RCM and ITC Key Updates for FY 2026-27: Complete Practical GST Guide with Real Examples
Reverse Charge Mechanism (RCM) and Input Tax Credit (ITC) are now two of the most important monthly GST compliance areas for businesses, accountants and tax professionals. In FY 2026-27, the focus is no longer only on whether tax is payable or credit is available. Businesses must also track portal-based controls such as GSTR-2B matching, IMS actions, Electronic Credit Reversal and Re-claimed Statement, and the RCM Liability/ITC Statement.
This article explains the latest practical position in simple language, with real examples, compliance strategy, common mistakes and FAQs. The Budget 2026 GST proposals are also covered carefully, with an important note that certain amendments are to be applied from the date notified by the Government.
What is Reverse Charge Mechanism?
Reverse Charge Mechanism means GST is paid by the recipient of goods or services instead of the supplier. Under the normal GST system, the supplier charges GST in the invoice, collects it from the customer and pays it to the Government. Under RCM, the supplier does not charge GST for that notified supply, and the recipient has to pay GST directly in cash through the electronic cash ledger.
Applicable Legal Provisions for RCM
RCM under GST mainly operates through Section 9(3) and Section 9(4) of the CGST Act. Section 9(3) applies to notified categories of goods or services, while Section 9(4) applies to notified supplies received by registered persons from unregistered persons. Notification No. 13/2017-Central Tax (Rate), as amended from time to time, is the key notification for RCM on services.
Common RCM Categories
- Legal services received from an advocate or firm of advocates by a business entity.
- Services supplied by a director to a company or body corporate, other than services in employee capacity.
- Goods Transport Agency (GTA) services, where GTA has not opted for forward charge in applicable cases.
- Insurance agent services to an insurance company.
- Recovery agent services to a banking company, financial institution or NBFC.
- Sponsorship services in cases where the notified RCM condition is satisfied.
- Import of services, where the place of supply is in India.
- Renting of immovable property other than residential dwelling by an unregistered person to a registered person, subject to the latest exclusion for composition taxpayers.
Major RCM Updates for FY 2026-27
1. Renting of Commercial Immovable Property from an Unregistered Person
Renting of immovable property other than residential dwelling by an unregistered person to a registered person has been brought under RCM from 10 October 2024. Therefore, if a regular registered business takes an office, shop, warehouse or other commercial immovable property on rent from an unregistered landlord, GST is generally payable by the registered tenant under RCM.
Example: A registered regular taxpayer pays office rent of Rs. 50,000 per month to an unregistered landlord.
The tenant pays Rs. 9,000 in cash under RCM and may claim ITC if the office is used for taxable business supplies and all ITC conditions are satisfied.
2. Sponsorship Services
Notification No. 07/2025-Central Tax (Rate) also amended the sponsorship entry in Notification No. 13/2017-Central Tax (Rate) by inserting the words “other than a body corporate” against the supplier category. Practically, this means sponsorship transactions must be checked carefully based on the nature of the supplier and recipient instead of applying one broad rule blindly.
3. Import of Services
Import of services continues to be a major RCM area. If the supplier is outside India, the recipient is in India and the place of supply is in India, IGST is generally payable by the Indian recipient under reverse charge. This commonly applies to foreign software subscriptions, cloud services, online tools, professional consulting and overseas technical services used by Indian businesses.
Example: An Indian company buys a software subscription from a US vendor for Rs. 1,00,000.
The Indian company should report the RCM liability, pay IGST in cash, maintain proper documentation and claim ITC if the service is used for taxable business purposes.
4. Goods Transport Agency (GTA)
GTA taxation requires special care because the liability depends on the option exercised by the GTA. If the GTA opts to pay GST under forward charge, the supplier charges GST in the invoice. If the GTA does not opt for forward charge in applicable cases, the recipient may be liable under RCM.
| Particulars | Forward Charge | Reverse Charge |
|---|---|---|
| Who pays GST? | GTA supplier | Recipient of service |
| Invoice treatment | GST charged by GTA | GST not charged by GTA for RCM supply |
| Recipient action | Claim ITC as per eligibility | Pay GST in cash and then claim eligible ITC |
| Key document | Forward charge declaration/option where applicable | RCM working and payment proof |
RCM Compliance Procedure
Step 1: Identify RCM Supplies
Review expense ledgers every month. Legal fees, director sitting fees, freight, foreign subscriptions, commission, sponsorship, government charges and commercial rent from unregistered landlords should be checked first.
Step 2: Prepare Self-Invoice Where Required
A self-invoice is required where tax is payable under RCM and the supplier is not registered. Businesses should maintain a monthly RCM register with supplier name, nature of supply, taxable value, tax rate, tax amount and ITC eligibility.
