Context
Most small businesses think GST flows one way: the supplier charges the tax, you pay the supplier, the supplier pays the government. Reverse charge (RCM) flips that for certain supplies, the buyer pays the GST straight to the government. The flow above answers the only question that matters at the desk: does RCM apply to *this* purchase, and if so, what do I have to do?
The first test is the Section 9(3) notified list. Section 9(3) of the CGST Act[1], read with Notification 13/2017-Central Tax (Rate)[2], fixes a list of supplies where the recipient always pays: goods transport agency (GTA) freight, legal services by an advocate, sponsorship, a director's services to the company, an insurance agent, and a recovery agent, among others. If your purchase is on that list, you pay RCM whether or not the supplier is GST-registered. A small business that hires a transporter or a lawyer is squarely caught, this is not a big-company-only rule.
The second test, Section 9(4), is far narrower than its reputation. It once required any registered buyer to pay RCM on purchases from unregistered suppliers, but that omnibus version was suspended; today it is notified only for specific recipients, principally a real-estate promoter who buys below the prescribed registered-procurement threshold under Notification 07/2019-CT(R)[3]. For an ordinary small business, buying from an unregistered supplier does not by itself create an RCM liability. Treating 9(4) as a general rule is the most common over-correction, so the flow keeps it on its own narrow branch.
Where RCM applies, four rules bite. You pay in cash through the electronic cash ledger, because RCM tax is not treated as "output tax" under Section 2(82)[4] and Rule 85(4) requires it, so input tax credit cannot discharge it. You self-invoice an unregistered supplier under Section 31(3)(f)[4], since they issue no invoice. You may then claim the RCM as input tax credit, but only if the supply is otherwise eligible. And a composition dealer is not spared: composition covers outward sales, the inward RCM liability remains, and worse, a composition dealer can claim no credit on the RCM paid, so for them it is a pure cost.