Reverse Charge Mechanism (RCM) Under GST: Complete Practical Guide for FY 2026-27
Reverse Charge Mechanism under GST is one of the most important compliance areas for businesses, professionals, builders and finance teams. In a normal GST transaction, the supplier pays tax. Under RCM, that responsibility shifts to the recipient. If you miss an RCM entry, the impact is usually not limited to one late payment. It can lead to interest, return mismatch, ineligible ITC claims and unwanted scrutiny during assessment or audit.
This practical guide explains where RCM applies in FY 2026-27, where businesses usually make mistakes, how payment and ITC work, and what changes matter most after the recent amendments on residential rent, commercial property and sector-specific notifications.
What Is Reverse Charge Mechanism Under GST?
Reverse Charge Mechanism means the liability to pay GST shifts from the supplier to the recipient. The concept is recognized under section 2(98) of the CGST Act, and the charging framework mainly flows through section 9(3) and section 9(4) of the CGST Act and section 5(3) and section 5(4) of the IGST Act.
In practice, RCM usually creates three separate tasks for the recipient:
- Identify whether the inward supply is actually covered by a valid RCM notification.
- Discharge GST liability through the electronic cash ledger.
- Claim input tax credit only if section 16 conditions are satisfied and the credit is not blocked under section 17(5).
When Does RCM Apply?
For FY 2026-27, RCM broadly arises in the following situations:
| RCM Trigger | Legal Basis | Practical Meaning |
|---|---|---|
| Notified goods or services | Section 9(3) CGST / Section 5(3) IGST | Recipient pays GST because the supply is specifically notified |
| Notified unregistered supplier cases | Section 9(4) CGST / Section 5(4) IGST | Applies only to notified classes and supplies, not all URD purchases |
| Import of services | IGST law and notified RCM framework | Indian business recipient pays IGST under reverse charge |
| Promoter and real-estate specific cases | Real estate notifications from 2019 onward | Promoter pays GST on specific inward supplies such as shortfall, cement and capital goods from URD |
RCM on Services: The Most Important Area
Most businesses face RCM more often on services than on goods. The following are the major service categories that matter in day-to-day compliance.
1. Import of Services
If an Indian business receives services from a person located outside India, GST is generally payable by the recipient under reverse charge, subject to the place of supply and import-of-service conditions being satisfied.
Example: A Surat-based company pays ₹1,00,000 to a US consultant for business advisory services. If the place of supply is in India, IGST at 18% is payable under RCM, resulting in tax of ₹18,000.
2. Goods Transport Agency (GTA) Services
GTA remains one of the most common RCM areas. RCM generally applies where the recipient falls in the notified category and the GTA has not opted to pay GST under forward charge at 12%.
Example: Freight bill of ₹50,000. If the recipient is a notified recipient and the GTA is under the 5% RCM model, GST payable under RCM will be ₹2,500.
3. Legal Services by Advocate or Firm of Advocates
Legal services supplied by an individual advocate, including a senior advocate, or a firm of advocates to a business entity are covered under RCM. The usual GST rate is 18%.
Example: Legal fees of ₹20,000 can create RCM liability of ₹3,600.
4. Director Services
Services supplied by a director to a company are a high-risk area. The key distinction is substance:
- If payment is genuine salary and treated as employment income with TDS under section 192, GST generally does not apply.
- If payment is sitting fee, professional fee, consultancy fee or any non-employment payment, RCM generally applies at 18%.
5. Security Services
Security services supplied by a person other than a body corporate to a registered person are generally covered under RCM, subject to notified conditions and exclusions.
6. Government Services
Certain services supplied by the Central Government, State Government, Union territory or local authority to a business entity are covered under reverse charge. However, the law contains important exclusions and separate treatment for some categories.
- Postal services in specified cases are excluded.
- Services relating to aircraft or vessels in specified situations are excluded.
- Renting of immovable property by Government to a registered person has a separate RCM entry.
7. Renting of Residential Dwelling to Registered Person
From 18 July 2022, renting of residential dwelling to a registered person for use as residence is covered under RCM. This change substantially increased compliance risk for registered businesses and professionals renting residential premises for business-linked use.
Example: A registered firm takes a flat on rent for staff accommodation or official residential use where the notified conditions are attracted. GST at 18% may become payable under RCM.
8. Renting of Commercial Property by Unregistered Person to Registered Person
This is one of the most important recent changes. Based on the 54th GST Council decisions, renting of commercial immovable property by an unregistered person to a registered person was brought under RCM with effect from 10 October 2024.
Example: Monthly shop rent of ₹30,000 paid to an unregistered landlord can trigger GST of ₹5,400 under RCM.
