Background: Reverse charge mechanism is not a new concept for indirect tax assesses. Most Indian State VAT laws provides for levy of VAT on procurement of taxable goods from unregistered persons. Even in service tax, there are specified categories of services such as manpower supply services, rent-a-cab services, road transport service etc. which are liable for tax under reverse charge basis. Services from outside the Country are also liable on RCM. Under central excise law, where molasses are produced in a Khandsari sugar factory, the person who procures such molasses for use in manufacture of any commodity should pay the excise duty.
In this article, we try to analyse the requirement, issues with respect to reverse charge compliance in new GST law.
- Meaning of Reverse charge Mechanism
[Reverse charge mechanism (RCM)] refers to payment of taxes by recipient of goods or services rather than supplier of goods or services. According to Section 9(4) of CGST Act 2017, GST in respect of taxable supplies by unregistered to a registered person should be paid by such registered recipient. Section 9(3) provides for GST levy under reverse charge on specified goods or services. Such specified services or goods could be even from registered persons. Electronic commerce operator would be made liable for GST under RCM on specified categories of services (not on goods) provided within the state. Such levy is applicable only when specified services are supplied through electronic commerce operator.
The list of goods or services which are always liable for GST under RCM are already notified. Normally the areas where there is not much organised activity or where the suppliers would be uneducated and may not comply or will not comply are areas where RCM is imposed. It is also imposed on suppliers who cannot be reached like those who are located outside India on whom India would not have any jurisdiction. The services like goods transportation agency services still continue to be under RCM.
The dangerous part of RCM is levy of GST on procurement of any taxable goods or services from unregistered persons. This could be unfair to the small suppliers and create lot of practical issues and few of them are discussed in subsequent paragraphs.
- Levy due to registration
A person engaged in only export of goods or services would have obtained registration for limited purpose like claim of refund though there is no output GST payable by him. However, such registered person would also be liable for compliance under RCM on procurement of goods or services from unregistered persons. A person who is required to pay tax under reverse charge mechanism has to take compulsory registration under GST law.
- Purchases from Unregistered Persons
The unregistered purchases are subject to RCM where in the purchaser being a registered person is liable to Pay GST. Government has given a relaxation vide notification No.08/2017-Central Tax dated 28.06.2017 where in it is clarified that GST is required to be paid by the recipient only where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day.
Following aspects shall be kept in mind as far as purchases from Unregistered Persons (URPs) are concerned:
1. Procurement from all the unregistered vendors shall be taken into account while arriving the aggregate value of such inward supplies to see whether it has crossed Rs.5000/- in any given day.
2. The liability arises both in case of goods as well as services. Hence, aggregate value shall include both.
3. The GST is applicable on procurement from URPs irrespective of mode of payment like cash, Cheque, NEFT etc.
4. Petty cash expenses such as stationery, onetime repairs etc i.e. expenses charges to P&L shall be observed to identify the liabilities for compliance.
5. Applicable GST i.e. CGST and SGST shall be discharged for all the liable cases. IGST is unlikely as it is mandatory for the persons making interstate taxable supply to get registered under GST.
Cases where RCM is not applicable when goods/services procured from Unregistered persons:
- a) Where the aggregate value of procurements from all the unregistered persons put together does not cross Rs.5000/- in a day,
- b) Where the goods or services procured are exempted from payment of GST including non taxable items.
- c) Where the supply is not made in the course or furtherance of business. Ex: in case of purchase of jewellery from the individuals, the jeweller (Buyer) need not discharge GST as individual is not supplying the jewellery in his curse of business. (Confirmed by press release dated 13th July 2017). Most of the exchange offers in the retail sales could be excluded from RCM liability to the extent of old items received by the retail shops.
- d) When buyer is not liable and not taken registration under GST.
- e) Second hand goods received by a registered person who is dealing in buying and selling of second hand goods and who pays GST on the value of outward supply of such second hand goods – Exempted vide notification No.10/2017-Central Tax (Rate).
Major challenge for compliance could be identification of all taxable supplies from unregistered suppliers and applying the rate of taxes. There could be procurements such as biscuits, coffee or tea for employees, gift items, stationary items etc., all of which could be liable for GST. There could be miscellaneous services such as electrical maintenance, plumbing, carpentry etc. The assesse needs to identify all such procurements and ascertain rate of taxes for payment which could be a tedious exercise. There could be lot of expenses which are incurred by the employees travelling at other places. Even these expenses need to be screened every month to discharge liability under reverse charge.
- Time of Supply under reverse charge
The time of supply of goods and services shall be determined as under:
Consider Year in given example as 2018
Consider Year in given example as 2018
- Input Tax Credit:
Input tax credit of the GST paid on the goods and services under reverse charge mechanism shall be available subject to their use in the furtherance of business and if it is not covered under restricted goods and services as defined under Section 17 (5) of the CGST Act, 2017 and ITC Rules issued there under.
The condition of reversal of ITC when payment is not made to the supplier within 180 days would not be applicable in cases covered under RCM.
Unlike earlier Cenvat credit provisions, GST law does not specifically provide to avail the ITC in the subsequent month after making payment. In other words, it is assumed from the given return formats that as far as liability under RCM is paid in a particular month, the eligible ITC could be available in the same month.
- Documentation requirement
Other than the generally applicable provisions of GST like accounting, record maintenance, payment of tax, filing returns, etc, few additional procedures have been prescribed for the RCM compliance which is over and above the other applicable procedures.
a) Tax Invoice: a registered person who is liable to pay tax under reverse charge mechanism shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services.(read details related to Invoice)
Issue of individual tax invoice is not necessary for the procurements made from the URPs.
The recipient of supply in such cases may issue a consolidated invoice at the end of a month for all the supplies made for unregistered persons having aggregate value exceeds rupees five thousand in a day from any or all the unregistered suppliers.
Details of Such invoices shall be disclosed while filing GSTR-2 for the respective month.
b) Payment Voucher: a registered person who is liable to pay tax under RCM shall issue a payment voucher at the time of making payment to the supplier.(read More about Payment Voucher)
As per strict interpretation of provisions it appears that the payment vouchers have to be issued separately for each payment made to each unregistered supplier and no option is provided to issue a consolidated voucher like in case of tax invoice.
c) Records: Every registered person shall keep and maintain an account, containing the details of tax payable including tax payable in accordance with RCM provisions, tax collected and paid, input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.
The contents of the above documents like tax invoice, payment voucher etc are provided in CGST Rules issued by the government , contents includes details like description of goods/services, HSN, nature of tax, taxable value, rate of taxes, place of supply etc.(read all types of Format Under GST)
The assessee is free to make own format for each of such document as far as the contents provided in this regard are covered in such formats.
- RCM affects small businesses
Due to increased compliance, the registered persons would start avoiding procurements from small time vendors. Though this could force registration of non-compliant vendors, the genuine small vendors would suffer. Registration, complying with complicated return filing requirements could force small vendors to opt out of business. This could create employment problem as well.
Procurement of goods or services from unregistered persons would increase the compliance cost in addition to extra man hours. One more disadvantage is non-eligibility of ITC to unregistered vendors which results in increased procurement cost. Before GST is implemented, there is a need to identify all unregistered vendors and they should be suggested to register, if beneficial and practical. Otherwise it is expected that businesses who are keen to safeguard their margins would avoid transactions with such unregistered suppliers. Professionals could keep an eye on such transactions during GST implementation support and suggest assesses to reduce or avoid it. However, this would affect the small businesses very badly unless government provides some relaxation by fixing threshold limit for RCM levy.
- By CA Mahadev R