Goods and Services Tax (GST) has been implemented in India for quite some time now, and it has brought about a lot of changes in the way businesses operate. One such change is the introduction of reverse charge mechanism (RCM) under GST. In this article, we will discuss the GST on reverse charge on transactions with unregistered persons.
Reverse Charge Mechanism (RCM) is a provision under GST where the recipient of goods or services is liable to pay the tax instead of the supplier. It is applicable in certain specified cases where the supplier is not required to pay GST. Under RCM, the recipient has to pay the tax to the government and then claim the credit of the same.
As per the GST law, if a registered person purchases goods or services from an unregistered person, RCM is applicable. The registered person is required to pay the tax on the value of such supplies under RCM. This provision has been introduced to bring the unregistered persons under the ambit of GST and to curb the practice of tax evasion.
The rate of GST on transactions with unregistered persons is the same as the applicable rate of tax on the goods or services. For example, if the applicable rate of tax on a particular good is 18%, then the recipient has to pay 18% GST under RCM.
There are certain exemptions from RCM on transactions with unregistered persons. These are as follows:
1. Exempted goods or services as notified by the government.
2. Supplies made by a composition dealer to a registered person.
3. Supplies made to a registered person who is liable to pay tax under reverse charge on account of receiving goods or services from an unregistered person.
The introduction of RCM on transactions with unregistered persons has impacted the businesses in the following ways:
1. Increased Compliance: The introduction of RCM has increased the compliance burden on businesses as they have to now identify the unregistered persons they are dealing with and pay the tax under RCM.
2. Working Capital: The payment of tax under RCM will increase the working capital requirement of the businesses as they have to first pay the tax and then claim the credit of the same.
3. Impact on Small Businesses: Small businesses who are dealing with unregistered persons may find it difficult to comply with the RCM provisions and may face cash flow issues.
The introduction of RCM on transactions with unregistered persons has been done to bring the unregistered persons under the ambit of GST and to curb the practice of tax evasion. It has increased the compliance burden on businesses and impacted the working capital requirements. However, it is a necessary step for the smooth implementation of GST and will help in creating a level playing field for all businesses.
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