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.