9. Insurance Agent, Recovery Agent, Sponsorship and Similar Notified Services
Other important notified service categories include:
- Insurance agent services to insurance company
- Recovery agent services to bank or financial institution
- Sponsorship services to body corporate or partnership firm
- Specified banking and NBFC-related notified services
- Specified copyright and securities lending transactions
These transactions are often missed because finance teams focus only on legal fees, freight and rent. That is a costly mistake during annual review.
RCM on Goods
RCM on goods is narrower than many people assume, but the notified items still matter. The major traditional categories are below.
| Goods | Supplier | Recipient | Practical Note |
|---|---|---|---|
| Cashew nuts, not shelled or peeled | Agriculturist | Registered person | Covered under Notification No. 4/2017-CTR |
| Tobacco leaves | Agriculturist | Registered person | Traditional notified goods category |
| Silk yarn | Specified manufacturer | Registered person | RCM continues on notified basis |
| Raw cotton | Agriculturist | Registered person | Added later through amendment notification |
| Used vehicles, seized goods, old and used goods, waste and scrap | Government / local authority | Registered person | Applies in notified government supply cases |
Example: Raw cotton purchased for ₹2,00,000 from an agriculturist by a registered person can lead to GST under reverse charge, subject to the applicable notified rate structure.
What About Metal Scrap in FY 2026-27?
The 54th GST Council press release announced the decision to introduce RCM on supply of metal scrap by unregistered person to registered person, along with a separate TDS mechanism in B2B cases. Because this area has seen policy movement and implementation detail matters, businesses should cross-check the latest operational notification and return guidance before applying it in books.
RCM for Promoters and Builders
For promoters and real-estate businesses, RCM is a major scrutiny point. This is not a casual compliance area. Even otherwise compliant builders can face issues if monthly tracking is weak.
1. Section 9(4) Based RCM for Promoters
From 1 April 2019 onward, promoters became a specifically notified class of registered persons for certain inward supplies from unregistered persons. This is one of the clearest examples showing that section 9(4) is now limited to notified classes, not all taxpayers.
2. 80% Procurement Rule
A promoter is required to procure a prescribed minimum percentage of inputs and input services from registered suppliers. If there is a shortfall, tax may become payable under RCM on the shortfall, subject to the real estate notification framework.
3. Cement from Unregistered Supplier
Cement remains one of the most sensitive items in promoter compliance. If cement is procured from an unregistered supplier in a covered project, GST is payable under RCM at the applicable rate.
Example: Cement purchase of ₹1,00,000 from an unregistered supplier can result in GST of ₹28,000 under reverse charge in covered promoter cases.
4. Capital Goods from Unregistered Supplier
Capital goods purchased by promoters from unregistered suppliers in notified situations can also attract RCM. These entries must be reviewed separately from routine purchase accounting.
5. TDR, FSI and Long-Term Lease Related Entries
Real estate taxation on TDR, FSI and long-term lease premium involves a separate notification framework from 2019 onward. In many cases, the promoter becomes the person liable to pay tax under reverse charge, particularly for the taxable portion attributable to unsold residential apartments at completion.
How Payment, Self-Invoice and ITC Work
1. RCM Must Be Paid in Cash
GST liability under reverse charge cannot be discharged using existing ITC. It must be paid through the electronic cash ledger.
2. ITC Can Be Claimed Later, If Eligible
Once RCM tax is paid, input tax credit can be claimed if:
- the supply is used in the course or furtherance of business,
- the recipient is otherwise eligible under section 16, and
- the credit is not blocked under section 17(5).
3. Self-Invoice and Payment Voucher
Where the transaction falls in a notified unregistered-supplier RCM situation, documentation becomes critical. Businesses should review the need for:
- self-invoice, where required under law,
- payment voucher, and
- proper narration in books and tax registers.
4. Return Reporting
In practical GST compliance, RCM typically impacts:
- tax liability reporting in GSTR-3B,
- eligible ITC reporting in the corresponding ITC table, and
- purchase register and monthly reconciliation controls.
Monthly RCM Compliance Checklist Before Filing GSTR-3B
- Check legal fees, freight, director fees, security charges and rent ledgers every month.
- Verify whether any vendor is unregistered and whether the transaction falls under a notified section 9(4) category.
- Review foreign remittances and import of services separately.
- Pay RCM only through cash ledger.
- Claim ITC only after tax payment and subject to eligibility.
- Keep self-invoice and payment voucher where legally required.
- Reconcile books, GSTR-3B and internal RCM register.
- For builders, monitor 80% procurement compliance and cement purchases continuously, not only at year end.
