Commercial banks, cooperative banks, financial institutions, and non-banking financial companies (NBFCs) regularly engage third-party recovery agents to collect overdue loan installments and settle non-performing assets. When accounting for collection fees, success commissions, and legal processing charges billed by these agencies, internal finance teams often wonder whether GST should be paid directly to the vendor or discharged under reverse charge mechanism (RCM).
Statutory framework under Entry 8 of Notification 13/2017-Central Tax (Rate)
The reverse charge mandate for loan recovery operations is governed by Entry 8 of Notification No. 13/2017-Central Tax (Rate) issued under Section 9(3) of the CGST Act. As defined under Section 2(98) of the CGST Act, reverse charge shifts the liability to pay tax from the supplier to the recipient of the supply.
Entry 8 specifies three precise statutory parameters:
- Category of service: Services supplied by a recovery agent.
- Supplier: A recovery agent (whether an individual, partnership firm, LLP, or body corporate).
- Recipient: A banking company, a financial institution, or a non-banking financial company located in the taxable territory.
Similar to statutory liabilities on legal services by advocates and security personnel services, the responsibility to deposit tax rests squarely on the recipient institution.
Common mistake: Paying GST directly to a registered recovery agent on their forward invoice. Entry 8 applies regardless of whether the recovery agent is registered or unregistered. If the bank erroneously disburses GST to the agent, the bank remains legally liable to pay the RCM amount to the government in cash, together with interest under Section 50(1).
Cash payment rule and self-invoicing mandates
Discharging reverse charge liability involves specific procedural rules laid down across the GST statutes:
- Payment strictly through electronic cash ledger: Tax payable under reverse charge cannot be settled by debiting the Electronic Credit Ledger. The recipient must deposit cash into the cash ledger and pay the liability in Table 3.1(d) of Form GSTR-3B.
- Self-invoicing for unregistered agents: If the recovery agent is unregistered, the recipient institution must issue a self-invoice under Section 31(3)(f) of the CGST Act. Pursuant to Notification No. 20/2024-Central Tax inserting Rule 47A into the CGST Rules, this invoice must be issued within thirty days from the date of receipt of the service.
- No e-invoicing required on self-invoices: Per CBIC e-Invoice guidance, recipient self-invoices issued under Section 31(3)(f) for inward RCM supplies do not require an Invoice Reference Number (IRN).
Input tax credit eligibility and Section 17(4) restrictions
Under Section 2(62) of the CGST Act, input tax includes tax payable under Section 9(3). Consequently, GST paid on recovery agent charges under RCM is eligible for input tax credit (ITC) in Table 4(A)(3) of Form GSTR-3B in the same month it is paid.
However, banking companies and NBFCs must apply the statutory apportionment mechanisms under Section 17(4) of the CGST Act read with Rule 38 of the CGST Rules:
- Under the optional 50% mechanism of Section 17(4), a banking company or NBFC avails exactly 50% of the eligible input tax credit on inputs, capital goods, and input services every month, while the remaining 50% lapses permanently.
- In reporting, the full credit is first reflected in Table 4(A)(3) of Form GSTR-3B, and the 50% restricted portion is reversed under Table 4(B)(1) as a permanent reversal.
Worked example: RCM computation for an NBFC
Consider an NBFC in Maharashtra that engages an outsourced loan recovery agency to collect delinquent retail loans during October 2026. The agency submits an agreed recovery commission bill of ₹5,00,000 for successful collections.
| Particulars | CGST (9%) | SGST (9%) | Total (₹) |
|---|---|---|---|
| Recovery commission payable (Base amount) | Nil | Nil | ₹5,00,000 |
| RCM liability under Entry 8 (Paid via Cash Ledger) | ₹45,000 | ₹45,000 | ₹90,000 |
| Gross ITC recognized in Table 4(A)(3) | ₹45,000 | ₹45,000 | ₹90,000 |
| 50% reversal under Section 17(4) & Rule 38 in Table 4(B)(1) | ₹22,500 | ₹22,500 | ₹45,000 |
| Net ITC available to offset outward liability | ₹22,500 | ₹22,500 | ₹45,000 |
Formula applied: Total Tax = Base Commission × 18% = ₹5,00,000 × 18% = ₹90,000 (divided equally as ₹45,000 CGST and ₹45,000 SGST). Net admissible credit under Section 17(4) = Total Tax × 50% = ₹90,000 × 50% = ₹45,000.
Annual return reporting in Form GSTR-9
In the annual return (Form GSTR-9), inward RCM supplies must be reconciled across both liability and credit tables:
- Outward and inward RCM supplies: Declared in Table 4G of Form GSTR-9 as inward supplies on which tax is payable under reverse charge.
- ITC availed on RCM: Documented in Table 6C (for RCM from unregistered persons) or Table 6D (for RCM from registered persons under Section 9(3)), ensuring that differences in Table 6J remain zero.
Failure to report and pay RCM liability can lead to audit discrepancies under Section 61, triggering scrutiny notices in FORM GST ASMT-10 under Rule 99(1) along with mandatory interest demands under Section 50(1).
Frequently asked questions
Does RCM apply if the recovery agent is registered under GST?
Yes. Entry 8 of Notification No. 13/2017-Central Tax (Rate) applies to services supplied by any recovery agent to a banking company, financial institution, or non-banking financial company. The registration status of the recovery agent does not alter the reverse charge obligation.
Can a bank pay RCM on recovery agent commission using its input tax credit balance?
No. Under Section 49(4) of the CGST Act read with Section 2(98), reverse charge liability represents an output tax payable by the recipient and must be discharged entirely in cash through the Electronic Cash Ledger. Input tax credit cannot be used to pay reverse charge liability.
Is self-invoicing mandatory when hiring an unregistered recovery agent?
Yes. Under Section 31(3)(f) of the CGST Act, the recipient must issue an invoice for goods or services received from an unregistered supplier. Under Rule 47A of the CGST Rules, this invoice must be issued within thirty days from receipt of the supply.
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Last checked: 23 October 2026. Sources: Notification No. 13/2017-Central Tax (Rate), CBIC Central Tax Act Section 9, GSTN Manual on GSTR-9.