GST Reverse Charge Mechanism Explained

The recipient is the person who pays

On an ordinary supply the supplier charges GST and pays it through their return. On a reverse-charge supply the statute shifts the payment to the recipient. The supplier may still issue a document, but the tax does not ride on it in the usual way. You, the recipient, compute the tax, record it, and pay it. That is the whole mechanism. The surrounding system is in .

The shift exists so tax is collected from a person the law can see, typically a registered business, when the supplier is unregistered, overseas, or in a trade the notification has picked out. It is not a penalty. It is a different person on the paying side of an ordinary tax.

Only notified supplies, not every unregistered purchase

A persistent myth says that anything you buy from an unregistered person is under reverse charge. A broad rule of that kind was narrowed and should not be assumed. What remains is a list: specified categories of goods and services, and specified classes of supplier, published by notification and amended from time to time. If the supply is not on the list in force on the date of the supply, reverse charge does not apply merely because the vendor has no GSTIN.

Examples that have appeared on those notifications include certain goods-transport services, services by an advocate to a business entity, services by a director, and import of services. Those examples are illustrations of the kind of entry you will see. They are not a warrant to tax every freight bill or every lawyer. Open the notification, match the entry, and file the page in the voucher.

Import of services is the case people forget

A subscription, a design fee, or a software licence paid to a person outside India can be an import of services. The recipient in India is commonly the person who pays integrated tax under reverse charge, subject to the rule for that supply. The bank advice in foreign currency is not the end of the GST question. Put cross-border service payments in the same reverse-charge register as domestic notified bills, and classify them before the month closes.

Self-invoice, payment voucher, and the liability register

Where the supplier does not issue a tax invoice, the recipient issues a self-invoice with the particulars the rules require, and a payment voucher when paying the supplier. Number those documents in their own series. They are what you will show if someone asks how you measured the tax. A journal entry that says “RCM” and nothing else is not a document.

The register has one row per supply: date, vendor, why you believe the notification applies, taxable value, tax computed, self-invoice number, cash-ledger challan, and whether credit was claimed. The tax is a liability in . The credit, if the inward supply is eligible, is a separate claim described in the . Netting them in one cell hides both.

The payment screen often wants cash

Reverse-charge liability is commonly discharged through the electronic cash ledger, not by setting it off against the credit ledger. The payment screen for the period is the authority. If it demands cash, deposit cash. Do not assume an old workaround still works. After the tax is paid, credit may be claimed in the credit table when the conditions are satisfied, which is why the cash goes out even when the net cost of an eligible supply is small.

Freight and a legal fee in one month

A company in Ahmedabad pays a goods transport agency for an inbound truck and pays an advocate for a contract review. Both vendors are in the habit of saying “GST is under reverse charge” on the bill. The accountant does not take the habit as the law. She opens the notification, finds the transport entry that matches this agency and this consignment, and finds the legal-services entry that matches an advocate billing a business entity. Each match is printed and pinned to the voucher.

She raises two self-invoices, computes the tax from the rate lookup she has dated, and plans the cash. Credit on the transport is tested against the blocked-credit and eligibility rules; it is not assumed. Credit on the legal fee is tested the same way. Neither bill is left inside “office expenses” with no tax. The month’s GSTR-3B inward-supplies table shows both. A third bill, from an unregistered stationery shop, stays out of the register because she cannot find a notification entry that covers it.

How it shows up in the supplier’s return and yours

Some reverse-charge supplies are also reported by the supplier in their outward statement with a marker that tax is payable by the recipient. Do not be surprised if a supplier’s invoice and your self-invoice both exist. They are not two taxes. They are two documents about one shift in who pays. Your payment is the one that satisfies the liability.

If you are the supplier of a notified service, your job is to mark the invoice correctly and not to collect the tax. If you are the recipient, your job is to pay it. Businesses that are both, in different transactions, need both behaviours in the billing manual. Mixing them produces invoices that collect tax the supplier was not meant to collect, and purchases on which nobody paid.

A reverse-charge checklist

Review the month in this order. 1. List every expense that might be notified: transport, legal, director-related, import of services, and any other category your file has seen before. 2. Match each one to a current notification entry or record that no entry applies. 3. Issue the self-invoice and payment voucher the rules require. 4. Compute tax from a rate lookup you have dated. 5. Include the liability in GSTR-3B and pay it the way the payment screen requires, usually in cash. 6. Test credit separately and claim only what qualifies. 7. File the notification page with the voucher so the next person can see why the row exists.

New expense heads are the leak. A first-time foreign subscription will not be on last month’s list. Someone has to own the question. The puts that question on the purchase-register review, not on filing morning.

The notification is the source of the list

Entries are added and pruned. A supply that was under reverse charge in a previous year may not be under it now, and the reverse is also true. Quote the notification you relied on, including its date, in the register. If you cannot find the entry, do not invent the charge, and do not skip a charge that is plainly there.

Rates and the exact wording of each entry live on CBIC GST. The return tile and the payment behaviour live on the GST portal. Read both for the period. A blog example, including the examples on this page, is a map of where to look.