Reverse Charge Mechanism (RCM) — Section 9(3) & 9(4) CGST Act

By Priya Sharma | Updated March 2026

What Is Reverse Charge Mechanism (RCM)?

Reverse Charge Mechanism (RCM) is a provision under India's Goods and Services Tax regime where the liability to pay GST shifts from the supplier to the recipient of goods or services. Under the normal "forward charge" model, the supplier collects GST from the buyer and remits it to the government. Under RCM, the recipient self-assesses and pays GST directly to the government, then claims input tax credit (ITC) subject to standard eligibility conditions.

RCM is governed by Section 9(3) and Section 9(4) of the Central Goods and Services Tax (CGST) Act, 2017, and the corresponding Section 5(3) and Section 5(4) of the Integrated Goods and Services Tax (IGST) Act, 2017 for inter-state and import transactions. The mechanism exists to bring unorganised suppliers, cross-border service providers, and specific high-risk service categories into the tax net without requiring them to register and comply with GST formalities.

For foreign companies operating in India — whether through a wholly owned subsidiary, branch office, or liaison office — RCM is a daily compliance reality. Every time your Indian entity pays a lawyer, hires a goods transport agency, engages an unregistered vendor, or receives any service from your overseas parent company, RCM obligations trigger. Missing these obligations results in interest at 18% per annum and penalties under Sections 73/74 of the CGST Act.

Legal Basis

The statutory framework for RCM rests on multiple provisions:

• Section 9(3) of the CGST Act, 2017 — Empowers the Central Government to notify specific categories of goods and services on which GST must be paid by the recipient under reverse charge, regardless of whether the supplier is registered. The corresponding provision for IGST is Section 5(3) of the IGST Act, 2017.
• Section 9(4) of the CGST Act, 2017 — Originally required all registered persons to pay GST under RCM on any supply received from an unregistered person. This broad applicability was suspended from October 13, 2017 (Notification No. 38/2017) and later restricted to specified categories of recipients and supplies, primarily in the real estate sector.
• Notification No. 13/2017–Central Tax (Rate), dated 28.06.2017 — The primary notification listing services subject to RCM under Section 9(3). Amended 16 times through December 2025, most recently by Notification No. 07/2025–Central Tax (Rate) dated January 16, 2025, which removed sponsorship services from RCM.
• Notification No. 04/2017–Central Tax (Rate), dated 28.06.2017 — Lists goods subject to RCM under Section 9(3), including cashew nuts, tobacco leaves, silk yarn, raw cotton, and metal scrap.
• Notification No. 10/2017–IGST (Rate), dated 28.06.2017 — The IGST counterpart for import of services under RCM, read with Section 5(3) of the IGST Act.
• Section 13(3) of the CGST Act — Governs time of supply for services received under RCM, amended effective November 1, 2024, to clarify that the time of supply is the earlier of the date of payment or the date of issuance of the self-invoice.
• Section 24(iii) of the CGST Act — Mandates compulsory GST registration for any person liable to pay tax under RCM, irrespective of turnover threshold.

Section 9(3): Notified Services Under RCM

The government has notified specific categories of services where RCM applies regardless of the supplier's registration status. These are listed in Notification No. 13/2017–Central Tax (Rate), as amended. The recipient must pay GST at the applicable rate.

Recent change (January 16, 2025): Notification No. 07/2025–Central Tax (Rate) removed sponsorship services from RCM. Sponsors providing sponsorship to body corporates and partnership firms must now pay GST under forward charge instead of the recipient paying under RCM.

Notified Goods Under RCM

Notification No. 04/2017–Central Tax (Rate) lists goods where the registered recipient pays GST under RCM:

Section 9(4): Supplies from Unregistered Persons

Section 9(4) of the CGST Act originally imposed a sweeping RCM obligation: every registered person receiving taxable supplies from an unregistered person was required to pay GST under reverse charge. This proved unworkable for businesses making hundreds of small purchases from unregistered vendors daily.

