In the pre-GST era, traders often purchased goods from unregistered persons to avoid paying taxes. However, under the GST regime, purchases made from unregistered persons are subject to reverse charge mechanism. In other words, the buyer is liable to pay the tax on behalf of the unregistered seller. In this article, we will discuss the various aspects of GST on purchases from unregistered persons under the reverse charge mechanism.
Under the normal scheme of taxation, the supplier of goods and services is liable to pay GST. However, under the reverse charge mechanism, the recipient of goods and services is liable to pay GST. In other words, the recipient becomes responsible for paying the tax instead of the supplier. The reverse charge mechanism was introduced to bring unregistered suppliers under the tax net.
The reverse charge mechanism is applicable in the following cases:1. Purchases made from unregistered persons2. Import of services3. Purchase of certain goods and services specified by the government
As per the GST law, if a registered person purchases goods or services from an unregistered person, then the registered person is liable to pay GST under the reverse charge mechanism. The rate of GST applicable under reverse charge mechanism is the same as that applicable under normal mechanism. In other words, the tax rate remains the same irrespective of whether the supplier is registered or unregistered.
Under the GST law, the threshold limit for registration under the normal mechanism is Rs.20 lakhs (Rs.10 lakhs for special category states). However, there is no threshold limit for registration under the reverse charge mechanism. If a registered person purchases goods or services from an unregistered person, then the registered person is liable to pay GST under the reverse charge mechanism, irrespective of the value of the transaction. Therefore, even small businesses and startups are required to register under the reverse charge mechanism.
Under the reverse charge mechanism, the buyer is liable to pay GST on behalf of the unregistered seller. However, the buyer is also eligible to claim input tax credit (ITC) for the GST paid under reverse charge mechanism. The ITC can be claimed by the buyer in the same month in which the tax was paid.
Under the GST law, the buyer is required to comply with the following provisions under reverse charge mechanism:1. Identify the transactions liable for reverse charge mechanism2. Pay GST on behalf of the unregistered seller3. Claim ITC for the tax paid under reverse charge mechanism4. File GSTR-2 (details of inward supplies) and GSTR-3 (monthly return) on or before the due dates
The reverse charge mechanism was introduced to bring unregistered suppliers under the tax net. Under the reverse charge mechanism, the buyer is liable to pay GST on behalf of the unregistered seller. Even small businesses and startups are required to register under the reverse charge mechanism. The buyer is eligible to claim input tax credit for the GST paid under reverse charge mechanism. Therefore, it is important for small and medium business owners and startup founders to understand the provisions of GST on purchases from unregistered persons under the reverse charge mechanism and comply with the same.
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