CA Umesh Sharma

CA Umesh SharmaArjuna (Fictional Character): Krishna, from various peculiar provisions of GST the provision of RCM comes. According to this RCM provision what will happen if purchases are made from unregistered person?

Krishna (Fictional Character): Arjuna, The provision of reverse charge is already in service tax and the same provision is brought in GST. In service tax there are only specified persons who were required to pay tax on reverse charge basis but in GST all the persons are required to pay tax on reverse charge on purchase of goods and services.

Arjuna: Krishna, What is meant by R.C.M?

Krishna: Arjuna,  R.C.M means reverse charge mechanism which means that tax on purchase of goods or services has to be paid by the recipient. In simpler terms R.C.M means paying tax of the other person. Which transaction will be covered in RCM has been specified.

Arjuna: Krishna, What if a taxpayer purchases goods or services from an unregistered person?

Krishna: Arjuna, if a registered person purchases goods or services from an unregistered person then the registered person has to pay tax on such purchases. For Ex. If a registered person purchases Tea from an unregistered person and if such expenses are accounted in the books of account then the registered person has to pay tax on such payment. Everyday a businessman incurs various transactions with unregistered person, now because of R.C.M the registered dealers has to pay tax on such purchase. Composition Dealers are also required to pay tax on reverse charge on purchases from an unregistered person. Further the dealer have to give the details of purchases from unregistered person in the monthly return.

Arjuna: Krishna, what will be the time of supply in case purchase of goods in Reverse charge mechanism?

Krishna: Arjuna, The time of supply for purchase of goods in reverse charge mechanism will be the earlier of the following-

  1. The date of receipt of goods or
  2. Date on which payment is made or
  3. The date immediately following 30 days from the date of issue of invoice

For Ex. If a taxpayer purchases stationary from an unregistered person on 25th July 2017 and he provides the bill for the same on 2nd August 2017 and if the consideration is paid on 28th August 2017, then according to the provisions of RCM the time of supply will be 25th July 2017.

Arjuna: Krishna, what will be the time of supply in case of services in Reverse charge mechanism?

Krishna: Arjuna, The time of supply for services in reverse charge mechanism will be the earlier of the following-

  1. The date on which payment is made
  2. The date immediately following 60 days from the date of issue of invoice

Arjuna: Krishna, whether credit of GST paid in RCM will be allowed?

Krishna: Arjuna, Every taxpayer can avail credit of tax paid on Reverse charge mechanism but he has to pay tax first then he can avail credit on such purchase in the next month. As per the provisions of GST credit cannot be availed on food and beverages, building, passenger vehicle even if tax is paid on R.C.M basis that means the burden of such tax shall be borne by the taxpayer. For Ex- If a businessman has purchased food beverages of Rs. 20,000/- from unregistered person and paid GST in RCM of Rs. 2,400 then credit shall not be available on such goods and Rs. 2400/- will be added to the cost of the businessman.

Arjuna: Krishna, what one should learn from the provisions of reverse charge mechanism of GST?

Krishna: Arjuna, because of this provision in GST the number of registered persons will increase. Purchase from an unregistered person can prove costly for any registered person. Every person has to look at his expense side of profit and loss account every month and has check if there are purchases from any unregistered person because that will attract reverse charge. Hence business has to be done very carefully, in case of any mistake interest and penalty will have to be paid on such purchase. The provisions of RCM will affect drastically on small traders, service providers like Plumber, repairs maintenance person etc.

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18 responses to “Beware!! Danger of purchasing from unregistered person in GST”

  1. ASHWANI MAHAJAN says:

    I am very much impressed with your GST presentation on youtube.
    I have following query to be answered ::

    If we purchase goods from unregistered dealer against firm export order and export it (As we make purchases from farmer who is unregistered dealer :

    1. Can we make URD purchases against export order without payment of reverse mechanism GST?

    2. How it will be reflected in the documents.
    AKM

  2. Ajay Anand says:

    we are a small manufacturing unit registered under GST. we purchase tea/snacks daily for our employees from a unregistered street side stall.
    he bills us monthly for the supplies. the amount is approximately Rs 10,000 to 12000
    per month. do we have to pay GST under RCM and can we take credit for the same.

  3. CA.Govind Agrawal says:

    YES . Receiver of goods/ service will be required to pay GST under RCM . The rate of GST applicable be applied.

  4. Amit Joshi says:

    my question is stationery purchase is booked under expense and not purchase whether we have to paid tax under RCM ?

    • CA Chandan Garg says:

      If that shop owner issues a GST tax invoice to you, would you take credit of GST charged on it?

  5. Hardika says:

    Nice and easy to understand articles

  6. CA.K.Sathia narayanan says:

    Mr. CA. Umesh sharma.
    The articles posted by you is very simple and easy to grab the provisions and I like the fictional characters very much.

  7. Minkal says:

    What if, Mr A (registered dealer) purchases goods from Mr B (registered under composition scheme),
    As Mr B is liable to pay tax @0.5% on gross sale, Mr B can’t charge tax in invoice, so will RCM will be applicable to Mr.A……..???

  8. Rajesh Chavhan says:

    Very Good Article

  9. Sarbjit Randhawa says:

    I don’t think this interpretation is correct. As GST has been paid at source, and input tax credit claimed at each level, it is the unregulated seller who stands to loose because he cannot claim input tax credit. As far as the end buyer is concerned, the price already includes GST.

  10. c a k c agarwal says:

    very good article

  11. RAVIPRAKASH says:

    One more thing to add is that for each unregistered dealer purchases the recipient has to raise tax invoice. This will be voluminous job. Another point is that the for all expenses debited to profit and loss account GST attracts. For ex. Interest on loan from banks, as per law it is taxable. but notification will be issued. If loan from other than bank/financial instituion, then interest debited will be taxable either the receiver of interest has to issue tax invoice if he is registered or the payer has to pay under RCM. This will be a hectic and clerical job will be more.

  12. CA Chandravijay Shah says:

    If a CA renders his Services to Clients located in 5 States, is he required to get registered in 1 State only where his HO is located or in 4 other States also where he has no Branch or any other Office?

  13. Tarunkumar D Trivedi (Adv) says:

    If a person Purchases goods from Regd Person worth ₹.100/- plus GST ₹.18/- total ₹.118/- and if purchases goods worth ₹.100/- and pays ₹.18/- on RCM. In both cases he will get credit of ₹.18/-. How it will be dangerous to purchase goods from unregd. Person?

  14. Tarunkumar D Trivedi (Adv) says:

    What will difference if Regd Person charges GST @18% on ₹.100/- and raises invoice for ₹.118/-. If a registered person purchase goods worth ₹.100/- and pays GST ₹,18/-? In both the cases ITC will be available. How purchase from Unredg Person will be dengerous?

    • Prasanna says:

      It impacts cash flow and working style and maintenance of data will increase. In case ready to eat like food/snacks items need to follow Food license rules etc.. else the retailer will be in trouble.
      If the items are purchased from registered retailers, the chain can be tracked till manufacturer for filing the suite on manufacturer or the first retailer.

  15. KS says:

    As the limit under GST is supposed to be 19 lac or so what would be the taxability in the case or goods/service received from person below that limit? Does goods/service receiver has to pay under RCM?

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