Under normal scenario, tax is paid by the supplier of goods or services or both but under reverse charge mechanism, liability to pay tax is on the recipient of the goods or services or both and not on the supplier.
Sections 9(3) & 9(4) of the GST Act, 2017 deals with the provisions of Reverse Charge.
According to Section 9(3), Government has specified categories of supply of goods and services or both, on which tax will be paid on reverse charge basis by the recipient of such goods or services or both and provisions of this Act shall apply to such recipient as if he is person liable to pay tax in relation to such supply.
Similar provision has been incorporated in Section 5(3) of the IGST Act, 2017 to levy tax goods and services tax under the reverse charge basis on their interstate supply.
The GST Council has approved certain services on which tax shall be paid on a reverse charge basis which are mostly the same as are prevailing in the current service tax regime. However, the government is still to come out with a list of goods on which tax shall be paid on reverse charge basis.
Some services to which the reverse charge mechanism applies include goods transport agency services, legal services, rent-a-car services, manpower supply services, import of taxable services, security services, service portion in execution of works contract, sponsorship services, etc.
Although, there is a threshold limit of Rs 40 Lakhs for registration under GST in respect of normal tax payers but under the reverse charges, there is no such limit. The person who is liable to pay tax under reverse charge should get registration under GST irrespective of the aggregate limit.
In addition to Section 9(3) another sub section (4) is added in Section 9 of the GST Act, 2017 which will justify the heading of this article 'A Nightmare for unregistered dealers'.
According to Section 9(4) of CGST Act and Section 5(4) of IGST Act, if a registered person purchases specified categories of goods or Services or both from an unregistered person then tax on such supply shall be paid by registered person on reversed charges basis.
When a registered person receives goods/ services from an unregistered person has to pay tax on those goods/ services on his behalf on a reverse charge basis and all the provisions of the Act will apply to him as he is the person supplying such goods or Services. Now this will lead to an extra blockage of capital and some extra compliance under the Act in this regard. Though he will be allowed to claim input credit of such tax paid on reverse charge basis.
So, a registered person who procures any goods/ services from an unregistered dealer will have to pay tax on their receipt and then will have to claim ITC on the same subject to the conditions of the Act.
But an extra burden of payment of tax at the time of purchase, some extra compliance will force the registered person to make purchase from a person registered under the Act and which in turn will compel a person who is not registered or not liable to register to take registration under the Act in order to sell his goods/ services to a registered dealer.
Interestingly, Section 5(4) of the IGST Act which is Pari Materia with Section 9(4) of the GST Act, also provides that Integrated Tax i.e. IGST on supply of goods or services or both provided by a non-registered person to a registered person in the course of interstate trade, tax on such goods/ services shall be paid by the recipient on a reverse charge basis.
However, Section 24 of the GST Act, 2017 provides for mandatory registration in case of interstate supplies. So if an unregistered dealer cannot make interstate supplies then how can a registered person purchase goods/ services in the course of interstate trade or commerce from an unregistered dealer? So the question of paying the tax on reverse charge under IGST does not arise. The purpose of adding Section 5(4) in the IGST Act is still unknown.
In normal course of business we incur many expenses in relation to furtherance of business for example printing, stationery, packing, refreshment, travelling, Services like accounting, legal services which we debit in our profit and loss account to arrive at net profit.
So now a registered person will have to pay GST under reverse charge on all these services if procured from an unregistered dealer. Suppose if I debit my P&L account for say Rs. 20,000/- for a payment to an accountant for preparation of my books of accounts. Now, I will have to pay GST on Rs. 20,000/- under reverse charge if my accountant is not registered under GST.
So it will be very difficult for small business houses who procure these goods/ services from unregistered dealers to pay tax every time they procure such supplies and will become even more difficult for unregistered dealers to find buyers who will purchase goods from them.
Exemption to Section 9(4) of CGST :-
(i) Sale of old jewellery by individual to a jeweller. However, if an unregistered supplier of Gold ornaments sells it to a registered supplier then the tax under RCM will apply.
(ii) Local purchase of second hand goods from unregistered person to registered person, provided the registered person charges GST on further sale.
(iii) In respect of aggregate value of supplies of goods or services or both of up to 5,000 in a day, received by a registered person from any of suppliers who is or are not registered.
Following is the list of goods, the tax on which shall be paid on a reverse charge basis by the recipient of such goods, if he is a registered person.
1) Cashew nuts, not shelled or peeled
2) Bidi Wrapper leaves (tendu)
3) Tobacco leaves
4) Silk yarn
5) Supply of Lottery
6) Raw Cotton by Agriculturist
7) Primary Sector lending certificate
8) Used vehicles, seized and confiscated goods, old and used goods, waste and scrap
Following is the list of services, the tax on which shall be paid on a reverse charge basis by the recipient of such services, if he is a registered person:
1) Services by Goods transportation Agency (GTA)
2) Services Provided by Advocates to Business Entity
3) Services Provided by Arbitral Tribunal to Business entity
4) Sponsorship service to any Body corporate/Firm
5) Services provided By Central Govt./State Govt./UT/Local Authority to Business Entity
6) Services provided by Director of a Company
7) Services Provided by Insurance Agents
8) Services Provided by Recovery Agents to a Banking co./NBFC
9) Supply of services by an author, music composer, photographer, artist to a publisher, music company, producer
10) Supply of services by the members of Overseeing Committee to RBI
• RCM shall not be applicable in case of supply of exempt goods or services.
• Composite dealers can not claim input under RCM. In that case, the dealer is liable to pay tax at normal rate instead of rate applicable for composition scheme.
• Receipts of advance payments are also subject to reverse charge.
• Once the liability to pay GST is placed on the recipient then in case of default by the recipient, the liability does not recover from the supplier.
• Lending Certificate by a GST registered person to another GST registered person will now fall under Reverse charge.
• CBDT notifies levy of GST on Priority Sector Lending Certificate (PSLC) under Reverse Charge Mechanism
• The provisions relating to RCM (in case of supplies made by unregistered persons to registered persons) have been deferred/suspended to 30th Sept 2019 by Govt.
• If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator.