Most shop owners think of GST as something they collect from customers and pay to the government. Reverse charge flips that. So what is reverse charge in GST, with an example from a normal shop? It is a rule under which you, the buyer, pay the GST on certain purchases directly to the government, instead of the seller charging it on their bill. It catches many small businesses off guard, because it usually shows up on bills that don’t look like “stock” at all: the lorry freight, the advocate’s fee, or the rent for the shop itself.
Below: RCM in plain language, three everyday cases from Kerala shops, and a simple monthly routine.
What is reverse charge in GST, in simple words?
Under the normal system, called forward charge, the supplier adds GST to the invoice, collects it from you and pays it to the government. Under reverse charge, the liability to pay that tax moves to the recipient. The supplier bills you without GST (or with a note that tax is payable on reverse charge), and you deposit the tax yourself.
The law has two doors for this:
- Section 9(3) of the CGST Act: specific goods and services that the government has notified. If you receive one of these from the notified category of supplier, you pay the tax, whether the supplier is registered or not.
- Section 9(4) of the CGST Act: supplies from unregistered suppliers, but only for notified classes of recipients and notified goods or services. Today this is narrow and mainly affects real estate promoters, not retail shops.
Forward charge vs reverse charge at a glance
| Point | Forward charge | Reverse charge |
|---|---|---|
| Who pays GST to the government | Supplier | Recipient (you) |
| GST shown on supplier’s bill | Yes, charged and collected | No, or marked “payable on reverse charge” |
| How it is paid | Supplier can use their input tax credit | Recipient must pay through the electronic cash ledger |
| Input tax credit for you | After the supplier files and it reflects for you | After you pay it yourself, if the purchase is used for business |
What is reverse charge in GST with example: three everyday shop cases
The examples below use a registered regular taxpayer in Kerala (not composition). The amounts are illustrative, chosen only to make the maths easy. Always check the current rate and conditions with your accountant before paying.
Example 1: Freight paid to a goods transport agency
A supermarket in Thrissur gets a weekly load of rice and oil from a stockist in Palakkad. The lorry is booked through a transport company that issues a consignment note (a “GTA”, or goods transport agency). Services of a GTA to a registered person, a factory, a firm or a body corporate fall under reverse charge, unless the GTA has opted to pay GST itself under forward charge.
What to do in practice:
- Look at the GTA’s bill. If it charges GST and mentions that it pays tax under forward charge, there is no RCM for you; treat it like any other purchase bill.
- If the bill says tax is payable by the recipient, or carries no GST, you pay the GST on the freight yourself under reverse charge.
Example 2: An advocate’s fee for a legal notice
A hardware shop in Kozhikode pays an advocate ₹25,000 to send a legal notice to a customer who has not cleared dues. Legal services by an individual advocate or a firm of advocates to a business entity are under reverse charge. (There is an exemption for business entities whose aggregate turnover in the previous financial year was within the GST registration threshold, so very small businesses should check this first.)
Assuming the 18% rate on legal services and an intra-state supply:
- Fee: ₹25,000 (the advocate’s bill has no GST)
- CGST payable by the shop at 9%: ₹2,250
- SGST payable by the shop at 9%: ₹2,250
- Total RCM to be paid in cash: ₹4,500
If the shop is a regular taxpayer and the legal work is for the business, the same ₹4,500 can usually be claimed back as input tax credit once it is paid. So the real impact is on cash flow, not on cost.
Example 3: Rent for the shop from an unregistered landlord
A textile shop in Kochi pays ₹40,000 a month to an individual landlord who is not registered under GST. From 10 October 2024, renting of any property other than a residential dwelling by an unregistered person to a registered person was brought under reverse charge (Notification 09/2024-Central Tax (Rate)). At 18%, the shop pays ₹7,200 (₹3,600 CGST + ₹3,600 SGST) every month on reverse charge.
Two points matter here:
- If the landlord is registered, they charge GST on their invoice under forward charge, and there is no RCM for you.
- From 16 January 2025, tenants who have opted for the composition scheme were excluded from this rent entry, so a composition shop does not pay RCM on commercial rent from an unregistered landlord.
Other reverse charge supplies a shop may come across
The full lists are in the government’s reverse charge notifications for goods and for services (as amended from time to time). The ones a retail or restaurant business most often meets are:
- Security services (guards for the shop or godown) supplied by a person other than a body corporate to a registered business. Composition taxpayers are excluded from this one.
- Metal scrap bought from an unregistered person by a registered person, which hardware, steel and recycling businesses should watch.
- Residential dwelling rented to a registered person, for example a flat taken on rent to house staff.
For any doubtful bill, ask: is this item on the notified list, and is the supplier in the category named against it? If both are yes, it is RCM.