The broad applicability was suspended from October 13, 2017, via Notification No. 38/2017–Central Tax (Rate). The current position (as of FY 2025-26) restricts Section 9(4) RCM to specified classes of recipients and supplies:

• Real estate sector: Promoters must pay RCM on supplies of cement (at 28%), capital goods (at applicable rate), and specified construction inputs received from unregistered suppliers, to the extent that inward supplies from unregistered suppliers exceed 20% of total inward supplies of that category
• Transfer of Development Rights (TDR) and Floor Space Index (FSI): Paid by the promoter under RCM
• Long-term lease of land: Paid by the promoter under RCM when received from government or development authority
• Metal scrap: Added to the RCM list for unregistered suppliers (effective from recent notification updates in 2024-25)

For most foreign subsidiaries operating outside real estate and construction, Section 9(4) has limited direct applicability in its current restricted form. However, Section 9(3) notified services (legal, GTA, director fees) remain fully applicable.

Import of Services: Automatic RCM

The most critical RCM provision for foreign companies is the treatment of imported services. Under Section 5(3) of the IGST Act, 2017, read with Notification No. 10/2017–IGST (Rate), any service received by a person in India from a supplier located outside India (a "non-taxable territory") is subject to IGST under reverse charge.

When Does Import of Services Trigger RCM?

All three conditions must be met:

1. The supplier is located outside India
2. The recipient is located in India
3. The place of supply is in India (per Section 13(2) of the IGST Act, this is the location of the recipient for most B2B services)

Common Import-of-Services RCM Scenarios for Foreign Companies

• Management fees or shared service charges from the overseas parent company to the Indian subsidiary — IGST at 18% under RCM
• Software licences and SaaS subscriptions from foreign vendors — IGST at 18% under RCM
• Technical consulting or design services from the foreign head office — IGST at 18% under RCM
• Legal services from international law firms advising on Indian matters — IGST at 18% under RCM
• Royalty and brand licence fees paid to the foreign parent — IGST at 18% under RCM (also triggers withholding tax and Form 15CA/15CB obligations)

The Indian entity must self-assess the IGST, pay it through the electronic cash ledger, and can then claim the amount as ITC in the same return period — making it revenue-neutral if the entity has sufficient output tax liability.

Registration Requirement Under RCM

Under Section 24(iii) of the CGST Act, any person liable to pay tax under reverse charge must obtain compulsory GST registration, even if their aggregate turnover is below the standard threshold of INR 40 lakh (INR 20 lakh for special category states). This means:

• A newly incorporated Indian subsidiary of a foreign company that receives any management service from its parent must register for GST immediately — the turnover threshold exemption does not apply
• The composition scheme under Section 10 is not available to persons making supplies liable to RCM
• An unregistered person receiving services listed under Section 9(3) — such as legal services — must register and pay RCM on those services

Input Tax Credit on RCM Payments

GST paid under RCM is eligible for input tax credit, subject to the following conditions:

For most businesses, RCM is revenue-neutral — you pay GST in cash and immediately claim it back as ITC. The net cash flow impact is the timing difference between payment and ITC utilisation, which in practice is within the same monthly return cycle.

Time of Supply Rules for RCM

The time of supply determines when the RCM liability crystallises and must be reported. Different rules apply to goods and services:

Goods Under RCM (Section 12(3) of CGST Act)

The time of supply is the earliest of:

• The date of receipt of goods
• The date of payment (as entered in the recipient's books or debited from the bank account, whichever is earlier)
• The date immediately following 30 days from the date of issue of the supplier's invoice

If the time of supply cannot be determined by any of these methods, it is the date of entry in the recipient's books of account.

Services Under RCM (Section 13(3) of CGST Act)

The time of supply is the earlier of:

• The date of payment (as entered in the recipient's books or debited from bank, whichever is earlier)
• The date immediately following 60 days from the date of issue of the supplier's invoice

Amendment effective November 1, 2024: Section 13(3) was amended to add that when the supplier is unregistered and no invoice is available, the time of supply is the earlier of the date of payment or the date of issuance of the self-invoice by the recipient.

How This Affects Foreign Investors in India

RCM creates several compliance obligations that foreign companies must plan for:

Intra-Group Service Charges

When a foreign parent company charges management fees, IT support costs, or technical assistance fees to its Indian subsidiary, the Indian entity must pay IGST at 18% under RCM. This applies even if no invoice is raised — the payment or accounting entry itself triggers the time of supply. Companies must also ensure these charges comply with transfer pricing norms under the Income Tax Act and arm's length pricing requirements.

Dual Compliance: RCM + TDS

Payments to non-residents often trigger both GST RCM and income tax TDS under Section 195. For example, a royalty payment to a foreign parent attracts 18% IGST under RCM and TDS at 10% under the DTAA (or higher without a DTAA). The GST and income tax obligations are independent — paying one does not discharge the other.

