Reverse Charge under GST on Transaction between Registered & Unregistered Person

Reverse charge is a mechanism where the recipient of goods or services is required to pay GST instead of the supplier. In simple terms, it is a liability imposed on the recipient of goods or services instead of the supplier. Reverse charge is applicable when a registered person buys goods or services from an unregistered person. In this article, we will discuss the reverse charge under GST on transactions between registered and unregistered persons.

Under the GST regime, businesses are required to register under GST if their annual turnover exceeds Rs. 40 lakhs (Rs. 20 lakhs for North-Eastern States and hilly states). If a person is not registered under GST, he is considered an unregistered person. An unregistered person cannot charge GST on the goods or services he provides. Therefore, a registered person who buys goods or services from an unregistered person is required to pay GST on such goods or services under the reverse charge mechanism.

When is Reverse Charge Applicable?

Reverse charge is applicable in the following cases:

1. When a registered person buys goods or services from an unregistered person.

2. Buys goods or services from a composition dealer.

3. Specified goods or services from a registered person.

How does Reverse Charge Work?

When a registered person buys goods or services from an unregistered person, the registered person is required to pay GST on such goods or services under the reverse charge mechanism. The registered person can claim input tax credit of the GST paid under reverse charge, subject to the conditions of the GST law.

The registered person is required to pay GST under reverse charge at the applicable rate. The rate of GST under reverse charge is the same as the rate of GST that would have been applicable if the supplier of goods or services was a registered person. For example, if the applicable rate of GST on a particular item is 18%, then the registered person is required to pay GST at the rate of 18% under reverse charge.

The registered person is required to issue an invoice or a payment voucher as per the GST law. The registered person is also required to maintain proper records of all the transactions under reverse charge.

Exemptions from Reverse Charge

Reverse charge is not applicable in the following cases:

1. When a registered person buys goods or services from a registered person who is located in a non-taxable territory.

2. who is not required to pay GST.

3. A composition dealer.

4. A farmer and the amount does not exceed Rs. 5,000 per day.

5. When a registered person buys goods or services from a registered person who is a transporter for the transportation of goods by road.

Consequences of Non-Compliance

If a registered person fails to comply with the provisions of reverse charge, he will be liable to pay interest and penalty as per the GST law.

Conclusion

Reverse charge under GST is a mechanism where the liability to pay GST is shifted from the supplier of goods or services to the recipient of goods or services. Reverse charge is applicable when a registered person buys goods or services from an unregistered person. The registered person is required to pay GST under reverse charge at the applicable rate. Exemptions from reverse charge are provided in certain cases. Non-compliance with the provisions of reverse charge will attract interest and penalty as per the GST law.