Reverse Charge is a system where the receiver of the goods and/or services is liable to pay GST instead of the supplier. Sounds simple? But it isn’t! Here’s a break down of its cause and effects.
Reverse Charge provision states as:
The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
Let’s take a look at the passage again. This GST law clearly specifies that if a registered person buys goods or services from an unregistered person, the responsibility to pay GST to the govt is upon the registered person. With the framing of this law, the Government hopes that the market will itself weed out the bad eggs — which is not wrong in theory.
Reverse Charge and its effects on Registered and Unregistered Suppliers/Consumers
The origin of this Reverse Charge provision lies in the huge number of people escaping from paying tax through false representations by some businesses. Under GST, transactions made by you must be in accordance with that of your fellow Suppliers/Customers.
The government maintains a GST network in which nationwide business transactions are brought together to check for it truthfulness. In other words, your transactions should be in Sync with GST network where the common database consolidates. As a result, unlike the older system, the new system never allows you to manipulate account books according to the tax you to want pay to avoid taxes you’re expected to pay.
All you need to know about Reverse Charge if you’re a Registered Dealer-
Every purchase you make will be chargeable with tax if you are registered. There are two scenarios.
- Whenever you purchase from a registered dealer he collects and pays the GST.
- In contrast, when you purchase from an unregistered dealer you will be subjected to pay the GST. Because of which, it is very important to know your supplier well.
Alongside, a Registered person/business should keep a check on the following in respect of purchases from unregistered dealers, being:
- If the purchases made from an unregistered supplier for the day is above Rs 5000/-, only then it would attract GST.
For Example Company ABC is a registered company. If Company ABC purchases stationery worth Rs 5000 from unregistered persons (one or more than one) in a day then, such purchase from an unregistered person would not attract GST.
- Raise invoices (daily basis) on self for the purchase made by an unregistered person(s).
- Self-assess HS code/ services accounting code (SAC) classification and the applicable GST rate on goods or services procured from an unregistered person.
- Report purchases from an unregistered dealer in GST return (on monthly basis) and avail input tax credit (ITC) of the GST paid (under reverse charge mechanism). In case of supply of goods/services where GST paid is not available as credit, the situation suddenly becomes unfavourable to the registered consumer.
All you need to know about Reverse Charge if you’re an Unregistered Supplier-
Under GST, Registered Businesses would resist buying from unregistered dealers as it would increase his pain of making self-invoices, correct tax determination of it, payment receipts, and other such recordings on behalf of others. The extra burden of payment of tax at the time of purchase, some extra compliance will force the registered person to make the purchase from registered taxpayers only.
Consequently, this could reduce businesses of unregistered dealers forcing them to voluntarily register. They also can provide necessary assistance to their customers from GST compliance perspective. But this, in turn, will compel an unregistered person to take registration under GST to sell. In either case, Reverse Charge is going to hurt the unregistered small businesses.
Consider two situations to understand impact of this Reverse Charge provision
Assume a supplier S who supplies goods worth Rs 100 to a registered company C under GST.
If S is also registered under GST, he would charge Rs 100+ GST (which we assume is 18%) on his invoice. The customer would take credit of GST of Rs.18. The cost incurred would still remain Rs. 100.
Now consider S being unregistered. When he supplies goods to C, S would not charge any GST. The cost to C would be Rs 100. In this case, a registered person C is procuring goods/ services from an unregistered dealer S. Hence C will have to pay tax on their receipt under reverse charge. He then will have to claim ITC on the same subject to get back his Tax returns. But, as in GST, compliance is a major issue. Since the unregistered person, S may or may not issue an invoice for such supplies. He would certainly not issue a ‘GST invoice’ (being unregistered), the law casts an additional responsibility upon the registered buyer. Together with raising an invoice on self (‘self-invoicing’) for such purchases from unregistered person C.
Whereas, In previous Tax regime, even if the unregistered S charges Rs.110 (more than the registered S who charges Rs.100) for the supply, C may find it beneficial to buy from him as the total cost Rs.110 is still lower than Rs118 if he purchases from a registered S. Hence dealing with unregistered dealer sounded beneficial under the old tax system as it allowed the manipulation of account books according to the tax you to want pay which can never happen under GST.
Under GST, the registered consumer can claim input credit of such tax paid on a reverse charge basis. But in the background, buying from unregistered vendors will shoot up working capital requirements and create HSN classification disputes. Further, it adds to unwarranted litigation and related cost and perhaps forces businesses to re-look at sourcing pattern. Given these points would occur a loss for registered C adding extra burden in terms of workload, time and money.
Whatever the case, it is always better to deal with a registered supplier under GST.
How Can You Comply Better With GST
GST is a completely new revolution to tax regime giving extraordinary traceability. With many new concepts, it will be definitely challenging.
Especially, it gets difficult for registered small business houses who procure these goods/ services from unregistered dealers. Paying tax every time they procure such supplies becomes their burden. Being that, it becomes difficult for unregistered dealers to find buyers who will purchase goods from them.
Even if you have a CA to look after your financial accounting, its advisable to implement a good GST compliant accounting software. This should simplify the whole process. Vyapar is one such accounting software. It not only helps you in tracking reverse charges but in creating GST invoices too. Correspondingly, easing your effort to track purchases, manage inventory, and file GST returns accordingly with just a few clicks. Its trusted by thousands of businesses across India.