Reverse Charge and the Composition Dealer: The Cost Nobody Budgets For

Reverse Charge explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

A composition dealer pays 1% of turnover and thinks the tax question is settled. It is not. Reverse charge runs alongside the scheme at ordinary rates, is paid entirely in cash, yields no credit — and, uniquely, is a condition whose breach can cost the scheme itself.

Section 10(1) and s.10(2A) are both expressly "subject to the provisions of sub-sections (3) and (4) of section 9", and Rule 5(1)(d) repeats the obligation as a condition of the option. So a composition dealer pays reverse charge on notified supplies and on notified supplies from unregistered persons, at the normal rate, from the electronic cash ledger, with no credit under s.10(4). Two 2025 carve-outs in Notification No. 13/2017-CT(Rate) now expressly exclude a composition dealer from RCM on security services and on renting of commercial immovable property.

The words that make it inescapable

Section 10(1) opens: "Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9…"

Section 10(2A) opens identically.

And Rule 5(1)(d) adds: "he shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both".

Three separate statements of the same rule, in three places, is deliberate. The ICAI Handbook puts the consequence plainly: because section 10 is itself subject to s.9(3) and (4), "compliance with reverse charge provisions extends to such persons also", and "since composition dealers are not eligible to claim any input tax credit, the credit of such reverse charge paid is not available to them and hence, it forms part of compliance cost for the business."

The two limbs, and how differently they now operate

Section 9(3) — notified supplies. The Government notifies goods and services on which the recipient pays as if he were the person liable. The lists are Notification No. 13/2017-CT(Rate) dated 28.06.2017 for services and Notification No. 04/2017-CT(Rate) for goods, with Notification No. 10/2017-IT(Rate) on the IGST side. This limb is fully live and catches the ordinary purchases of a small business — goods transport agency freight, legal services from an advocate, sponsorship, a director's services, security services, renting of motor vehicles.

Section 9(4) — supplies from unregistered persons. This limb has a long history of retreat. The original blanket charge, relieved by Notification No. 08/2017-CT(Rate) up to an aggregate of ₹5,000 per day, was deferred from 13 October 2017 and the relieving notification was finally rescinded by Notification No. 01/2019-CT(Rate) dated 29.01.2019 with effect from 01.02.2019. By then the CGST (Amendment) Act, 2018 had already rewritten s.9(4) so that it applies only to notified classes of registered persons receiving notified goods or services from unregistered suppliers.

So s.9(4) is now narrow and specific. A composition dealer buying from an unregistered supplier is not automatically liable; the question is whether that recipient, and that supply, are notified. The main live notification is the promoter notification for real estate.

Two carve-outs that run in the composition dealer's favour

The Handbook records that under Notification No. 13/2017-CT(Rate), as amended, a person registered under the composition scheme is specifically excluded from paying tax under reverse charge on:

• security services (supply of security personnel); and
• renting of any commercial or immovable property other than a residential dwelling from an unregistered supplier.

These are unusual, and worth understanding. Both entries were drafted to catch registered recipients dealing with unorganised suppliers. Applying them to a composition dealer would have imposed a full-rate, no-credit cost on the smallest taxpayers for two of the commonest small-business inputs — a guard at the shop, and the shop itself.

Do not generalise from them. They are entry-level exclusions in a specific notification, not a principle. GTA freight, legal services and the rest of the s.9(3) list continue to apply to a composition dealer without relief.

What the dealer actually has to do

Self-invoice under s.31(3)(f). A registered person liable to pay tax under s.9(3) or s.9(4) who receives goods or services from an unregistered supplier must issue an invoice in respect of that supply on the date of receipt. A composition dealer is a registered person for this purpose. It is one of the few documents a composition dealer issues that is not a bill of supply.

Payment voucher under s.31(3)(g), at the time of making payment to the supplier.

Time of supply under s.12(3) and s.13(3), not s.12(2). Reverse charge liability arises on the earliest of the date of receipt of goods, the date of payment as entered in the books or debited to the bank account, or a fixed number of days after the supplier's invoice — thirty days for goods, sixty days for services. Notification No. 66/2017-CT, which removed the advance liability on goods, does not apply here: it addresses outward supplies of goods under s.12(2), not the recipient's reverse charge under s.12(3).

Pay in cash, and report it. Rule 62(2) requires the liability towards tax or interest to be discharged by debiting the electronic cash ledger. Reverse charge tax goes into CMP-08 as part of the self-assessed tax for the quarter, and the underlying purchases appear invoice-wise in GSTR-4 under Rule 62(3). Rule 62 returns →

And keep the accounts. Rule 56 requires a registered person to keep an account of tax payable, and s.35 applies to a composition dealer as to anyone else, in a relaxed form.

Why the stakes are higher than the tax

Failure to pay reverse charge breaches Rule 5(1)(d). Under Rule 6(1) the option is valid "so long as he satisfies all the conditions mentioned in the said section and under these rules", so a reverse charge default is capable of ending the scheme, not merely creating a liability.

Rule 6(2) then bites from the day of the failure — tax under s.9(1) on all outward supplies from that day, tax invoices instead of bills of supply, and CMP-04 within seven days. Rule 6(4) separately empowers the officer to issue a CMP-05 notice where he has reason to believe the person has contravened the Act or Chapter II.

And s.10(5) supplies the penalty, with s.73, s.74 or s.74A applying mutatis mutandis for determination — s.74A governing tax periods from FY 2024-25.

Meanwhile interest runs at 18% under s.50(1). The Handbook flags a specific pattern here: many composition taxpayers file all four CMP-08 statements at the time they file GSTR-4 rather than quarterly, without appreciating the interest that accrues. Rule 6 and the CMP-04 chain →

Key takeaways

• Section 10 is expressly subject to s.9(3) and s.9(4), and Rule 5(1)(d) makes payment a condition.
• Reverse charge is paid at the ordinary rate, from the cash ledger, with no credit under s.10(4) — a pure cost.
• Section 9(4) is now narrow: notified classes of recipients, notified supplies; the ₹5,000-a-day relief was rescinded from 01.02.2019 when the charge itself was recast.
• A composition dealer is excluded from RCM on security services and on renting of commercial immovable property from an unregistered supplier.
• Self-invoice under s.31(3)(f) and a payment voucher under s.31(3)(g) are required for unregistered-supplier RCM.
• Reverse charge value never enters turnover — both s.2(6) and s.2(112) exclude it.

Read next

• Rule 5: Seven Conditions and Restrictions
• Rule 62: CMP-08 by the 18th, GSTR-4 by 30 June
• Rule 6: Lapse, Withdrawal and the CMP-04 to CMP-07 Chain
• Aggregate Turnover vs Turnover in State

Disclaimer: Positions stated as on 5 September 2026, based on sections 9(3), 9(4), 10, 12(3), 13(3) and 31(3) of the CGST Act, 2017 and Rules 5, 6 and 62 of the CGST Rules, 2017 as recorded in the ICAI Bare Law (12th edition, amended to 31 March 2026), and the reverse charge chapter of the ICAI Handbook on Composition Scheme under GST (February 2026, 3rd edition), which states the law to 31 January 2026.