Step 3: Pay RCM in Cash
RCM liability cannot be paid using ITC. It must be discharged through the electronic cash ledger. This is one of the most common cash flow points missed by businesses.
Step 4: Report in GSTR-3B
RCM liability is reported in Table 3.1(d) of GSTR-3B. Eligible ITC relating to import of services and inward supplies liable to RCM is reported in the applicable rows of Table 4(A), subject to the RCM payment and ITC eligibility conditions.
Step 5: Claim ITC After Payment
ITC of RCM can generally be claimed after the RCM tax is paid, provided the inward supply is used for business and is not blocked or otherwise restricted under GST law.
Input Tax Credit: FY 2026-27 Compliance Guide
ITC is governed mainly by Sections 16, 17 and 18 of the CGST Act and the relevant CGST Rules, including Rules 36 to 43. In practical filing, ITC is now heavily linked with GSTR-2B, IMS, reversal tracking and portal statements.
1. GSTR-2B Matching is Critical
ITC should be reconciled with GSTR-2B every month. Provisional ITC has been substantially restricted over time, and businesses should avoid claiming credit only on the basis of purchase books where the invoice is not reflected properly in GSTR-2B.
2. Electronic Credit Reversal and Re-claimed Statement
The Electronic Credit Reversal and Re-claimed Statement helps track ITC temporarily reversed in Table 4(B)(2) of GSTR-3B and later reclaimed in Table 4(A)(5) and Table 4(D)(1). This is important for Rule 37 reversals, Rule 37A reversals and other temporary reversals that may become eligible for reclaim later.
3. RCM Liability/ITC Statement
The RCM Liability/ITC Statement tracks RCM liability reported in Table 3.1(d) and the corresponding ITC claimed in Table 4(A)(2) and Table 4(A)(3). Where the system shows mismatch, negative balance or non-posting of previous period entries, the taxpayer may face warnings or filing restrictions depending on the portal validation applicable at that time.
4. Rule 37: 180-Day Payment Rule
If the recipient does not pay the supplier within 180 days from the invoice date, ITC attributable to that invoice must be reversed along with applicable interest. Once payment is made later, ITC may be reclaimed subject to the law.
Example: A business purchases services of Rs. 1,00,000 plus GST of Rs. 18,000 and claims ITC. If payment to the supplier is not made within 180 days, ITC of Rs. 18,000 must be reversed. After payment is made, the credit can be reclaimed as per applicable provisions.
5. Rule 37A: Supplier Non-Filing Risk
Rule 37A applies where the supplier reports the invoice but does not pay tax through GSTR-3B within the prescribed time. In such cases, the recipient may be required to reverse ITC and may reclaim it after the supplier subsequently files the required return and pays tax.
6. Blocked Credits Under Section 17(5)
Certain credits are blocked even if the invoice appears in GSTR-2B. Common examples include motor vehicles in restricted cases, food and beverages in non-eligible cases, club membership, personal consumption, works contract and construction-related credits where blocked by Section 17(5). Eligibility must be checked invoice by invoice.
Budget 2026 GST Proposals: Credit Notes and Post-Supply Discounts
Budget 2026-27 proposed important GST amendments to reduce disputes around post-supply discounts and credit notes. The key proposal is to amend Section 15(3)(b) so that the earlier requirement of a pre-supply agreement and invoice-wise linkage for post-supply discounts is removed. The revised approach focuses on issuance of a credit note by the supplier and reversal of attributable ITC by the recipient in accordance with Section 34.
| Topic | Earlier Position | Budget 2026 Proposed Position |
|---|---|---|
| Post-supply discount | Required pre-supply agreement and linkage with relevant invoices, along with ITC reversal. | Credit note mechanism to be recognised where recipient reverses attributable ITC. |
| Section 34 credit notes | Credit notes were issued for excess value/tax, return of goods or deficiency in supply. | Express reference proposed for discounts covered under Section 15(3)(b). |
| Practical impact | Higher documentation disputes for post-sale schemes and year-end discounts. | Potentially easier treatment for commercial discounts, subject to notified law and ITC reversal. |
Practical Compliance Strategy for FY 2026-27
Monthly Checklist
- Update the RCM register before filing GSTR-3B.
- Check commercial rent paid to unregistered landlords.
- Review legal, director, GTA, import service and sponsorship expenses.
- Pay RCM through cash ledger before claiming related ITC.
- Reconcile ITC with GSTR-2B and purchase register.
- Review IMS invoices and credit notes before GSTR-3B filing.
- Track temporary ITC reversals in the Electronic Credit Reversal and Re-claimed Statement.
