Understanding Reverse Charge for Purchases from Unregistered Suppliers

The Reverse Charge Mechanism (RCM) under GST is a crucial aspect of tax compliance. While specific goods and services commonly fall under RCM, an additional provision exists under Section 9(4) of the CGST Act. This section mandates that if a registered individual acquires goods or services from an unregistered dealer (URD), the registered recipient becomes responsible for remitting GST via the reverse charge. This applies exclusively to certain specified goods, services, and registered entities. All relevant provisions of the Act then apply to this recipient as if they were the primary taxpayer for that supply. This particular provision is activated when the following criteria are fulfilled:

• There must be a transfer of goods or services.
• The supplied items or services must be taxable.
• The supplier must be an unregistered individual or entity.
• The recipient of the supply must be a registered person.
• The transaction must constitute an intra-state supply, as inter-state sales necessitate mandatory registration.

Historically, daily purchases from unregistered suppliers totaling up to Rs. 5,000 were exempt from GST. This meant that RCM applied to transactions with unregistered suppliers only when payments exceeded Rs. 5,000. However, this specific exemption was revoked, effective February 1, 2019.

Example: If ABC Ltd., a registered entity, acquires goods worth Rs. 7,500 from an unregistered dealer, the Goods and Services Tax (GST) under RCM is applicable on the full Rs. 7,500, not just a portion of it.

Recent Policy Changes

Effective February 1, 2019, the Reverse Charge Mechanism for supplies made by unregistered individuals to registered individuals is limited to specific goods, services, and designated persons. The official notification detailing these particular individuals or items is pending. Prior to this, the implementation of this RCM provision had been postponed to September 30, 2019, having been initially scheduled for October 1, 2018.

Understanding the Scope of Reverse Charge

Registered taxpayers are advised to routinely review their expenditures and profit/loss statements to identify any transactions or expenses that may fall under RCM. If an expense is part of a currently notified list of supplies, the taxpayer is obligated to pay GST on that transaction under the RCM framework. (Note: As of February 9, 2019, the specific list of notified supplies was still awaiting release).

Tax Payment Procedure under RCM for URD Purchases

The process for paying tax under the Reverse Charge Mechanism for purchases made from unregistered dealers generally involves the following steps:

• Taxpayers must accurately identify the HSN (Harmonized System of Nomenclature) codes for all goods and services subject to RCM.
• Invoice details need to be recorded, clearly indicating when RCM applies.
• Mechanisms should be in place to verify if invoices correspond to notified lists for RCM application, ensuring proper declaration.

Taxpayers should ensure that invoices from unregistered suppliers (lacking a GSTIN) are reviewed for RCM applicability. For such invoices, the taxable value and the GST amount payable under RCM must be correctly entered. Effective systems should be employed to track these invoices, potentially alerting users to similar past transactions for consistent RCM application.

Potential Profit & Loss Items Subject to GST under RCM

Businesses should diligently monitor the expenses recorded in their profit and loss accounts, as several categories might attract GST under the Reverse Charge Mechanism. Examples of such expenses include:

• Rent payments
• Commissions
• Printing and stationery costs
• Various repair and maintenance charges (e.g., office, vehicle, computer)
• Legal fees
• Consultancy fees
• Professional fees
• Audit fees
• Freight and Goods Transport Agency (GTA) expenses
• Gift-related expenditures
• Business promotion costs
• Advertisement expenses

Exemptions from RCM Application

Certain items are inherently exempt from RCM because they do not attract GST in the first place. These include:

• Salaries and wages
• Electricity charges
• Interest payments
• Automobile fuel (e.g., diesel or petrol)
• Government fees (e.g., Ministry of Corporate Affairs fees, land registration fees)

RCM and Exempted Goods/Services

The Reverse Charge Mechanism does not apply when the supply consists of goods or services that are already exempt from GST.

Illustrative Scenarios:

1. Auto Rickshaw Travel: If a registered individual uses an auto rickshaw for local travel, RCM is not applicable. This is because passenger transportation by auto rickshaw is a GST-exempt service.
2. Budget Hotel Stay: A registered individual staying in a hotel with a daily room tariff of Rs. 800 will not incur GST under RCM. Since room tariffs below ₹1,000 are exempt from GST, the question of RCM becomes irrelevant.

Impact of RCM on Businesses

The application of RCM for purchases from unregistered dealers can lead to several challenges for registered businesses, including increased working capital requirements, more complex compliance procedures, and potential disputes over classification. Consequently, registered businesses might favor transacting solely with other registered dealers to simplify their operations and minimize complexities. This preference could negatively affect unregistered dealers, potentially compelling them to voluntarily register for GST or at least support their registered clients with GST compliance, such as providing accurate HSN codes and applicable GST rates, to retain their market share.