ITC on Reverse Charge Tax: Which Conditions Apply, Which Do Not, and the ISD Route

ITC on 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.

Paying reverse charge is the easy part. Getting the credit right is where the errors live — because three of the conditions that govern ordinary input tax credit do not apply to reverse charge credit, and one condition that does apply exists nowhere else.

Reverse charge liability is discharged from the electronic cash ledger under rule 85(4) — the credit ledger cannot be used. The credit is then taken on the strength of rule 36(1)(b): an invoice issued under section 31(3)(f), "subject to the payment of tax". The section 16(2)(aa) / rule 36(4) GSTR-2B matching condition does not apply to reverse charge credit. The 180-day payment rule in rule 37(1) does not apply either. And since 01.04.2025, an Input Service Distributor must distribute RCM credit paid by a distinct person registered in the same State — section 20 as substituted by the Finance Act, 2024.

Paying it: cash only, and the timing that follows

Section 49(4) permits the electronic credit ledger to be used for payment towards output tax. But rule 85(4) provides that any liability of tax payable under reverse charge shall be discharged by debiting the electronic cash ledger.

So reverse charge is a cash outflow, always. A business sitting on a large credit balance still pays RCM in cash.

The payment falls due with the return — by the 20th for monthly filers or the 25th for quarterly filers, of the succeeding month. And the Handbook records the consequence that makes this manageable: "after discharging reverse charge liability, the credit of the same can be claimed by the recipient in the same month itself, if he is otherwise eligible."

Same month, not next month. The Handbook is emphatic on this, noting that the phrase "subject to the payment of tax" in rule 36(1)(b) led to an ambiguity — whether credit becomes available only in the month after the tax is paid — and that it was repeatedly clarified on the GST department's public handles that credit on reverse charge supplies can be availed in the same month as the supply, on a provisional basis, subject to payment of tax by the due date for the relevant month.

The document: rule 36(1)(b)

Ordinary credit rests on a supplier's tax invoice or debit note under section 16(2)(a). Reverse charge credit rests on a different document.

Rule 36(1)(b) provides that ITC shall be availed by a registered person on the basis of an invoice issued in accordance with section 31(3)(f), subject to the payment of tax.

So the recipient's own self-invoice is the credit document, and it must be paired with proof of payment of tax. The Handbook states it in terms: "ITC would be available to the recipient on the basis of Tax Invoice issued by recipient along with proof of payment of tax."

Where the supplier is registered and has issued a tax invoice, that invoice carries the credit in the ordinary way — with the words "the tax is payable on reverse charge basis" on it, as rule 46(p) and section 31 require.

Three conditions that do not apply

GSTR-2B matching — section 16(2)(aa) and rule 36(4)

Since 01.01.2022, ordinary credit requires that the supplier have uploaded the invoice in GSTR-1/IFF and that it be communicated to the recipient in GSTR-2B.

The Handbook states the carve-out flatly: this requirement "would be applicable only on forward charge and not on ITC availed under reverse charge, import of goods, import of services, ISD credits etc."

The reason is structural. In a reverse charge transaction the supplier is very often unregistered and files no GSTR-1 at all; there is nothing to match against. The matching architecture was built for forward charge and does not fit.

In the return, the separation is visible. Reverse charge credit is claimed in Table 4(A)(2) of GSTR-3B for import of services, and Table 4(A)(3) for other inward supplies liable to reverse charge — deliberately outside Table 4(A)(5), "All other ITC", where the 2B-matched credit sits.

The 180-day rule — rule 37(1)

Ordinary credit is reversed with interest if the recipient does not pay the supplier the value and the tax within 180 days of the invoice.

Rule 37(1) expressly excludes supplies on which tax is payable under reverse charge. The Handbook lists the four exclusions from the 180-day rule together: supplies under reverse charge; deemed supplies without consideration under Schedule I (first proviso to rule 37); additions to value under section 15(2)(b) for supplier's liabilities borne by the recipient (second proviso); and value representing discount for which financial credit notes have been issued.

This matters commercially. A dispute with an unregistered supplier that delays payment beyond six months does not trigger a credit reversal on the RCM tax — which the recipient has, after all, already paid to Government in cash.

The supplier's payment of tax — section 16(2)(c)

Ordinary credit requires that the supplier have actually paid the tax charged, in cash or by utilising credit, subject to section 41. Under reverse charge, the recipient is the person who pays. The condition is satisfied by the recipient's own cash payment; there is no counterparty risk in this limb at all.

The conditions that do apply

Section 16(1) — the goods or services must be used or intended to be used in the course or furtherance of business.

Section 16(2)(b) — receipt of the goods or services. Where goods are received in lots or instalments, credit is available on receipt of the last lot.

Section 16(2)(d) — the credit must be taken in a return furnished under section 39.

Section 16(4) — the time limit. Credit on an invoice or debit note cannot be availed after the 30th November of the following financial year (w.e.f. 01.10.2022; earlier, the due date of the September return) or the date of furnishing the relevant annual return, whichever is earlier. The Handbook adds the warning: "any delay beyond this time limit will result in available credit being forfeited permanently."

