Registration – Reverse Charge Mechanism – GST Taxes

Revere Charge Mechanism

Section 2 (98) of The Central Goods And Services Tax Act 2017 defines the term reverse charge as “means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub section (3) of section 9, or under sub section (3) or sub section (4) of section 5 of the Integrated Goods And Services Tax Act”.

Reverse charge means the liability to pay tax by a person receiving goods or services or both. In the normal circumstances the seller (supplier) would be paying sales tax to the Government on the goods sold or services supplied. But under the reverse charge mechanism recipient (purchaser) would be paying taxes provided such goods or supplies have been made by the un registered dealers / persons. Basically payment of goods and services tax under reverse charge mechanism would come into the picture only when the purchases are made from un- registered persons or dealers under the said Act. The objective of collecting tax under reverse charge mechanism is to ensure that the tax is collected for every sale and or transaction. Tax is paid either by the seller (supplier) or by the purchaser (receiver) and not by both. This way Government is ensuring that it is receiving the appropriate tax on every transaction.

Recipient Of Supply Goods or Services Or Both

Section 2(93) of The Central Goods And Services Tax Act 2017 defines the term ‘recipient of supply of goods or services or both (a) ­where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available or to whom possession or use of goods is given or made available and (c) where no consideration is payable for the supply of a service, the person to whom the services is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply shall include an agent acting as such on behalf of the recipient in relation to the goods or service or both supplied.

Here recipient can be a person who is liable to pay consideration OR where no consideration is payable then the person to whom the goods have actually been delivered and will also include an agent acting on behalf of the recipient.

Person

Section 2(84) The Central Goods And Services Tax Act 2017 defines the term Person to include (a) an Individual (b) a Hindu Undivided Family (c) a Company (d) a Firm (e) a Limited Liability Partnership Firm (f) an AOP, or a BOI, whether incorporated or not, in India or outside India (g) any Corporation established by or under any Central Act, State Act or Provincial Act or a Government Company as defined in clause (45) of section2 of the Companies Act 2013 (h) any body corporate incorporated by or under the laws of a country outside India (i) a co-operative society registered under any law relating to co-operative societies (j) a local authority (k) Central Government or a State Government (l) society as defined under the Societies Registration Act 1860 (m) trust and (n) every artificial juridical person, not falling within any of the above.

Supply

Section 7 (1) of The Central Goods And Services Tax Act 2017 defines the term supply to include (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business (b) import of services for a consideration whether or not in the course or furtherance of business (c) the activities specified in Schedule I made or agreed to be made without a consideration (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Essentially there has to be a supply for the tax to be levied. If there is no supply then there is no tax. Tax is either payable by the supplier making the supply of goods / selling of the goods which can be construed as tax on the outward supplies. This happens when the supplier is registered under the act. Tax is paid on the inward supply of goods / purchases by the recipient / purchaser under revere charge mechanism when the seller is not registered under the act.

Levy Of Tax

Section 9(3) of The Central Goods And Services Tax Act 2017 states that The Government may on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both 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.

The above section deals with specific reverse charge, that is, on certain specific supplies the recipient will have to pay tax for having received the supplies of such goods or services or both.

Notification Number 13/2017 – Central Tax (Rate) dated 28^th June 2017 notifies the categories of supply of services where the tax will be paid under reverse charge basis by the recipient of such services. Notification 4/2017 – Central Tax (Rate) dated 28^th June 2017 specifies the goods where the central tax will be paid the under reverse charge basis by the recipient of the intra state supply such goods.

Section 9(4) of The Central Goods And Services Tax Act 2017 states that 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.

The above section deals with the general reverse charge and states that where a registered person procures his supplies from an un-registered person the registered person will have to pay tax on reverse charge mechanism.

Registered Person

Section 2(94) of The Central Goods And Services Tax Act 2017 states that a registered person means a person who is registered under section 25 but does not include a person having Unique Identity Number.

Section 25 (1) of The Central Goods And Services Tax Act 2017 states that every person who is liable to be registered under section 22 or under section 24 shall apply of registration in every State or Union Territory in which he is so liable in such manner and subject to such conditions as may be prescribed.

Who is required to be registered under The Central Goods And Services Tax Act 2017 ??. (1) Section 22 of the said act states that every supplier shall be liable to be registered under the act if aggregate turnover in a financial year exceeds twenty lakh rupees. (aggregate turnover would be ten lakh ruppes for special category states). All such suppliers shall be treated as registered supplier. (2) A supplier who opts to pay tax at a fixed percentage than at the regular rates provided the aggregate turnover of such supplier during the preceding financial year has not exceeded rupees fifty lakh rupees (Section 10) (3) The provisions of section 24 mandates that a person who has to pay tax under reverse charge mechanism shall obtain registration under the Act (4) Others would be treated as un registered supplier.

