Reverse Charge under GST is a very important topic. There are certain goods & services which attract reverse charge. However, this is not all.
As per Sec 9(4) of CGST Act, if a registered person purchases goods/services from an unregistered dealer (URD) then the registered taxpayer is liable to pay GST on reverse charge basis. All the provisions of the Act will apply to such recipient as if he were the person liable for paying the tax in relation to the supply of goods or services.
This provision will apply if the below conditions are met:
- There should be a supply of goods or services
- The supply should be in respect of taxable goods/services
- Supply must be by an unregistered person.
- Supply must be to a registered person
- Supply must be an intra-state supply as compulsory registration is required for inter-state sales
Purchasing from Unregistered Suppliers
Purchases upto Rs. 5,000 per day from unregistered suppliers will not attract GST. In other words, there is a reverse charge on buying from unregistered dealers if you are dealing with unregistered suppliers and making payments above Rs. 5,000.
ABC Ltd. is a registered company which has spent Rs. 7,500 on purchases from a URD. Should it pay GST via RCM (Reverse Charge Mechanism) on Rs. 1,500?
Once the limit of Rs. 5,000 in a day is crossed, the GST is payable on the entire amount of Rs. 7,500 on RCM.
What does it mean?
Registered taxpayers will have to look into their expenses daily and analyze their P/L accounts to check whether any transactions/expenses fall under RCM.
If the expenses are above Rs. 5,000 then they will be required to pay GST on these transactions under RCM.
What is the process of paying tax via RCM on purchases from URDs?
Our ClearTax GST software can help you in this.
- You will be required to fill up all the correct HSN codes for the goods and services that fall under RCM. This will not be a problem as you can use our HSN calculator for free to find out the HSN codes for all the items.
- Upload invoice details on our software. While uploading invoices, you can select whether RCM is applicable or not.
- Our software will read your invoices. If you cross the threshold of Rs. 5,000, you will get an alert message saying that your aggregate purchases from URDs have exceeded Rs. 5,000.
The message will read:“Please verify: There are one or more unregistered purchase invoices under reverse charge without any tax (no or 0 tax) in your data. As per GST rules you should add appropriate tax amount against such invoices before filing.”
- Our software will identify invoices which do not have any GSTIN and can be subject to RCM.
- You will be asked to select the appropriate invoice.
- You will be asked to enter the invoice taxable value and GST payable under RCM.
- Our software will track these invoices and remember their treatment. If an earlier invoice from the same GSTIN was marked as under Reverse Charge, the system will alert the user that a similar invoice from the same GSTIN had already marked been under Reverse Charge and hence the new invoice may also be under Reverse Charge.
Note: One thing you can do is ask your vendors to bill accordingly. If you find you are exceeding the Rs. 5,000 limit, you can ask your vendor to split the bill for consecutive days so that you do not end up paying tax for small amounts.
For example, you have a bill of Rs. 500 from a printer. You find that your total purchases from URDs is Rs. 5,250,i.e., crossing the threshold of Rs. 5000.
- Make payment the next day and enter bill for the next day
- Request the printer to issue 2 bills for 2 days for Rs. 250 each
What are the Profit & Loss items which might attract GST under RCM?
You must remember to keep a close track of the expenses portion of your P/L account. Following is an example of some expenses which can attract GST under RCM-
- Commission payments
- Printing and stationery
- Repairs and Maintenance
- Office Maintenance
- Vehicle maintenance
- Computer maintenance
- Legal Fees
- Consultancy Fees
- Professional Fees
- Audit Fees
- Freight and transportation expenses (GTA)
- Gift expenses
- Business promotion expenses
For these items, RCM will not apply for the simple reason that GST is not applicable on these:
- Salary and wages
- Car fuel (Diesel/petrol)
- Government Fees (such as MCA fees, land registration fees etc.)
Exempted Goods and RCM
If the supply involves exempted goods/services RCM will not be applicable.
- A registered person hires auto rickshaw for commuting from one place to another.
This section will not apply as the transportation of passenger by auto rickshaw is exempted from GST.
2. A registered person stays in a budget hotel whose tariff is Rs. 800 per day. Is GST applicable on RCM?
Since the room tariff is less than ₹1,000 it is exempted from GST. The question of RCM does not arise.
There are certain complexities & confusion in paying GST under RCM.
For items excluding GST, you will just calculate the GST amount and pay under RCM. Many URDs follow cost+profit method.
For example, a printer sends a bill of Rs. 6,000 for printing 600 brochures. The printer sends a simple bill of Rs. 6,000 only without any GST. Then the registered person will calculate GST @12% on Rs. 6,000 and pay Rs.720 to the government.
The complications arise when you are paying items at MRP (which include GST). Say, you (registered business) are buying biscuits of Rs. 500 (MRP which includes GST) from a small roadside shop (URD). Your total purchases from URD in the day exceeds the Rs. 5000 limit and RCM applies.
How to pay tax via RCM in such cases?
You can back calculate from Rs. 500 (say 400 taxable value) and pay Rs. 400 to URD and GST 100 to govt and claim ITC. But the URD will not accept less payment. Also, as per GST act, you cannot collect GST under RCM from the service provider/supplier.
Pay GST on Rs. 500
If you pay GST on Rs. 500, it will be double taxation.
As per most CAs, one should simply calculate GST on Rs. 500, pay and claim the same as ITC.
This will increase working capital, compliances, classification disputes etc. for registered businesses. Registered businesses may prefer to deal with other registered dealers only to ease business processes and reduce complications. This could hamper the business of unregistered dealers. In order to maintain market share they might be required to voluntarily register or at least assist their registered customers in GST compliance (such as identify HSN Codes, applicable GST rates etc.)