- Check RCM Liability/ITC Statement for negative balance or mismatch.
Quarterly Checklist
- Review supplier GSTR-3B filing status for Rule 37A risk.
- Clear old pending IMS records wherever action is required.
- Reconcile credit notes with ITC reversal entries.
- Check GTA declarations and vendor tax treatment.
Year-End Checklist
- Perform full RCM audit of expense ledgers.
- Review blocked credit under Section 17(5).
- Check 180-day payment ageing for Rule 37 reversals.
- Match annual ITC with books, GSTR-2B and GSTR-3B.
- Prepare GSTR-9 and audit working papers with clear RCM and ITC reconciliation.
Practical Example: Complete RCM Working
Suppose a company has the following expenses in one month:
| Expense | Value | GST Rate | RCM GST |
|---|---|---|---|
| Legal services | Rs. 50,000 | 18% | Rs. 9,000 |
| Import of software service | Rs. 1,00,000 | 18% | Rs. 18,000 |
| Commercial rent from unregistered landlord | Rs. 40,000 | 18% | Rs. 7,200 |
| Total | Rs. 1,90,000 | - | Rs. 34,200 |
The company will pay Rs. 34,200 in cash under RCM. If all supplies are used for taxable business purposes and no restriction applies, the company may claim ITC of Rs. 34,200 after payment. The tax is usually not a final cost for an eligible regular taxpayer, but it creates a cash flow impact.
Key Risk Areas
- Claiming RCM ITC before paying the corresponding RCM tax.
- Missing RCM on import of services and foreign software subscriptions.
- Not checking rent paid to unregistered landlords.
- Ignoring IMS credit notes and later facing ITC mismatch.
- Reclaiming ITC without sufficient balance in the reversal/reclaim statement.
- Claiming ITC where supplier has not filed GSTR-3B, creating Rule 37A exposure.
- Not reversing ITC where supplier payment is pending beyond 180 days.
FAQs on RCM and ITC for FY 2026-27
1. Can ITC be used to pay RCM?
No. RCM liability must be paid in cash through the electronic cash ledger. ITC cannot be used for payment of RCM tax.
2. When can RCM ITC be claimed?
RCM ITC can generally be claimed after the RCM tax is paid, subject to eligibility conditions and restrictions under GST law.
3. Is self-invoice mandatory for RCM?
Self-invoice is required where the supplier is unregistered and tax is payable by the recipient under RCM. Proper documentation should also be maintained for import of services.
4. Is GTA always under RCM?
No. GTA may be under forward charge or reverse charge depending on the option exercised and the applicable conditions. Each GTA invoice should be checked before filing.
5. What if the supplier reports invoice in GSTR-1 but does not file GSTR-3B?
Rule 37A may require reversal of ITC in specified cases. The credit can generally be reclaimed after the supplier files the required return and pays the tax.
6. Can ITC be claimed without reflection in GSTR-2B?
As a practical compliance approach, ITC should be claimed only after proper GSTR-2B matching, except where a specific legal or portal treatment applies. Claiming credit outside GSTR-2B can create mismatch and dispute risk.
7. Is RCM applicable on director salary?
Salary paid to a director in employer-employee relationship is not GST. However, services supplied by a director to a company in a non-employee capacity may be covered under RCM.
8. Can RCM ITC be claimed in the same month?
Yes, it may be claimed in the same tax period if the RCM liability is paid and all ITC eligibility conditions are satisfied.
9. What is IMS in GST?
Invoice Management System is a GST portal facility where recipients can accept, reject or keep invoices pending. If no action is taken, records may be treated as accepted for GSTR-2B generation as per the portal process.
10. What is the biggest GST compliance focus for FY 2026-27?
The biggest focus is system-driven reconciliation: RCM paid versus RCM ITC claimed, GSTR-2B versus purchase register, IMS credit note handling, temporary reversal tracking and timely vendor follow-up.
Final Takeaway
RCM and ITC compliance is now a monthly control process, not a year-end adjustment. Businesses should maintain a clean RCM register, review import services and unregistered rent payments, track vendor return filing, act on IMS records and reconcile ITC before every GSTR-3B filing.
Correct compliance protects ITC, avoids interest exposure, prevents return-filing issues and improves cash flow planning. For FY 2026-27, the safest approach is simple: pay RCM in cash, claim ITC only after eligibility checks, reconcile with portal statements and keep clear working papers for every major credit and reversal.
References
- GST Council - Notification No. 07/2025-Central Tax (Rate)
- Notification No. 07/2025-Central Tax (Rate) PDF
- GST Portal User Guide - Create and Submit GSTR-3B
- GSTN FAQs on Invoice Management System
- GST Council Secretariat Newsletter, January 2026