Under the current Service Tax Law tax on Reverse Charge basis is leviable under various services but the concept of Reverse Charge on goods is totally a new concept under the GST regime. Sections 9(3) & 9(4) of the GST Act, 2017 deals with the provisions of Reverse Charge.
Section 9(3) provides that government, on recommendation of Council, by notification specify categories of supply of goods and services or both, tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and provisions of this Act shall apply to such recipient as if he is person liable to pay tax in relation to such supply.
Similar provision has been incorporated in Section 5(3) of the IGST Act, 2017 to levy tax goods and services tax under the reverse charge basis on their interstate supply.
GST Counsel in its meeting held on 19-05-2017 has approved certain services tax on which tax shall be paid on reverse charge basis which are mostly same as are prevailing in the current service tax regime. However the government is still to come out with list of goods on which tax shall be paid on reverse charge basis.
In addition to Section 9(3) another sub section (4) is added in Section 9 of the GST Act, 2017 which will justify the heading of this article ‘A Nightmare for unregistered dealers’.
Section 9(4) of the Act reads as under:
The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
Now a registered person purchasing goods/ services from unregistered person has to pay tax on those goods/ services on his behalf on reverse charge basis and all the provisions of the Act will apply to him as he is the person supplying such goods or Services. Now this will lead to an extra blockage of capital and some extra compliance under the Act in this regards. Though he will be allowed to claim input credit of such tax paid on reverse charge basis.
So a registered person who procures any goods/ services from an unregistered dealer will have to pay tax on their receipt and then will have to claim ITC on the same subject to the conditions of the Act.
But an extra burden of payment of tax at the time of purchase, some extra compliance will force the registered person to make purchase from a person registered under the Act and which in turn will compel a person who is not registered or not liable to register to take registration under the Act in order to sell his goods/ services to a registered dealer.
Interestingly Section 5(4) of the IGST Act which is Pari Materia with Section 9(4) of the GST Act, also provides that Integrated Tax i.e. IGST on supply of goods or services or both provided by a non-registered person to a registered person in course of interstate trade, tax on such goods/ services shall be paid by the recipient on reverse charge basis.
However Section 24 of the GST Act, 2017 provides for mandatory registration in case of interstate supplies. So if an unregistered dealer cannot make interstate supplies then how can a registered person purchase goods/ services in the course of interstate trade or commerce from unregistered dealer? So the question of paying the tax on reverse charge under IGST does not arise. The purpose of adding Section 5(4) in the IGST Act is still unknown.
In normal course of business we incur many expenses in relation to furtherance of business for example printing, stationery, packing, refreshment, traveling, Services like accounting, legal services which we debit in our profit and loss account to arrive at net profit.
So now a registered person will have to pay GST under reverse charge on all these services if procured from an unregistered dealer. Suppose if I debit my P&L account for say Rs. 20000/- for a payment to an accountant for preparation of my books of accounts. Now, I will have to pay GST on Rs. 20000/- under reverse charge if my accountant is not registered under GST.
So it will be very difficult for small business houses who procure these goods/ services from unregistered dealers to pay tax every time they procure such supplies and will become even more difficult for unregistered dealers to find buyers who will purchase goods from them.