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Reverse Charge Mechanism under GST: Buying from Unregistered Dealers

Soniya Khanna

| Updated: Dec 12, 2018 | Category: GST

GST REVERSE CHARGE MECHANISM

In reverse charge mechanism, the recipient of the goods or services is liable to pay GST in place of the supplier.

Under this article we will cover the following:

  • What is a reverse charge?
  • Identification of Applicability of Reverse Charge Mechanism (RCM)
  • A sample of Transactions made under Reverse Charge Mechanism (RCM) as per Section 9(4)
  • What are the Profit & Loss items covered under Reverse Charge Mechanism (RCM)?
  • Conditions & Eligibility to Claim Input Tax Credit (ITC)
  • What is the process of paying tax under reverse charge mechanism?
  • Discuss the applicability of Reverse Charge Mechanism (RCM) when goods are exempted from Tax
  • How to pay tax under reverse charge mechanism?
  • The Time of Supply under Reverse Charge Mechanism

We hope that this article will be able to solve all your queries regarding the reverse charge mechanism under GST.

What is a Reverse Charge Mechanism under GST?

Usually, GST is paid by the supplier on the supply of goods or services while in case of reverse charge mechanism, the recipient is liable to pay GST instead of the supplier. If we talk about the reverse charge applicability then it is also applicable on goods or services provided by the unregistered dealer to a registered dealer as per section 9(4). It implies that directly buyer will pay the GST rather than a supplier.

GST Payment Process

GST Payment under Reverse Charge

Identification of Applicability of Reverse Charge Mechanism (RCM)    

According to Sec 9(4) of CGST Act, under the reverse charge mechanism registered taxpayer is liable to pay tax as registered person purchases goods or services from an unregistered dealer. The entire provisions of the Act will apply as the recipient of the goods or services is liable to pay tax.

The provision of the reverse charge will be applicable in the case below conditions are fulfilled:

  • There should be a supply of taxable goods or services;
  • There must be supply from unregistered person to a registered person
  • There must be an intra-state supply as in case of inter-state sales, registration is mandatory

Note: The provisions of GST will not be attracted in case of inward supplies from unregistered dealers up to Rs 5,000 per day.

The provisions of reverse charge will be attracted if purchases exceed Rs. 5000 from unregistered dealers in a single day. To verify whether the reverse charge is applicable, the limit has to be evaluated on daily basis.

Now let’s try to understand with an example:

For Example:

SK Ltd is a company which is registered under GST. The company has entered into a transaction of Rs. 10,000 for inward supplies made from unregistered dealers in a single day. In this case, the transaction amount exceeds Rs. 5000 therefore under reverse charge mechanism (RCM), the GST shall be payable on the entire amount.


Interpretation

The registered taxpayer has to analyze the profit and loss accounts on daily basis in order to evaluate whether the transactions fall under the reverse charge mechanism (RCM).

Transactions made under Reverse Charge Mechanism (RCM) as per Section 9(4)

Under GST, when supply is made by unregistered dealers reverse charge mechanism will be applicable.

Here are some of the examples when the reverse charge will be applicable in case of buying from unregistered dealers:

  • Plumber Services in case of a water leakage
  • Spiral binding/bookbinding and photocopy services
  • Electrical repairing
  • Tube light or bulb purchase
  • Purchase of office stationery

What are the Profit & Loss items covered under Reverse Charge Mechanism (RCM)?

The following must be carefully examined which are entered in your profit and loss account, for the purpose of evaluation of transaction under Reverse Charge Mechanism (RCM) under section 9 (4);

  • Advertisement
  • Business promotion expenses
  • Payments related to Commission
  • Computer maintenance
  • Gift expenses
  • Consultancy Fees
  • Audit Fees
  • Freight and transportation expenses (GTA)
  • Legal Fees
  • Office Maintenance
  • Printing and stationery
  • Professional Fees
  • Rent
  • Repairs and Maintenance
  • Vehicle maintenance

Excluding the following:

  • Salary/wages
  • Electricity
  • Fuel such as Diesel/petrol
  • Interest
  • Government Fees (such as MCA fees, land registration fees etc.)

Conditions & Eligibility to Claim Input Tax Credit (ITC)

If the recipient has paid GST on the purchase of goods or services availed from an unregistered person under reverse charge mechanism then the recipient is eligible for Input Tax Credit.

However, prior to the claiming of Input Tax Credit certain conditions must be considered under reverse charge mechanism RCM:

  • Under the reverse charge mechanism, the registered dealer who is liable to pay GST has to do self-invoicing in respect of the purchases made.
  • The credit will be allowed to the recipient in the month tax payment has been made.

