Can Government collect tax from Un-registered Person under GST?

DS Mahajani ^*

Can Government collect tax from Un-registered Person under GST? ..Answer, No (but indirectly, Yes – thru Reverse Charge Mechanism!!)

After marathon discussions within and outside GST Council, CGST Bill, IGST Bill, UTGST Bill and GST Compensation Bill (“GST Bills”) could see light of the day when it was passed by Lok Sabha on 29^th March 2017.

Yes, it is an important event in the history of post-Independence as most of the existing Indirect tax laws of the Country shall be replaced by a new tax called – Goods and Service Tax.

Before passing of Constitution (101^st Amendment) Act, 2016, (through which GST Law is to be introduced in India) by the Parliament, the Government released Model GST Law in public domain in June 2016. Thereafter in November 2016, GST Council put in public Revised Model GST Law.

Both, Model GST Law and Revised Model GST Law, gave hindsight to India Inc., how the GST Law is going to be pan out once it is implemented.

Now, we have GST Bills passed by Lok Sabha, which are also in public domain.

The purpose of both Model GST Law was to give understanding on GST Law and therefore ideally when the GST Laws is passed there should not be any difference between what was put in public and what is passed by the Parliament.

But to prove the famous idiom the devil is in the detail correct, the Government has given shocker in the Central Goods and Services Tax Bill, 2017 (“the CGST Bill”) passed by the Lok Sabha.

As per Clause 9 (4) of the CGST Bill, 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.

As per above provision, when a registered person receives any goods or services or both from a supplier, who is not registered under GST Act (i.e. unregistered person), provision of reverse charge shall apply.

In a typical case, a Company gets small time services like Air Conditioner Repairing Service from a person, who is not registered under GST Act or purchases office stationary from a nearby shop, not registered under GST, would now require to pay tax under reverse charge basis.

The provision though look simple it going to painful to comply considering the number of such transactions in the practical business working.

As you know, State Goods and Services Tax Bill (SGST Bill) would be on same lines of CGST Bill, so reverse charge provision would also be there under SGST Bill.

The story does not end here.

Now, please read Clause 31 (3) (f) and (g) of the CGST Bill.

Clause 31 (3) Notwithstanding anything contained….

(a) …

(b) …

(c) …

(d) …

(e) …

(f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both.

(g) a registered person who is liable to pay tax under sub-section (3) or subsection (4) of section 9 shall issue a payment voucher at the time of making payment to the supplier.

This means a registered person on receipt any goods or services or both from any un-registered person shall issue (Self) Invoice for such goods or services or both received under reverse charge and shall also issue a payment voucher at the time of making payment to the (unregistered) supplier.

Since it is Invoice, it would follow all routes of CGST Bill – i.e. upload Invoice on GST Network and show it under Return of Outward Supply (GSTR-1) and Consolidated Return (GSTR-3) every month.

To prepare (Self) Invoice for reverse charge and list of actions thereafter is going be a painful exercise for a registered person under GST Act.

Now here the question is – can Government collect tax indirectly for the supply of goods or services or both by unregistered person to a registered person. If so, then where is the question of unregistered person under GST Act?

There could be one reason for reverse charge provision and that is the Government wants to bring maximum persons under GST net. But if aggregate turnover of an unregistered person in a financial year genuinely does not exceeds Rs.20 Lacs under GST Act, why he would get registered under GST. Considering this it is amply clear that reverse charge provision is against the spirit of threshold limit under GST Act.

Further due to above provisions, the registered person would avoid purchasing goods or services or both from unregistered person, which will be absolutely unfair to the later from business parity point of view.

Though the credit of reverse charge basis is available but this provision would unnecessary block working capital of the registered person. Please note the Government is not going to gain anything from this provision but it will add mammoth compliance burden on the registered person.

I always mention the famous quote of Benjamin Franklin, one of the Founding Fathers of the United States, that there are only two things certain in life: death and taxes. (But the tax under the reference was not expected at all, as it was not mentioned in both the Draft Model GST Law)

^* The views expressed are personal.

[Author: DS Mahajani, M.Com, ACS, ACMA. He can be reached at [email protected]]