The Tax You Pay on Your Own Purchases
Normally the supplier collects GST and pays it. Under reverse charge the obligation flips: the recipient pays the tax directly to the government on the supply received. It applies to notified categories of supply, to supplies received from unregistered persons in specified cases, and to certain services supplied through e-commerce operators. Two features catch businesses out. The tax must be paid in cash, not from input tax credit. And the obligation exists whether or not anyone invoiced you for it.
Where it commonly applies
Without attempting a complete list, the categories businesses most often encounter:
• Goods transport agency services, in specified cases
• Legal services from an advocate or firm of advocates
• Services of a director to the company, in specified cases
• Sponsorship services
• Import of services, covered in our dedicated article
• Specified notified goods
• Supplies received from unregistered persons, in notified cases
The notified lists change. Treat any list, including this one, as a prompt to check rather than an answer.
The cash rule
Reverse charge liability is paid in cash. It cannot be set off against input tax credit, however large your credit balance.
A business with substantial accumulated credit can therefore still have to fund a reverse charge payment every month. For an exporter under LUT sitting on a large credit balance, this is a recurring cash item that surprises people.
The credit
Having paid the tax, you take credit on it, subject to the ordinary conditions and to Section 17(5) blocked categories.
The credit does not appear in GSTR-2BÂ in the ordinary way, because there is no supplier GSTR-1 behind it. That makes reverse charge one of the structural differences in a GSTR-2B reconciliation. Document it, or it reappears as an apparent mismatch every month.
Self-invoicing
Where the supply is received from an unregistered person in a case covered by reverse charge, the recipient is required to issue an invoice in respect of it, and a payment voucher.
This is the obligation businesses most often miss entirely, because there is no supplier document prompting it.
Registration consequence
A person liable to pay tax under reverse charge is required to register, regardless of turnover. A small business below the threshold that receives a reverse charge supply can therefore be pulled into registration by that alone.
Where it goes wrong
Not identified at all. The commonest failure. Nobody invoiced for it, so nobody recorded it.
Paid from credit. The portal does not permit it, but the accounting sometimes assumes it.
No self-invoice where one was required.
Credit taken without the liability being paid.
Treated as a GSTR-2B mismatch rather than as a structural difference, producing an unnecessary DRC-01C response.
Reverse charge on director remuneration handled inconsistently, which is a recurring audit finding.
How Northrop LLP helps
Northrop LLP identifies reverse charge exposures across your expense base, sets up the self-invoicing discipline, and documents the position so it is explained rather than queried.