What is Reverse charge mechanism?

“Reverse Charge” means the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both instead of the supplier of such goods or services or both under subsection(3) or subsection(4) of section 9.

 

Provision under Reverse charge mechanism for unregistered traders:

  • As per the gst , If the registered person buy any product or service from an unregistered person, then the registered person has to pay tax.

 

  • One of the biggest indirect tax reforms in the country that came into effect on July 1, is on purchases of goods and services from persons who are not registered under the law. Any person whose aggregate turnover in a financial year exceeds the threshold limit of Rs 20 lakh (Rs 10 lakh for north-eastern states), shall be liable to obtain registration. Thus, a person, whose turnover is below the threshold limit, is exempted from obtaining registration.

 

  • If unregistered person procures some goods or services, which attract GST under reverse charge, then the person will mandatorily be required to obtain GST registration. In such a case, the person will become a registered person and provisions will apply accordingly.

 

  • Additionally, since the unregistered person may/ may not issue invoice for such supplies and would certainly not issue a ‘GST Invoice’ (being unregistered), the law casts an additional responsibility upon the registered buyer of goods/ services, to raise an invoice on self (‘self invoicing’) for such purchases from unregistered persons.

 

Exemption under Reverse Charge Mechanism For Unregistered traders:

There is also a small exemption granted, to the tune of Rs 5,000 per day, for total consolidated purchases made during a particular day, of goods and services, from one or all unregistered vendors in the day.

 

A registered person should keep a check on the following in respect of purchases from unregistered dealers, being:

  • Availability of threshold exemption of Rs 5000 per day on purchases made from unregistered supplier of goods and services
  • Self invoice (on daily basis) for consolidated purchases made from unregistered person(s) during the day
  • Self-assess HS code/ services accounting code (SAC) classification and the applicable GST rate on goods or services procured from an unregistered person
  • Discharge GST liability on monthly basis, report such purchases from unregistered dealer in GST return and avail input tax credit (ITC) of the GST paid (under reverse charge mechanisM.

Impact of reverse charge provisions on dealing with unregistered person:

  • The major impact will be that most of the registered person will avoid dealing with unregistered parties. The registration ratio will go up due to limited scope of trade partners.
  • An unregistered person will find it difficult to trade with registered persons. Due to tax liability and compliance liability gets shifted on recipient, registered persons will avoid dealing with unregistered suppliers.
  • Tax compliance cost will go up if a registered person deals with an unregistered dealer.
  • Buying from unregistered vendors will spear up working capital requirements, classification disputes, add to unwarranted litigation and related cost.

 

  • Example to show cost impact due to dealing with unregistered person:

Particulars

Registered Person

Unregistered Person

Cost

10,000

10,000

Tax charged

1,800

1,800

Input in same month

1,800

-

Cash outflow

11,800

11,800

Tax input

1,800

-

Impact on Tax outflow

-1,800

-

Interest expense for one month

-

15

Net cost on purchase

10,000

10,015

  • With help of above example, you can understand that indirectly purchasing from an unregistered person will have negative impact on cost of supplies.

 

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