Reverse Charge for Buying from Unregistered Dealers under GST

Last Update Date : September 20, 2018

reverse charge mechanism

In normal cases, the supplier pays tax on the supply of goods and/or services. However, the reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier. Other than on services specifically provided in section 9(3), the reverse charge is also applicable when an unregistered supplier is providing some goods/services to a registered recipient by virtue of section 9(4). It means GST will be paid to the government but directly by the buyer instead of the seller/supplier.

Conditions to Identify whether RCM is applicable

As per Sec 9(4) of CGST Act, if a registered person purchases goods/services from an unregistered dealer (URD), the registered taxpayer is liable to pay GST on the reverse charge basis. The entire provisions of the Act will apply as if the recipient of the goods and/or services is liable to pay tax for the supply of goods or services.

If the below conditions are met, the provision of reverse charge will apply:

  • There should be a supply and supply should be of taxable goods and/or services
  • Supply must be to a registered person by an unregistered person
  • Supply must be an intra-state supply since registration is mandatory for inter-state sales

Quick Note: Inward supplies from unregistered dealers up to Rs 5,000 per day will not attract GST.

In other words, reverse charge applies on purchases above Rs 5,000 in aggregate from unregistered dealers in a single day. This limit has to be evaluated on a daily basis to check whether the provision of RCM is applicable.

Example

Royal Ltd. is a company registered under GST. It has paid Rs 8,000 on all inward supplies made from unregistered dealers in a single day. Since the daily limit of Rs 5,000 is crossed in this case, GST is payable on the entire amount of Rs 8,000 under reverse charge mechanism (RCM). To evaluate whether transactions fall under RCM, the registered taxpayers need to check and analyse their profit and loss accounts regularly (preferably daily basis).

Examples of Transactions attracting RCM under Section 9(4)

Reverse charge mechanism will be applicable under GST when supply is made by unregistered dealers. The following transactions are some examples where businesses or individuals have to pay a reverse charge on buying from unregistered dealers:

  • Services of a plumber where there is water leakage
  • Photocopy, spiral binding or bookbinding services
  • Small electrical repair or a general upkeep
  • Purchase of a tube light or bulb
  • Purchase of pen/pencil/papers for the office

Items that might attract GST under RCM: For evaluation of transactions falling under RCM under section 9 (4), the following items need to be closely tracked which are entered in your profit and loss account:

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

Eligibility and Restrictions to Claim ITC

GST paid by the recipient under reverse charge mechanism on purchases or services availed from unregistered persons is eligible for Input Tax Credit.

However, there are certain conditions which need to be taken care of before claiming any credit on tax paid under RCM:

  • The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.
  • The recipient has to pay the tax, and the credit will be allowed to him in the month of payment of tax.

Also, there is a restriction in the provisions that the GST credit cannot be availed on blocked credits as per section 17(5) although the tax is paid on RCM basis. Example: motor vehicles, Foods & beverages, Works contract, etc.

RCM when Goods are Exempted from Tax

When goods and/or services supplied are exempted from tax, RCM under section 9 (4) will not be applicable.

Example

A registered taxable person hiring an auto rickshaw for commuting from one place to another or a registered taxable person staying in a budget hotel whose tariff is Rs 850 per day. In both cases, GST will not be applicable. Hotels having room tariff less than Rs 1,000 per day charge is exempted from tax. There are certain complications and misperception when it comes to GST payment under RCM.

Example

A stationery store owner sends an invoice to his registered taxable customer for binding 600 pages into a spiral binding book. He has raised invoice worth Rs 6,000 excluding any GST. Here, the registered taxable person will calculate 12% GST of Rs 720 and pay the due amount to the government.

When the amount is paid at MRP for the items purchased from unregistered dealers, the complications arise.

Example

You, as a registered person, have purchased chocolates of Rs 500 (including GST Rs 80) from a hawker who is an unregistered dealer. On the same day, your total purchase from unregistered dealers exceeds the amount of Rs 5,000. Here, the question arises how to pay tax under the reverse charge mechanism in such cases. Here, backward calculations are required. Rs 420 needs to be paid to the dealer and Rs 80 to the government and claim ITC on the same. However, the unregistered dealer will not accept a payment less than MRP! In addition, based on the GST Act, one cannot collect GST under RCM from the supplier or service provider. And if you pay Rs 80 GST over and above MRP Rs 500, there will be dual taxation.

As a result, registered businesses may prefer to deal with other registered dealers only to ease business processes and reduce complications.
This system could hamper the business of unregistered dealers. Hence, with a view to maintaining their market share and sustain competition, they might be required to register voluntarily. Or, they assist their registered customers in complying with the GST regime by identifying HSN codes, GST rates, etc.

Time of Supply under Reverse Charge

Under the reverse charge mechanism, time of supply in case of both goods and services matter most.

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

  • the date of receipt of goods
  • the date of payment
  • the date immediately after 30 days from the date of issue of an invoice by the supplier

Even then, if the determination of the time of supply is not possible, the date of accounting entry in the books of the recipient should be considered.

Example

Goods were received on 13th May 2018 and invoice was raised on 3rd June 2018. The transaction date recorded in the books of the recipient was 15th May 2018. Date of receipt of goods 15th May 2018. Here, the earliest date, i.e. 13th May 2018 will be considered as the time of supply of goods.

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

  • the date of payment
  • the date immediately after 60 days from the date of issue of an invoice by the supplier

Even then if the determination of the time of supply is not possible, the date of accounting entry in the books of the recipient should be considered.

Example

The amount was paid on 27th July 2018 for the services availed. For the same, the invoice was issued on 20th May 2018. And, the transaction date recorded in the books of the recipient was 25th May 2018

Here, 20th July 2018 will be considered as the time of supply of service as the day immediately following the 60 days from the date of issue of the invoice.

How can H&R Block help you?

After the implementation of GST, the tax compliance requirements changed drastically. As a result, several businesses find it challenging to focus on their business while trying to be GST compliant. This is where we come into the picture. Our team of in-house GST experts can help you meet all the GST compliance requirements right from registration and filing of returns to handling notices.

We hope, this guide answers all the questions you had about reverse charge under GST. If you still have any question in mind, you can post it on our TaxForum to get it answered from a tax expert.

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