Indirect tax is normally paid by the supplier of the goods or the service provider. However, in certain cases, the receiver or the customer of such goods or services are made responsible to pay the taxes instead of the seller or service provider. This mechanism of paying taxes by the recipient is called payment of taxes under the reverse charge mechanism [RCM].
The payment of tax liability fully under reverse charge by the recipient and partly by the supplier as well as the recipient under a joint charge was applicable under the erstwhile service tax regime. Similarly, under the Karnataka VAT regime, where a registered dealer procured goods from an unregistered dealer, the liability to pay VAT on such transaction was on the registered dealer who procured goods.
Reverse charge mechanism is levied mainly for two purposes-
- Compliance shifted to the registered person where he procures from persons who are not required to get registered due to the basic exemption limit; or
- To increase compliances in the cases of certain unorganised sectors where complying with the laws would be difficult to the assessee and collecting taxes from such unorganized suppliers would be difficult for the government.
In this backdrop, we examine GST implications of reverse charge in respect of procurements done from unregistered vendors and recent developments in this regard.
Reverse charge mechanism under GST
Payment of taxes under RCM is continued by the Government under the GST regime. The taxes payable under RCM by the recipients should be made by cash [which adds to the initial cash outflow of the recipient] and the recipient can avail ITC of the same in the same month if such goods or services are used for taxable supplies and in the business.
Where such goods or services are used for exempt supplies or are restricted [blocked], then the credit of the same would not be available. In such cases, the taxes paid adds to the cost of the recipient.
GST is payable by the recipient of supply under the mechanism of RCM in two cases:
1. Notified taxable goods and services like goods transport agency services where transporter issues consignment note, advocate services, import of services, sponsorship services, services by a director, etc. GST under RCM is required to be paid on the procurement of such goods and services irrespective of whether procured from registered or unregistered vendors. The recipients of the specified goods and services are compulsorily required to get registered under GST to pay GST under RCM. The payment of GST under RCM for these notified goods and services is applicable from 01st July 2017 to date.
2. Procurement from unregistered vendors- GST under RCM was required to be paid on procurement of all other taxable goods and services procured from unregistered vendors. In this case, the goods and services were not specified and the registered recipients were required to pay GST under RCM on all the taxable goods and services procured from unregistered vendors.
There has been confusion recently due to the notification of the CGST amendment act in respect of applicability of payment of GST under RCM for procurements from unregistered vendors.
Tax Payment of RCM for unregistered person/dealer [URP/ URD] procurements-
01st July 2017 to 12th October 2017: Payment of GST under RCM was exempted where the aggregate value of the goods and services procured by a registered person from unregistered vendors were not exceeding Rs. 5,000 in a day. Where the value of procurements from unregistered vendors exceeded Rs. 5,000 in a day, the registered recipient was liable to pay GST under RCM on the entire value of the taxable goods and taxable services procured from unregistered vendors.
Deferment of RCM for URP procurements-
The liability to pay GST under RCM on the procurements from unregistered vendors was deferred from 13th October 2017 to 30th September 2019.
Latest development under the Amendment Act, 2018-
The provision of payment of GST under RCM for procurements from unregistered vendors has been amended by the CGST Amendment act which is effective from 01st February 2019.
Since the provision itself has been amended, the notifications of deferment had no relevance and were hence rescinded by the Government by way of notification no. 01/2019- CT(R) dated 29th January 2019. Therefore, the deferment of RCM on procurements from unregistered suppliers from 01st February 2019 till 30th September 2019 is redundant and rescinded consequently.
Implication of the amendment act, 2018-
01st February 2019 onwards - The CGST Amendment Act, 2018 has amended the section 9(4) of CGST Act. Post amendment which states that GST under RCM for the procurements from unregistered persons would be payable only by the notified class of registered recipients and for the notified goods or services.
Provision as per CGST Amendment act, 2018 [w.e.f. 01st February 2019]: Section 9(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, 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 such supply of goods or services or both.
Contrary to the erstwhile applicability of RCM to all the registered persons on all the goods and services procured from the unregistered vendors, now the GST under RCM for the procurements from unregistered vendors is applicable only in the cases of specified goods or services procured by the specified classes of registered recipients.
Since the goods or services procured from unregistered vendors or the class of registered recipients on which RCM would be applicable has not been specified or notified by the Government till date, RCM on procurements made from unregistered suppliers [URP] is not yet effective till date.
Therefore, the registered recipients are not required to pay GST under RCM for procurements from unregistered vendors till the goods or services and the specified classes of registered recipients are notified by the Government.
The Government has heard to the difficulties and concerns faced by the industry and public in general and has given a sigh of relief to the public by way of amendment to the above provision as mentioned. However, it has to be seen as to which are the classes of registered recipients and the goods and services on which RCM is applicable. Effectively, GST under RCM is not applicable on the procurements of taxable goods and services from unregistered vendors other than those specified u/s 9(3) of CGST Act as mentioned above.
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