Reverse charge mechanism under GST: What to watch for while dealing with unregistered traders

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.

Written by Anjlika Chopra | Published:July 11, 2017 3:30 am
Parliament of India (Source: PTI)

A critical aspect in the goods and services tax (GST), 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.

The GST law stipulates that where a registered person buys goods or services from an unregistered person, the liability to discharge GST is cast upon the registered person (being recipient of such goods or services), under the reverse charge mechanism. 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.

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.

Interestingly, as a person does not cross the threshold turnover limit, such person would not obtain GST registration. However, if such 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.

To summarise, 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)

Might consider a review with key unregistered vendors in case they are mandatorily required to obtain GST registration

Buying from unregistered vendors will spear up working capital requirements, classification disputes, add to unwarranted litigation and related cost and perhaps force businesses to re-look at sourcing pattern. This could dampen businesses of unregistered dealers and either force them to voluntarily register or provide requisite assistance to their customers from GST compliance perspective (for instance, voluntarily identify HS classification for the products/ services).

While the lawmakers prescribe a threshold limit of Rs 10/ 20 lakh, however, given that the GST law mandates recipient to pay GST under reverse charge on such amount, all transactions are subject to GST.

It seems that an impact shall soon be felt on host of unregistered players including skilled manpower who are self-employed but not registered on account of turnover below threshold limit. Businesses may evaluate the impact, observe the efforts involved in self invoicing and related compliance, before deciding upon alternative sourcing models.

The writer is senior director with Deloitte Haskins and Sells LLP

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  1. S
    Sushant Kumar Mohanty
    Jul 20, 2017 at 6:02 pm
    Your views on the topic is appreciated. how ever the legal provision regarding exemption on purchase of goods/services up to 5000 per day is not indicated in your article. kindly intimate the exemption provision.
    Reply
    1. K
      Kunal
      Jul 17, 2017 at 12:56 pm
      Sir, I am Goods Transport Operator not agency services sold on kachha chittha. the service receipts are all under factory act. So, can I go to take GST Registration if service precipitant has been falling in tax liability ?
      Reply
      1. r
        rs_mani3657
        Jul 13, 2017 at 12:28 pm
        GST is a good phenomenon from the poerspective of Govt being the increase in revenue. But focussing on revenue should not deny the social obligation by exerting pressure of gst on essenttia eatables such as rice wheat and other eatables. For example to secure/promote genuine hygenic environment tax should not be levied on such hygenic goods. For eg. rice in retail s attracts lesser tax while the purified and packed rice attracts higher tax. This made people to resort to buy unhgenic goods for the reason of lesser cost and thus the Gov. itself ignores the protection of hugenic goods. Wil the concerned authorities look after and take care of this?
        Reply
        1. S
          Suresh
          Jul 12, 2017 at 10:01 am
          An education ins ution is exempted under GST. There might be some services provided to that Education Ins ution which may attract RCM. Should the Education Ins ution get registered under GST?
          Reply
          1. S
            SHIVAKUMAR
            Jul 15, 2017 at 5:04 pm
            all services connected to Education ins ution are exempted, canteen inside the ins ution, bus engaged for movement of students etc.
            Reply
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              CA Deepak Singh
              Jul 23, 2017 at 12:09 pm
              Sir, But all services provided to an educational ins ution are not exempt, like construction of building, some taxable goods like stationery, if received from unregistered dealer, whether edu ins is required to get registered and pay gst
          2. S
            salil
            Jul 11, 2017 at 12:50 pm
            One question - what is the big loss fr reverse charge mechanism ? "The GST law stipulates that where a registered person buys goods or services from an unregistered person, the liability to discharge GST is cast upon the registered person (being recipient of such goods or services), under the reverse charge mechanism. ........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. " So the buyer pays GST on reverse Charge Mechanism but he also gets credit for the same - because he is also the seller - due to self invoicing - the effect is nil GST paid. The big companies are trying to scare the Small guys and fleecing them by forcing them to reduce the prices. the big accounting firms are also part of this scam
            Reply
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