Why “every unregistered purchase is RCM” is outdated
When GST began on 1 July 2017, Section 9(4) applied widely: almost any purchase from an unregistered supplier meant RCM for the registered buyer. That created a lot of paperwork for small purchases, and it was suspended from October 2017. From 1 February 2019 the law was changed so that Section 9(4) applies only to notified classes of registered persons and notified supplies, which today mainly covers real estate promoters.
For a normal shop, this means:
- Buying packing covers, cleaning supplies or a small repair job from an unregistered local vendor usually attracts no GST at all: no RCM to pay and no input tax credit to claim.
- You should still record the purchase with a proper voucher for your accounts.
- The exception is when the item itself is on the Section 9(3) list, such as commercial rent from an unregistered landlord or metal scrap from an unregistered seller. Then RCM applies because of what you bought, not just because the seller is unregistered.
How to pay reverse charge: cash rule, self-invoice and ITC timing
Pay it in cash, not from your input tax credit
Your electronic credit ledger (the ITC balance) can only be used to pay output tax, and tax payable on reverse charge is not treated as output tax. So RCM must be paid through the electronic cash ledger, that is, actual money deposited through a challan. Even if you have a large ITC balance, you cannot set it off against RCM.
Issue a self-invoice and a payment voucher
When you buy an RCM item from an unregistered supplier (like the landlord in Example 3), you must issue an invoice to yourself, called a self-invoice, under Section 31(3)(f). Since 1 November 2024, Rule 47A requires this within 30 days from the date you receive the goods or services (Notification 20/2024-Central Tax). You also issue a payment voucher when you pay the supplier. When the supplier is registered (like many GTAs), their invoice serves the purpose.
When does the liability arise?
- Goods: the earliest of the date you receive the goods, the date of payment, or the date immediately after 30 days from the supplier’s invoice.
- Services: the earlier of the date of payment, or the date immediately after 60 days from the supplier’s invoice.
In simple terms: if you pay the advocate in the same month as the bill, include the RCM in that month’s return.
Claiming input tax credit on RCM
In GSTR-3B you report the RCM purchase as inward supplies liable to reverse charge (Table 3.1(d)) and pay the tax in cash. If the purchase is for business and not in the blocked list, you can claim the same amount as ITC in Table 4(A)(3) of the same return. Our guide on input tax credit in GST with an example explains the general conditions, and GSTR-1 vs GSTR-3B covers where each figure goes.
A composition dealer is different: it must pay RCM where applicable but cannot claim ITC, so for them RCM is a real cost.
A simple monthly reverse charge routine for your shop
- Tag RCM suppliers once. In your supplier list, mark the GTA, advocate, unregistered landlord and security agency as “RCM”. Then nobody has to remember it every month.
- Keep these bills separate, in a folder or an expense-register column.
- Raise self-invoices within 30 days for unregistered RCM suppliers. Number them in their own series.
- Total the RCM by rate before the 3B due date and split it into CGST/SGST (or IGST for inter-state).
- Pay by challan into the cash ledger, then file GSTR-3B with RCM in Table 3.1(d) and the eligible ITC in Table 4(A)(3).
- Check at quarter-end that every RCM bill in your expense register has a matching payment in your returns.
Common reverse charge mistakes small businesses make
- Paying RCM on every unregistered purchase, years after that rule was narrowed.
- Missing RCM on shop rent after October 2024 because the landlord “never charged GST before”.
- Trying to set off RCM against the ITC balance, then getting a demand for short cash payment.
- Forgetting the matching ITC claim and paying the same tax twice in effect.
Keep your GST records clean with Caddayn Biller
Reverse charge mostly sits on your expense side, but it only stays manageable when your sales and stock data are clean too. Caddayn Biller gives you GST billing with barcode support, inventory with low-stock alerts, UPI, card and cash payments, and reports you can share with your accountant every month, on Windows or the web. See how it fits a retail counter in our guide to GST billing software for retail shops in India and our checklist for GST invoice software for shops, or download Caddayn Biller and try it on your own counter.
FAQ on reverse charge in GST
Is reverse charge applicable on purchases from unregistered dealers?
Not in general. Since February 2019 it applies mainly when the item itself is on the notified list, such as commercial rent or metal scrap from an unregistered seller.
Can I pay RCM using my input tax credit balance?
No. Reverse charge tax must be paid through the electronic cash ledger. After paying it, you may claim it as ITC if the purchase is used for business and the credit is not blocked.
Does a composition dealer have to pay reverse charge?
Yes, where the supply falls under RCM and the composition dealer is not specifically excluded (as it is for commercial rent and security services). A composition dealer cannot claim ITC, so the RCM paid is a cost.
What is a self-invoice in GST?
It is an invoice the recipient issues to itself when it buys an RCM item from an unregistered supplier. Under Rule 47A, it must be issued within 30 days of receiving the supply.
This article is general information for shop owners, not tax advice. RCM lists, rates and exemptions change through notifications, so confirm your specific case with your GST practitioner.