Reverse charge mechanism under GST
Reverse charge turns the normal arrangement around: the recipient pays the tax to the government instead of paying it to the supplier. The accounting consequence is that one transaction produces two entries, and forgetting the second is where the notices come from.
| Account | Dr | Cr |
|---|---|---|
| Freight expense | 10,000.00 | — |
| Input CGST (RCM) | 250.00 | — |
| Input SGST (RCM) | 250.00 | — |
| Output CGST payable (RCM) | — | 250.00 |
| Output SGST payable (RCM) | — | 250.00 |
| Transporter | — | 10,000.00 |
When it applies
Notified supplies
Specific categories notified by the government, such as goods transport agency services, legal services from an advocate, and sponsorship — the list is specific and changes.
Import of services
A service received from outside India is generally taxed in the recipient’s hands, which catches every business paying for foreign software or advertising.
Supplies from unregistered persons
Applies in specified cases rather than generally. The scope has changed considerably since 2017 and should be checked rather than assumed.
The self-invoice
Where the supplier is unregistered, the recipient generally has to issue an invoice to themselves for the supply, and a payment voucher.
Credit is usually available
The tax paid under reverse charge is normally available as input credit, subject to the usual eligibility rules — so the net cost is often nil but both entries must be made.
Paid in cash, not from credit
Reverse charge liability generally has to be discharged in cash rather than set off against the credit ledger, which is a cash-flow point worth knowing.
How to account for it
- Identify the supply. At the point of booking the bill, not at the end of the quarter when the return does not balance.
- Book both sides. The liability as output tax, and the credit as input tax where eligible. One without the other is the classic error.
- Issue a self-invoice where required. For supplies from unregistered persons, along with a payment voucher.
- Declare in the return. In the reverse charge line of 3B, and claim the credit in the ITC table.
Reverse charge questions
Who pays the tax under reverse charge?
The recipient, directly to the government, instead of paying it to the supplier as part of the invoice. The supplier’s invoice carries no tax and usually states that reverse charge applies.
Can I claim credit for tax paid under reverse charge?
Normally yes, subject to the usual eligibility rules — so the net cost is often nil. But both the liability and the credit have to be recorded; booking only the credit is a notice waiting to happen.
Do I need to issue an invoice to myself?
Where the supply is from an unregistered person, generally yes — a self-invoice and a payment voucher. Where the supplier is registered, their invoice is the document.
Is this page tax advice?
No. The notified list and the scope for unregistered suppliers have both changed materially since 2017. Confirm with your tax adviser.
Related
Book both sides automatically
tBiz posts the liability and the credit together when a supply is marked reverse charge.