GST is paid by the supplier of the goods or the service provider. But, in some cases, the receiver of such goods or services are made accountable to pay the taxes instead of the seller of goods or service provider. This mechanism of paying taxes by the recipient is called Reverse Charge Mechanism (RCM).
The objective of levying Reverse charge-
- To reduce the compliance burden from the person who is not registered due to the basic exemption limit.
- To increase the compliances in the cases of certain unorganized sectors, like Transporters.
It is very difficult for the unorganized sectors to follow the compliances under the law and tax collection from such unorganized sectors would be a headache for the government.
Reverse Charge Mechanism (RCM) under GST:
Payment of taxes under Reverse Charge Mechanism is continued by the Government under the GST regime. The taxes payable under Reverse Charge Mechanism by the recipients of goods or services should be made by cash and the recipient can avail Input Tax Credit (ITC) of the same in the same month if such goods or services are used for taxable supplies.
In some cases 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 instances, the taxes paid as RCM are added to the cost of the recipient.
GST is payable by the recipient of supply under the Reverse Charge Mechanism (RCM) in two cases:
- Notified taxable goods and services like goods transport agency (GTA) services where transporter issues consignment note, advocate services, sponsorship services etc. GST under Reverse Charge Mechanism (RCM) is required to be paid on the purchase of such goods and services irrespective of whether procured from registered or unregistered vendors. The recipients of the specified goods and services are mandatorily required to get registered under GST to pay GST under Reverse Charge. The payment of GST under Reverse Charge for these specified goods and services is applicable from 01st July 2017.
- Purchase from unregistered vendors- GST under RCM was required to be paid on the purchase of all other taxable goods and services from unregistered vendors. The goods and services were not specified and the registered recipients were required to pay GST under Reverse charge mechanism on all the taxable goods and services procured from unregistered vendors.
There has been confusion nowadays due to the notification of the CGST amendment act in respect of applicability of payment of GST under RCM for the purchase of goods from unregistered vendors.
Here is the clarification for the above-mentioned case.
Tax Payment of RCM for purchase from the unregistered dealer –
From 01st of July 2017 to 12th of October 2017: Payment of GST under Reverse Charge was exempted where the aggregate value of the goods and services purchased by a registered person from unregistered dealers were not exceeding Rs. 5,000 in a day. Where the value of the purchase from unregistered dealers exceeded Rs. 5,000 in a day, the registered recipient of goods was liable to pay GST under RCM on the entire value of the taxable goods and taxable services procured from unregistered dealers.
The liability to pay GST under RCM on the purchase from unregistered dealers was deferred from 13th October 2017 to 30th September 2019.
Latest development under the Amendment Act, 2018-
The provision of payment of GST under Reverse Charge for purchase from unregistered dealers has been revised by the CGST Amendment Act, 2018 which is effective from 01st February 2019. Later 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. 02/2019- CT(R) dated 29th January 2019. Therefore, the deferment of Reverse Charge on procurements from unregistered suppliers from 01st February 2019 till 30th September 2019 is redundant and rescinded consequently.
The implication of the amendment act, 2018-
01st February 2019 onwards – The CGST Amendment Act, 2018 has revised the section 9(4) of CGST Act. Post-amendment which states that GST under RCM for the purchase from unregistered dealers 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. (ICAI, 2018)
Different from past applicability of RCM to all the registered persons on all the goods and services purchased from the unregistered dealers, now the GST under RCM for the purchase from unregistered dealers is applicable only in the cases of specified goods or services procured by the specified classes of registered recipients.
As the goods or services acquired from unregistered suppliers or the class of registered recipients on which Reverse Charge would be applicable has not been specified or notified by the Government till date, RCM on procurements made from unregistered suppliers (URD) is not yet effective till date.
Thus, the registered recipients are not required to pay GST under Reverse Charge for purchase from unregistered dealers till the goods or services and the specified classes of registered recipients are notified by the Government.