A founder pays ₹1,80,000 to an advocate for drafting a shareholders' agreement. The invoice says "Legal professional fees — ₹1,80,000". No GST line. The accounts team books it as an expense, the CFO signs off, and GSTR-3B for the month is filed showing outward tax only. Eleven months later, a GST officer runs a Section 9(3) match against the company's expense ledger and issues a notice for ₹32,400 of unpaid tax, plus interest at 18% per annum under Section 50(1), plus a penalty.

Nothing was hidden. The advocate was correct not to charge GST. The company was simply supposed to pay it themselves — and did not.

This is the reverse charge mechanism, and it is the single most common source of GST demand notices against otherwise well-run private limited companies. The problem is structural: every other GST liability announces itself on an invoice. RCM does not. It only exists in the recipient's head, or in a checklist during the monthly close.

What the law actually requires

Section 9(1) of the CGST Act 2017 sets the default rule: the supplier collects and remits GST. Section 9(3) and Section 9(4) carve out exceptions where that liability shifts entirely to the recipient.

Section 9(3) — notified goods and services. The Government notifies specific categories where the recipient pays. The operative instrument is Notification No. 13/2017-Central Tax (Rate) for services and Notification No. 4/2017-Central Tax (Rate) for goods, both amended repeatedly since. For a typical private limited company, the entries that actually bite are:

Legal services from an individual advocate or firm of advocates — 18%. This covers representational services and legal advisory. A law firm structured as an LLP is still covered.
Goods Transport Agency (GTA) services — 5% without input tax credit to the transporter, where the GTA has not opted for forward charge. A GTA that has opted in files a declaration in Annexure V; if you have not seen that declaration, assume RCM applies.
Director's services to the company — 18%, where the director is not an employee. Sitting fees, commission, and professional fees paid to a non-executive or independent director fall here. Salary to a whole-time or managing director under an employment contract does not.
Security services (supply of security personnel) from any person other than a body corporate, to a registered person — 18%.
Renting of a motor vehicle designed to carry passengers, where the supplier is a non-body-corporate charging 5% and the recipient is a body corporate — 5%.
Sponsorship services provided by any person other than a body corporate to a body corporate or partnership firm — 18%.
Services from a person located in a non-taxable territory (import of services) — this is the one that catches every startup running on foreign SaaS. Payments to AWS, Google Cloud, Figma, Slack, or a US-based consultant are an import of service. If the foreign supplier has no Indian GST registration, the Indian recipient pays IGST under RCM at 18%.
Metal scrap supplied by an unregistered person to a registered person, added by Notification No. 06/2024-Central Tax (Rate) effective 10 October 2024.
Renting of commercial immovable property by an unregistered person to a registered person, inserted by Notification No. 09/2024-Central Tax (Rate) effective 10 October 2024. If your office landlord is an individual without GST registration, the company pays RCM on the rent. Composition taxpayers were excluded from this entry with effect from 16 January 2025.

Section 9(4) — supplies from unregistered persons. This is widely misunderstood. The original blanket version — RCM on every purchase from an unregistered supplier — was suspended and then replaced. Section 9(4) as it now stands applies only to a class of registered persons notified by the Government in respect of specified categories. It is not a general rule that every purchase from an unregistered vendor triggers RCM. Stationery from a local shop, a plumber's repair bill, a small printing job — none of these attract RCM in the ordinary course. The specific notified 9(4) cases (real estate developers buying inputs below the 80% threshold, the scrap and commercial-rent entries above) are narrow and should be checked against the current notification rather than assumed.

Section 5(3) and 5(4) of the IGST Act 2017 mirror this for inter-state supplies and imports of service. Import of services from an unrelated party for consideration is a supply under Section 7(1)(b) of the CGST Act, and the Indian recipient discharges IGST under RCM.

Section 24(iii) is the trap that catches early-stage companies. A person required to pay tax under reverse charge must register for GST regardless of turnover. There is no ₹20 lakh or ₹40 lakh threshold shelter. A two-person company below any turnover threshold that pays a single advocate's bill or a single AWS invoice becomes compulsorily registrable.

Rule 36(1)(b) and Section 31(3)(f) require the recipient to raise a self-invoice for every RCM supply received from an unregistered supplier. Section 31(3)(g) requires a payment voucher at the time of payment. These are not optional paperwork — they are the documents on which the input tax credit claim rests.

Practical implications

RCM must be paid in cash. Always. Section 49(4) read with Rule 85(4) bars the use of the electronic credit ledger to discharge reverse charge liability. Even a company sitting on ₹40 lakh of accumulated ITC must pay RCM in cash through the electronic cash ledger. Founders who assume "we have credit, so it nets off" are wrong at the ledger level, and the mismatch surfaces at the annual reconciliation.

Interest runs at 18% from the original due date. Section 50(1) charges interest at 18% per annum from the day after the tax was due until it is paid. A ₹32,400 RCM liability missed for eighteen months carries roughly ₹8,750 of interest before any penalty. Interest under Section 50 is not discretionary and is not waived on voluntary disclosure.