Section 17 — apportionment and blocked credit. Credit is restricted to what is attributable to business and to taxable including zero-rated supplies; section 17(5) blocks what it blocks, whether the tax was paid forward or reverse. RCM tax on a passenger vehicle rental for staff transport is a live example. Renting of a passenger motor vehicle →

Depreciation — no credit on the tax component of the cost of capital goods and plant and machinery where depreciation on that component has been claimed under the Income-tax Act.

One asymmetry worth noting. For section 17(2), the value of exempt supply includes supplies on which the recipient is liable to pay tax on reverse charge. So the same transaction is creditable input tax for the recipient and exempt supply value for the supplier's common-credit reversal — which is why a GTA on the 5% option must run rule 42/43 on its common inputs.

The ISD route: mandatory since 1 April 2025

This is the newest and least-absorbed change in the area.

Section 20 was substituted by the Finance Act, 2024, notified through Notification No. 16/2024-Central Tax dated 06.08.2024, applicable w.e.f. 01.04.2025, and section 2(61) was substituted with it.

Section 20(1) now provides that any office of the supplier which receives tax invoices towards input services, including invoices in respect of services liable to tax under section 9(3) or 9(4), for or on behalf of distinct persons, shall be required to be registered as an Input Service Distributor under section 24(viii), and shall distribute the credit.

Section 20(2) requires the ISD to distribute the credit of central tax or integrated tax charged on invoices received by it, including the credit of central or integrated tax in respect of services subject to levy under section 9(3) or 9(4) paid by a distinct person registered in the same State as the ISD.

What changed. The Handbook is explicit: "Prior to the Finance Act, 2024, amendment, ISDs were not permitted to distribute input services credit that included services subject to RCM." Now they are mandated to.

But note the boundary. The ISD does not pay the reverse charge itself. An ISD cannot make outward supplies and cannot be used where there is a liability to pay GST — it only receives invoices and issues documents distributing credit under rule 39. The RCM tax is paid by the distinct person registered in the same State as the ISD, and the ISD then distributes the resulting credit.

A further amendment was in train. The Handbook records that sections 20 and 2(61) were proposed to be amended by the Finance Bill, 2025 to expressly provide for ISD distribution of ITC in relation to inter-State supplies on which tax is payable under reverse charge, by inserting a reference to sections 5(3) and 5(4) of the IGST Act.

Recording it: the ledgers to keep

Rule 56(1) requires every registered person to keep a true and correct account of goods or services imported or exported, and of supplies attracting payment of tax on reverse charge, with the relevant documents — invoices, bills of supply, delivery challans, credit and debit notes, receipt vouchers, payment vouchers and refund vouchers.

Rule 56(4) requires every registered person other than a composition dealer to keep an account of tax payable including tax payable under sections 9(3) and 9(4), tax collected and paid, input tax, ITC claimed, and a register of invoices, credit notes, debit notes and delivery challans.

The Handbook prescribes six separate ledgers, and the discipline is worth adopting because it makes the return mapping mechanical:

Output IGST-RCM · Output CGST-RCM · Output SGST-RCM · Input IGST-RCM · Input CGST-RCM · Input SGST-RCM

And one procedural point that saves credit. Where RCM is paid via Form DRC-03 rather than admitted in Table 3.1(d), the Handbook advises entering the credit in Table 4(A)(5) so that it flows into the electronic credit ledger. Its reasoning: credit is blocked under section 17(5)(i) only where the tax is discharged pursuant to a demand under section 74 — so RCM discharged pursuant to a section 73 demand, or a section 74 demand with relief under section 75(2), may be paid through GSTR-3B or DRC-03 and the credit still claimed.

Key takeaways

• Rule 85(4) — reverse charge is paid in cash; the credit ledger cannot be used.
• Credit is available in the same month, on the strength of the section 31(3)(f) self-invoice read with rule 36(1)(b), subject to payment of tax.
• GSTR-2B matching (section 16(2)(aa) / rule 36(4)) does not apply to reverse charge credit.
• The 180-day rule in rule 37(1) does not apply to reverse charge supplies.
• Section 16(4) still applies — 30 November of the following year or the annual return, whichever is earlier.
• For section 17(2), RCM supplies are exempt supply in the supplier's hands — the GTA reversal point.
• Since 01.04.2025, an ISD must distribute RCM credit paid by a distinct person in the same State; the ISD does not itself pay the tax.
• Keep six RCM ledgers and, where DRC-03 is used, claim the credit through Table 4(A)(5).

Read next

• RCM Entry 1: Who Actually Pays GST on a GTA Freight Bill
• RCM Entry 15: Renting of a Passenger Motor Vehicle
• Section 9(4): The Promoter's 80% Shortfall

Disclaimer: Positions stated as on 5 September 2026, based on sections 16, 17, 20, 31(3)(f), 31(3)(g), 35 and 49(4) of the CGST Act, 2017, rules 36, 37, 39, 46, 56 and 85(4) of the CGST Rules, 2017, and section 20 with section 2(61) as substituted by the Finance Act, 2024 notified through Notification No. 16/2024-Central Tax and applicable from 1 April 2025, as reproduced in the ICAI Handbook on Reverse Charge under GST (2nd edition, February 2025).