According to section 17(5), credit cannot be availed on blocked credits although the tax is paid on the basis of the reverse charge mechanism. For Instance: motor vehicles, Foods & beverages, Works contract, etc.

What is the Process of Paying tax under Reverse Charge Mechanism?

We can guide you the process of paying tax under reverse charge mechanism:

  • For this purpose, you have to provide the correct HSN codes in respect of the goods and services falling under the reverse charge mechanism.
  • You have to provide invoice details to us.
  • We will tell you whether the aggregate purchases from unregistered dealers have crossed the threshold of Rs. 5,000.
  • After that appropriate invoice will be selected by you and enter the taxable value of invoice and GST payable under reverse charge mechanism.

Note: You are suggested to ask your vendor to split the bill for consecutive days so that you do not end up paying tax for small amounts in case you find you are exceeding the threshold limit of Rs. 5,000.

Discuss the applicability of Reverse Charge Mechanism (RCM) under GST when goods are exempted from Tax.

In case of such goods or services which are exempted from tax, the provisions of the reverse charge mechanism will not be applicable as per section 9 (4).

For Example:

Let’s say if a registered taxable person is taking service of an auto rickshaw or staying in a budget hotel then GST will not be applicable in both the cases. As hotels whose tariff is less than Rs 1,000 per day are exempted from tax. However, under the reverse charge mechanism, there are still some complications and misconception taking GST payment.

How to Pay tax under Reverse Charge Mechanism?

If the total purchases from unregistered dealer exceed Rs. 5000 then the next question arises that how to pay tax under reverse charge mechanism. Under the reverse charge mechanism, GST cannot be collected from the supplier or service provider.

For Example:

Suppose you are paying Rs. 500 to the unregistered dealer which is a taxable value and Rs. 100 to the government for GST and claiming Input Tax Credit. Make sure you are not eligible to collect GST from the service provider or you can say supplier under the reverse charge mechanism.


 Effect

Therefore business entities always prefer to deal with registered dealers as it helps in ease of doing business and it eliminates complications. Unregistered dealers might register themselves voluntarily in order to maintain market share and sustain competition.

The Time of Supply under Reverse Charge Mechanism

The time of supply shall be the earliest of the following dates in case of a reverse charge on goods:

  • Date of receipt of goods
  • Date of payment
  • Date immediately after 30 days from the date invoice issued by the supplier

In case time of supply cannot be determined then the date of accounting entry made in the books of accounts of the recipient will be considered.

Let’s understand taking an example:

For Example:

Goods were received on 10th October 2018 for which invoice was raised on 15th November 2018 and the transaction date was recorded as 05th November 2018. In such case, the earliest date is 10th October 2018 which will be considered as the time of supply.

The time of supply shall be the earliest of the following dates in case of a reverse charge on services:

  • Date of payment
  • Date immediately after 60 days from the date invoice issued by the supplier

In case time of supply cannot be determined then the date of accounting entry made in the books of accounts of the recipient will be considered.

Let’s understand taking an example:

For Example:

In respect of the services availed amount was paid on 19th October 2018 for which invoice was issued on 20th August 2018 and the transaction was recorded in the books of the recipient on 10th October 2018.In such case, the time of supply will be considered on 20th October 2018 which is the day immediately following the 60 days from the date invoice issued.


 Frequently Asked Questions


  • What happens if the receiver of goods or services is an unregistered dealer who is required to pay tax under Reverse Charge?

 Under reverse charge, all taxpayers who are required to pay tax have to apply for GST registration irrespective of the applicability of threshold limit of Rs 20 Lakhs.

  • Is Input Tax Credit allowed under Reverse Charge Mechanism?

Yes, the input tax credit will be allowed in respect of the tax paid under reverse charge mechanism in case goods or services will be used for business. The input tax credit can be availed by the recipient.

  • Is Input Service Distributor liable to Reverse Charge if receives supplies?

An input service distributor is not eligible to undergo purchases which are liable to Reverse Charge. However, if the input service distributor wants to procure such supplies and take the reverse charge then he has to register as a Normal Taxpayer.

  • How Enterslice can help you?

As we can see there is a drastic change in the tax compliances after GST implementation. It has become challenging for every business to focus on their core activities while trying to be GST compliant. Our team of expert professionals can help you in meeting GST compliances such as GST registration, GST return and handling GST notices.

In case you still have queries then you can post a query on our website. We assure that your query will be solved in the best possible way.

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Soniya Khanna

Legal Advisor at Enterslice I Areas of Expertise: FinTech & Corporate Advisory

Business Plan Consultant


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