Penalty exposure under Section 73 and Section 122. Where the shortfall is not on account of fraud, Section 73 permits a penalty of 10% of the tax or ₹10,000, whichever is higher — reduced to nil if the tax and interest are paid before a show-cause notice is issued, and to 15% if paid within 30 days of the notice. Where the department alleges suppression, Section 74 raises the penalty to 100% of the tax and extends the limitation period to five years from the annual return due date, against three years under Section 73. Failing to issue a self-invoice separately attracts Section 122(1)(ii) — ₹10,000 or the tax involved, whichever is higher.

ITC on RCM is available, but conditionally and with a deadline. Once RCM is paid in cash and the self-invoice exists, the tax is generally creditable under Section 16 — unless it falls into a Section 17(5) blocked category, or the underlying supply is used for exempt outward supply. But the credit must be claimed by the earlier of 30 November following the end of the financial year or the date of filing the annual return, per Section 16(4). Paying an FY 2025-26 RCM liability in, say, February 2027 during an audit means the tax is payable with interest while the corresponding credit is time-barred. That converts a cash-flow-neutral compliance step into a permanent cost.

GSTR-3B and GSTR-2B do not surface RCM for you. Outward RCM liability is declared in Table 3.1(d) of GSTR-3B; the corresponding credit is claimed in Table 4(A)(3). Nothing auto-populates 3.1(d) — GSTR-2B shows RCM-flagged invoices only where a registered supplier has marked them, which by definition excludes the unregistered-supplier and foreign-supplier cases that cause most trouble. The department's reconciliation at GSTR-9C Part II, and the increasingly routine analytics run against the expense ledger in Form 3CD Clause 44, do the surfacing instead — after the fact.

Step-by-step: what to do

Build an RCM expense map, once. Go through twelve months of the purchase ledger and tag every vendor against the Section 9(3) notified list. Legal, freight, security, director payments, foreign software and services, commercial rent from an individual landlord, scrap sales. Most companies find between four and nine recurring RCM vendors. Once mapped, the monthly work is trivial.
Flag RCM at the point of vendor onboarding, not at close. Add two fields to the vendor master: GSTIN (blank = unregistered) and RCM applicable (Y/N with the notification reference). This moves the decision from the accountant closing the books at speed to the person who has the vendor contract in front of them.
Raise self-invoices and payment vouchers monthly, in a consolidated run. Section 31(3)(f) permits a consolidated self-invoice at month-end for supplies received from unregistered suppliers where the aggregate value from a supplier is below ₹5,000 in a day; larger values need per-supply documents. Number them in a distinct series (e.g. RCM/2026-27/001) so they are separable during audit.
Pay in cash before the 20th. Compute total RCM for the month, deposit through Form GST PMT-06 into the electronic cash ledger, and discharge the liability when filing GSTR-3B by the 20th (or the 22nd/24th under the QRMP staggered dates). Do not attempt to offset from the credit ledger — the portal will reject it, and a rejected offset late on the 20th is how a return gets filed late.
Report in Table 3.1(d), claim in Table 4(A)(3), same month. Where the supply is not blocked under Section 17(5), the payment and the credit go in the same GSTR-3B. The net cash impact is nil for the month in which it is paid; the cost only arises when it is discovered late.
Reconcile RCM annually before 30 November. Before the Section 16(4) window closes, run the full-year RCM ledger against GSTR-3B Table 3.1(d). Any shortfall found before 30 November can still be paid and credited. After that date the credit is lost while the liability survives.
Check the foreign-payment ledger separately. Every remittance that generated a Form 15CA/15CB is a candidate. Cross-check the foreign vendor list against RCM tagging — the overlap is high and the omission rate is higher.

FAQ

Does RCM apply to every purchase from an unregistered vendor?
No. Section 9(4) is not a blanket rule. It applies only to notified classes of registered persons for notified supplies — currently narrow categories including metal scrap and commercial rent from an unregistered landlord. Ordinary purchases from small unregistered vendors do not attract RCM.

Can I use input tax credit to pay my RCM liability?
No. Section 49(4) with Rule 85(4) requires RCM to be discharged in cash through the electronic cash ledger. Credit can only be claimed after the cash payment, not used to make it.

We pay AWS and a few US SaaS vendors. Is that really RCM?
Yes. Import of services from a supplier in a non-taxable territory attracts IGST at 18% under Section 5(3) of the IGST Act, payable by the Indian recipient. Where the foreign supplier holds an Indian GST registration and charges GST on the invoice, RCM does not apply — check the invoice for an Indian GSTIN.

Our turnover is ₹12 lakh and we are not GST registered. Do we still have to worry?
Yes, and more so. Section 24(iii) makes registration compulsory for anyone liable to pay tax under reverse charge, with no turnover threshold. A single advocate's invoice or foreign SaaS payment creates a registration obligation.

Is RCM payable on the sitting fees we pay our independent directors?
Yes, at 18%. Services supplied by a director to the company, where the director is not in an employer-employee relationship, are notified under Section 9(3). Salary paid to a whole-time or managing director under a contract of employment is outside GST entirely under Schedule III.

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