Practical RCM Case Study
Assume a registered company in Surat has the following expenses in one month:
- Legal fees: ₹50,000
- Commercial property rent from unregistered landlord: ₹1,20,000
- GTA expense under RCM model: ₹40,000
| Particulars | Taxable Value | Rate | GST Under RCM |
|---|---|---|---|
| Legal fees | ₹50,000 | 18% | ₹9,000 |
| Commercial rent from URD landlord | ₹1,20,000 | 18% | ₹21,600 |
| GTA expense | ₹40,000 | 5% | ₹2,000 |
| Total | ₹2,10,000 | - | ₹32,600 |
If the company misses this liability, interest exposure starts immediately. If it claims ITC without first paying RCM properly, the problem becomes larger because the issue then shifts from only tax payment to tax payment plus ITC eligibility.
Related DN & CO. Articles You Can Read Next
- GSTR-3B Changes 2026: Zero Mismatch, IMS, ITC Block and Interest Rules
- Top 5 GSTR-1 Filing Mistakes in FY 2026-27
- Rule 86A: ITC Blocked Beyond One Year Under GST
- GST on Sale of Capital Goods, Old Vehicles, ITC Reversal and Margin Scheme
- GST Complete Guide for Businesses in India
Official References
The article is based on the statutory framework and official notifications/circulars below:
- CBIC Sectoral FAQs on Reverse Charge Mechanism
- CBIC GST Flyer on Reverse Charge Mechanism
- Notification No. 4/2017-Central Tax (Rate): Reverse charge on notified goods
- Notification No. 43/2017-Central Tax (Rate): Raw cotton under RCM
- Notification No. 36/2017-Central Tax (Rate): Government supply of used goods, waste and scrap
- CBIC Central Tax (Rate) Notifications Page, including Notification No. 13/2017 and amendments
- Notification No. 05/2022-Central Tax (Rate): Residential dwelling rented to registered person under RCM
- Circular No. 245/02/2025-GST: Clarification on commercial property RCM and composition taxpayer exclusion
- 54th GST Council Meeting material discussing commercial property RCM
- Press Release of 54th GST Council Meeting, including metal scrap recommendation
- CBIC Integrated Tax (Rate) Notifications Page, including PSLC-related IGST RCM amendment
Frequently Asked Questions on RCM Under GST
1. Can ITC be claimed on GST paid under RCM?
Yes, ITC can generally be claimed if the inward supply is used for business purposes, tax has been paid, and the credit is not blocked under section 17(5).
2. Can ITC be used to pay RCM liability?
No. RCM liability has to be discharged in cash through the electronic cash ledger.
3. Does RCM apply on every purchase from an unregistered person?
No. This is a common misconception. After the amendment to section 9(4), RCM on unregistered purchases applies only to notified classes of registered persons and specified notified supplies.
4. Is GST payable on residential rent under RCM?
It can apply where a residential dwelling is rented to a registered person under the notified framework introduced from 18 July 2022. However, exact facts matter and some clarified situations need separate review.
5. Is GST payable on commercial rent from an unregistered landlord?
Yes, this entry was brought under RCM from 10 October 2024 for registered recipients, but composition taxpayers were later excluded from this RCM entry from 16 January 2025. Always check recipient status before applying the rule.
6. Is GST applicable on salary paid to a director?
Genuine salary paid in employer-employee relationship is generally outside GST. Professional fee, sitting fee or consultancy payment to a director generally attracts RCM.
7. When should RCM be paid?
RCM liability should be discharged in the relevant tax period through GSTR-3B based on the applicable time-of-supply rules and accounting facts.
8. Is self-invoice required in RCM cases?
Documentation depends on the nature of the transaction. In notified unregistered-supplier RCM cases, self-invoice and payment voucher requirements should be checked carefully and maintained properly.
9. What happens if RCM is not paid?
The business may face tax demand, interest, penalty exposure, ITC disputes and mismatch-based scrutiny during assessment or audit.
10. What is the biggest practical mistake in RCM compliance?
The biggest mistake is assuming that RCM is only about legal fees and freight. In reality, rent, director payments, foreign services, promoter transactions and notified unregistered supplier cases are equally important.
Final Takeaway
Reverse Charge Mechanism is not a side issue in GST compliance. It is a core monthly control area. If your business pays legal fees, freight, rent, director fees, foreign consultancy charges or deals in real estate projects, you cannot afford to review RCM casually.
The safest approach is simple: identify notified transactions correctly, pay RCM in cash on time, claim ITC only after payment and eligibility review, and maintain a dedicated RCM register every month. That one system can save a business from avoidable interest, notices and working capital blockage.