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Published on:

September 20, 2024

Alankar Mishra

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Explore GST

Basics of GST

Purchase from an Unregistered Dealer under GST

By implementing the Goods and Services Tax (GST) in India, there has been a noticeable improvement in the country’s tax system since multiple indirect taxes have been streamlined into one. It must be noted that while the introduction of GST has brought tax compliance down to the lowest levels in history for all kinds of businesses, it has also brought some new challenges especially when it comes to unregistered dealers.

To make sure companies do not expose themselves to any legal or financial damage that may arise due to buying from unregistered dealers it is necessary to comprehend the consequences of buying for such dealers. This guide will provide basic instructions on how to conduct these dealings – and so much more – under the GST.

Understanding GST and Unregistered Dealers

Unregistered dealers under the GST system are defined as those persons or businesses who are not registered under the GST law. This may be because, for other reasons, their turnover is less than the minimum prescribed turnover for compulsory registration or their business includes services or goods that are exempt. Unregistered dealers unlike registered taxpayers are not obliged to charge or pay GST in turnover on their sales and this presents hindrances to businesses that buy from them.

Why Businesses Deal with Unregistered Dealers

Unregistered dealer is usually used in context when defined about normal trades with other businesses as those who do not have eight registrations and do not hold registrations in their business. Businesses may choose to buy from unregistered dealers on different grounds: For

‍Cost Advantages: Unregistered dealers sell at cheap rates as their operating costs are minimized making them cheap to classic business offers.

‍Niche Offerings: Certain products or services such as those that are offered by small market artisans or such, may only be presented by grey customers.

‍Long-lasting Relationships: Some organisations tend to have a long-lasting commitment with local suppliers or small-scale suppliers that have not registered under GST.

‍The Role of Reverse Charge Mechanism (RCM)

Under the reverse charge mechanism, GST is collectable by the buyer and not the seller when goods are supplied by an unregistered dealer. That is, the burden of paying the tax is placed on the buyer who has to self-assess and pay GST at the taxation authority and keep records for the legally taxable transaction.

There is always a penalty for misconduct with RCM obligations especially noncompliance, interest from tax that has not been paid and even issues after reviewing records.

Exceptions to RCM concerning Purchases from Unregistered Dealers

How business i6 Re Reverse Charge Mechanism on purchases from unregistered dealers? RCM is a disadvantage to companies and they must take note of these exceptions to avoid needless loss of tax and compliance costs. Some of these include:

Salary and Wages

Payment for salary and wages attracts no reverse charge mechanism payments concerning salary cannot fall under RCM. These do not constitute taxable supplies of goods and services under GST.

Electricity

RCM is only applicable to services supplied as regards the consumables. Facility cost is not charged on electricity usage therefore no RCM is chargeable on electricity consumption.

Interest

Both payable and receivable interest are not subject to GST. Hence RCM does not apply to interest-related payments.

Fuel for Vehicles (Diesel/Petrol)

RCM will not cover the cost incurred towards the purchase of diesel or petrol as this is now out of the scope of GST

Government Fees

Any fee regarded in nature related to government services, MCA fees or any other land registration costs, RCM or GST will not be charged to those services.

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Exempted Goods and RCM

Additionally, there can be exempted goods and services which are not covered by the Reverse Charge Mechanism. This means that if the supply consists of exempted items, no GST under RCM is required to be paid on the purchase. Examples of such situations are discussed below:

Auto Rickshaw Services

When a registered person receives an auto-rickshaw service for commuting, such service will not attract GST. Hence RCM cannot be applied for such transport service too.

Low-Value Accommodation

When a registered person uses a budget accommodation costing less than 1000 INR, he is not liable to pay GST. Accordingly, there shall be no reverse charge in this case either.

Compliance Challenges with Unregistered Dealers

Engaging unregistered dealers brings in various compliance issues:

‍Increasing Regulatory Compliance Burden: Commit with the transaction, in which these users visit the premise of the business and purchase the goods or services do not attract claims and deems the need to record and report these transactions in the GST returns because under RCM these are still reported (GSTR-1, GSTR-3B). Such events can flash the violation consequences in the form of penalization or some cases, auditing.

Impact on Input Tax Credit (ITC): Understanding the available input tax credit, it appears that a business can recoup the GST that was paid under the reverse charge mechanism RCM provided that there is proper payment and proper documentation to back it up. The process is subject to errors which may lead to disallowing the ITC thereby making it quite taxing for the businesses.

Scenarios and Practical Examples

Construction Company: Suppose a construction company purchases materials like sand or gravel from local suppliers who are unregistered due to their low turnover. In this case, the company must pay GST under RCM, even though the suppliers are not registered.

‍Restaurant Business: If a restaurant buys handmade plates from unregistered artisans, it is required to pay 12% GST on these purchases under RCM and ensure proper documentation.

‍Benefits and Risks of Purchasing from Unregistered Dealers

Benefits:

Cost Savings: Cost-effective purchasing is more common in unregistered dealers which helps in the reduction of direct costs for the businesses.

‍Unique Products: Unregistered vendors may be able to supply innovative products which they can hardly get with registered suppliers.

‍Flexibility: Dealing with local unregistered suppliers helps to give more room for business practice in terms of sourcing and dealing.

Risks:

Compliance Risks: Failure to adequately implement the RCM may lead to penalties, interest costs and tax authorities paying more attention to business activities.

ITC Challenges: Documentation errors or reporting errors under RCM may also result in ITC being disallowed thus increasing tax liability.

‍Administrative Burden: All transactions undertaken with unregistered dealers have to be recorded and adequate notice has to be taken through RCM and this increases administrative burden.

Government Regulations and Updates

To handle tax matters related to unregistered dealers, the Indian government has implemented certain policies of GST. One of the major rules is the Reverse Charge Mechanism, which determines that all taxable supplies regardless of the supplier’s registration status are accounted for.

To enhance tax compliance, changes were made to the recent changes in the GST act which have been intended to improve the ease of doing business. There are many more unregistered dealers now which makes it necessary the understand RCM provisions and its compliance even to businesses that were not previously engaged with the concept.

Conclusion

Opposition to the compliance of the provisions of GST concerning unregistered dealers and supplies of goods and services to them is best done with exhaustive preparation and regulation. Although the allure of purchasing from unregistered dealers comes with a silver lining, such advantages should be balanced against the drawbacks of going against the law. It is quite clear that businesses can stay out of trouble in terms of RCM compliance by documenting precisely, reporting adequately and understanding what is required of them under the tax system.

FAQs

1. What happens if I purchase from an unregistered dealer under GST?

In such circumstances, when a buyer buys products from such dealers, such buyers are required to assess GST which falls under the Reverse Charge Mechanism (RCM). In this case, the buyer must evaluate GST and make a payment of this tax directly to the government.

2. How can I claim ITC for the GST amount paid under RCM?

Yes, input tax credit can be claimed for the GST paid under RCM as long as the documentation of the transactions is done properly, and taxes have been paid and reflected on the GST returns.

3. How can I ensure compliance when dealing with unregistered dealers?

Follow the guidelines above while participating in transactions with unregistered dealers for RCM compliance. These include recording all activities with such dealers, paying requisite GST under RCM within the right period, and capturing these in relevant returns.

4. What would be the consequences of RCM non-compliance?

Failures of RCM can lead to penalties, interest on unpaid taxes, and additional scrutiny by tax authorities. Furthermore, mistakes in RCM formulation can result in unclaimed ITC, which can increase your tax exposure.