing software services

A tech company subscribes to a SaaS platform from a US-based provider. The SaaS fee is USD 10,000 per month. This is an import of services. The tech company is liable to pay IGST under reverse charge at 18% of the INR equivalent. The IGST is paid along with the foreign remittance (the bank may collect IGST at the time of remittance under the Liberalised Remittance Scheme). The tech company claims ITC on the IGST paid.

The Procedural Steps

Step 1 — Self-invoice the supplier

For reverse-charge supplies where the supplier does not issue a tax invoice (typically unregistered suppliers), the recipient must self-invoice. The self-invoice contains the supplier’s name, the recipient’s GSTIN, the description, the taxable value, and the GST amount. The invoice number follows the recipient’s invoice series.

Step 2 — Declare in GSTR-3B

Table 3.1(d) — Outward supplies on which tax is to be paid on reverse charge. The aggregate taxable value and the tax amount are declared here.

Step 3 — Pay the tax in cash

Table 6.1 — Payment of reverse-charge tax. The electronic cash ledger is debited. The tax is paid through net-banking, NEFT, RTGS, or OTC at a bank.

Step 4 — Claim ITC on the reverse-charge payment

Table 4(A)(1) of GSTR-3B — ITC on inward supplies from registered suppliers liable to reverse charge; this matches the corresponding entry in GSTR-2B. Table 4(A)(2) of GSTR-3B — ITC on inward supplies from unregistered suppliers liable to reverse charge; claimed on a self-assessment basis.

For all cases, the ITC is claimed in the same return or a later return, subject to the time limit under Section 16(4). For unregistered suppliers, the supporting documents (self-invoice, payment proof) must be retained.

Common Mistakes

1. Paying reverse-charge tax late. The tax is due by the 20th of the following month (or the due date of GSTR-3B). Late payment attracts interest under Section 50 at 18% per annum.
2. Not generating the e-way bill for GTA reverse-charge. When the recipient is the consigner and pays reverse charge, the e-way bill is the recipient’s responsibility. Failure to generate the e-way bill is a separate offence.
3. Missing self-invoice. The supplier does not issue a tax invoice. The recipient must self-invoice. Without the self-invoice, the ITC claim is not properly documented.
4. Confusing forward-charge and reverse-charge GTA. The GTA must declare in writing whether the service is under forward charge or reverse charge. If the GTA has not opted for forward charge, the recipient is liable for reverse charge.
5. Claiming ITC twice. Some recipients claim ITC on reverse-charge payment in Table 4(A) and again on the supplier’s GSTR-1 (for registered suppliers). The double-claim is detected by GSTR-2B reconciliation.

When to Get Help

Reverse-charge compliance is one of the most-missed items in monthly GST filings. If your business hires legal, GTA, security, or pays rent to individuals, your books should reflect the reverse-charge liability every month — not as a year-end adjustment.

We routinely set up reverse-charge workflows in Tally, Zoho Books, and QuickBooks. Our GST return filing service covers the monthly GSTR-3B reconciliation. Share your invoice summary and your current GSTR-3B on WhatsApp for a no-charge reverse-charge audit.

For the underlying ITC rules, see our ITC guide. For the broader composition-vs-regular choice, see our composition vs regular GST guide.

Sources

• GST Portal — Returns
• CBIC — CGST Act Sections 9(3), 9(4); Notification 13/2017-CT(R); Notification 7/2019-CT(R)