Reverse charge means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of goods or services or both under Section 9 (3) or Section 9 (4) of CGST Act, ( Central Goods and Service Tax Act) or Section 5 (3) or Section 5 (4) of the IGST Act ( Integrated Goods and Services Tax Act).
Section 9(4) of the CGST Act provides for 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. The Tax is paid by the registered person as the recipient of goods and services. All the provisions of the Act shall apply to such recipient as if he is the person liable for paying the tax.
If we examine the above provision of GST Liability to pay GST under reverse charge on purchases or services procured from un registered dealers or service providers, the Liability has been shifted from the supplier of goods or provider of services to the receiver of goods or receiver of services if he is a registered person.
On further understanding of the provisions, it will be clear that it is the liability of the person who is receiving goods and services and utilising them for the business or furtherance of business. All the business organisations whether small or big will have urgencies and necessity to use the services of small time vendors, service providers, and services of skilled man power who will be un organised sector and will not have registration under GST.
Every registered person availing services from anun registered dealer or purchasing goods from un registered dealer has to pay the GST under the respective HSN Code of the Service / Goods by raising an Invoice. It means all the registered persons, liable for GST for un registered services/ goods are to raise Invoice on self and file returns to take Input Tax Credit.
This will be additional activity for the registered dealers who are liable to pay GST under reverse charge mechanism and are supposed to know the rate of GST and HSN code for each and every category of service or goods procured.
Usual practice of the industry is to ascertain the service category and HSN code for the Goods produced or Services rendered by that industry for billing. But the effect of reverse charge under GST will make all the Tax Payers to know the rate of GST and HSN codes for all the purchases and services ( un registered). So an expert advice will be mandatory for all the GST payers. A small size business house/ SME/ distributor who has employed an accountant, need to take the services of an expert.
Why not a simple mechanism of reverse charge payment and filing of returns where the registered dealers pay the GST for all the un registered goods and services with one Invoice and the category registered by the registered person who is liable to pay the GST under reverse charge mechanism.
All most all of the emergency purchases and small repair and plumbing works and services are done by un registered persons. Hence the liability to pay GST will fall on the registered person who has availed these services or procured goods. It means SMEs/ business organisations are forced to incur additional tax liability, compliance, ( cash flow) on these procurements from an un registered person.
By this activity it is tendency of the business to reduce purchases from unregistered persons or to avoid services from un registered persons. We could see the news and articles from industry, preparations for GST, to comply with GST and to avoid / reduce purchases from unregistered persons.
If the industry/ business houses/ SMEs stop the services of un registered person, there will not be any purchases from small time vendors, or utilization of services from skilled man power who are self employed and not registered.
GST paid by the recipient under reverse charge on some of the purchases or services from un registered persons, may be available Input Tax Credit, but not on all the goods and services paid under revere charge, as there are restrictions and conditions for Input Tax Credit.
What is the motto of the Government, is it bringing all the activities of small timers to bring under tax net? Or ease of business for the industry or, /making it convenience for the Government.
Implementation of GST is evident and very short time for the industry to look for alternatives or change a vendor. It is the testing time for all till a clear path is ahead.
M Sudhakar, Advocate