Director Fees for Foreign Directors

If your Indian subsidiary has a foreign director who receives sitting fees or commission, the company must pay 18% GST under RCM on these payments. This catches many foreign companies off guard because director remuneration in their home country is typically not subject to indirect tax.

Legal and Professional Services

Engaging Indian law firms or individual advocates for FEMA compliance, company registration, or contract drafting triggers RCM at 18%. The advocate does not charge GST — your company pays it directly.

Common Mistakes

• Not paying RCM on intra-group services from the foreign parent. Many Indian subsidiaries of foreign companies overlook that management fees, shared IT services, and brand licence fees from the parent company attract IGST under RCM. These are "import of services" regardless of whether a formal invoice is issued. The tax department identifies these through Form 15CA/15CB filings and cross-references them with GST returns.
• Using ITC to pay the RCM liability itself. A common error: companies try to offset their RCM GST payment using accumulated ITC. RCM tax must be paid exclusively through the electronic cash ledger (i.e., in cash). You can claim ITC on the RCM payment afterwards, but you cannot use existing ITC to make the initial payment.
• Missing the 60-day deemed supply rule for services. If your company receives services under RCM and the supplier does not issue an invoice, the time of supply is deemed to be 60 days from the invoice date (or from the date of service if no invoice exists). Companies that delay payment beyond 60 days without issuing a self-invoice trigger the tax liability regardless — and lose the ability to claim ITC for that period.
• Failing to register for GST solely because turnover is below threshold. A new Indian subsidiary with zero revenue still needs GST registration if it receives any service subject to RCM — legal services from an advocate, GTA services for office setup, or import of services from the parent company. The turnover threshold of INR 40 lakh does not apply to RCM-liable persons under Section 24(iii).
• Not issuing a self-invoice for supplies from unregistered persons. When RCM applies to a supply from an unregistered person (or a foreign service provider), the recipient must issue a self-invoice under Rule 47A. Without this self-invoice, ITC cannot be claimed. Many companies pay the RCM but fail to generate the self-invoice, effectively doubling their cost.

Practical Example

NovaBridge Technologies Pte Ltd, a Singapore-based software company, sets up a private limited subsidiary in Bengaluru — NovaBridge India Pvt Ltd. In its first quarter of operations (April–June 2026), the Indian subsidiary incurs the following RCM-liable expenses:

NovaBridge India must pay INR 5,61,900 in cash through the electronic cash ledger before the 20th of the following month (the GSTR-3B due date). It reports the liability in Table 3.1(d) of GSTR-3B and claims ITC of INR 5,61,900 in Table 4(A)(3) of the same return.

Net cash impact: Zero (assuming NovaBridge India has sufficient output tax liability to utilise the ITC). However, it must self-issue invoices for the security services and the import of services, maintain a payment voucher for each RCM transaction, and ensure all amounts are reconciled with GSTR-2B.

If NovaBridge India had missed the RCM on the Singapore parent's management fees: The tax department would assess INR 4,50,000 in unpaid IGST, charge interest at 18% per annum (approximately INR 81,000 for one year of delay), and potentially levy a penalty of 10% of the tax amount (INR 45,000) or INR 10,000, whichever is higher, under Section 73 of the CGST Act. ITC on the missed amount would be available only after the tax and interest are paid.

Key Takeaways

• RCM shifts the GST payment obligation from the supplier to the recipient — governed by Section 9(3) and 9(4) of the CGST Act and Section 5(3) and 5(4) of the IGST Act for imports
• Notification No. 13/2017 lists 20+ service categories under RCM, including legal services (18%), GTA (5%), director fees (18%), and security services (18%)
• Every service imported from outside India (including intra-group management fees from a foreign parent) triggers IGST under RCM at the applicable rate — typically 18%
• RCM tax must be paid in cash through the electronic cash ledger; ITC is claimable in the same return period but cannot offset the initial RCM payment
• Compulsory GST registration applies to all RCM-liable persons under Section 24(iii), regardless of turnover — the INR 40 lakh threshold does not apply
• Time of supply for services under RCM is the earlier of the date of payment or 60 days from the supplier's invoice — missing this creates deemed liability and interest exposure at 18% per annum

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