Tax Invoice

Section 31 (1) of The Central Goods And Services Tax Act 2017 states that a registered person supplying taxable goods shall issue a tax invoice showing the description, quantity and value of the goods, the tax charged thereon and such other particulars as may be prescribed. Section 31 (3) (b) of the said ac states that a registered person may not issue a tax invoice if the value of the goods or services or both supplied is less than two hundered rupees subject to such conditions as may be prescribed. Section 31 (1) (c) of the said states that a registered person supplying exempted goods or services or both or paying tax under the provisions of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed; provided that registered person may not issue a bill of supply if the value of the goods or services or both supplies is less than two hundered rupees subject to such conditions and in such manner as may be prescribed.

Rule 46 of Central Goods And Services Tax (CGST) Rules 2017 states thatTax Invoice should be issued by a registered person. Further Rulr 46(p) states that tax invoice should state that whether tax is payable on reverse charge basis.

So, (1) A tax invoice can be issued only by the registered person provided the person is supplying taxable goods or services or both. (2) Tax invoice is not to be issued when exempted goods or services or both are supplied. (3) Tax invoice need not be issued when the value of the goods or services or both supplied is less than two hundered rupees. (4) Tax invoice will not be issued by the registered person when they opt to pay tax under the provisions of section 10. (5) Hence a person who is not registered under the act cannot issue a tax invoice and or bill of supply to their customers.

Prohibition from Collection Of Tax

Section 32 of the CGST Act 2017 prohibits collection of tax. (a) It states that a person who is not a registered person shall not collect tax in respect of any supply of goods or services or both any amount of by way of tax under this Act (Section 32 (1)). (b) It further states that no registered person shall collect tax except in accordace with the provisions of this act or the rules made thereunder (sectio 32 (2)).

Maximum Retail Price

Let us also try to understand the provisions Consumer Goods (Mandatory Printing Of Cost of Production And Maximum Retail Price) Act 2006. (a) Section 2 (f) of the said act states that “maximum retail price” means such price at which the consumer goods shall be sold in retail and such price shall include all taxes levied on the goods. (b) Section 2(e) of the said act states that “printing”means printing of cost ofproduction and retail price at a visible place in Hindi and English and the local language of the place it is sold.

Having discussed definitions and meanings as above and the maximum retail price, let us try discuss certain situations. Discussions hereunder is restricted to the supply of goods.

Now that we have the following types of persons :

(1) Registered Person / Supplier – paying taxes on outward supplies at regular rates.

(2) Registered as Composite Person / Supplier – paying tax at specified percentage.

(3) Un-registered Person / Supplier – not required to pay tax

Now let us examine a few situations ::

(In all the situations it has been assumed that the transactions are in the nature of B 2 B and have been done in the furtherance of business.)

(A) Un-registered supplier purchases goods from another un-registered supplier.

X and Y both are un – registered suppliers and deal in different kinds of goods attracting tax. Both of them are not aware of the other persons standings so far as registration is concerned. Y purchases goods from X and discharges the value of supplies. X charges maximum retail price (MRP) from Y. No tax invoice is given. X handovers a slip after jotting down the price which he has charged Y.

Should Y register himself under the Act and pay tax under reverse charge mechanism (RCM). If he does so, he would be paying tax twice. Once to X and second time under reverse charge mechanism. Thinking that Y has already paid tax to X which is part of MRP Y does not registers himself and does not pays the tax under RCM. X also does not registers himself under the act. (thinking that he is not required to register himself under the act since his turnover is less than the threshold limit). Now what will happen to the tax collected by X.

(B) Un-registered supplier purchases goods from registered supplier.

Registered supplier will raise a tax invoice on his outward supplies to un – registered supplier and pay tax accordingly.

(C) Un-registered supplier purchases goods from supplier registered as composite supplier.

X is un – registered supplier. Y is registered as composite supplier (trader). X purchases taxable goods from Y. Y supplies them at MRP and X discharges the value. No bill of supply is given / no tax invoice is given. Y handovers a slip after jotting down the price which he has charged Y. (Since Y has opted to pay tax under section 10 of the CGST Act he cannot issue a Tax Invoice and he can only issue a bill of supply which will not contain the tax charged by Y to X).

Y is collecting the tax which is part of MRP and is definitely more than what he is paying under the composition scheme. What will happen to the difference of tax.

Should X register himself under the act and pay tax under RCM since the tax paid by Y would be less than what he has collected from X. If X does so he would be paying tax twice.

In my opinion it is not required for X to register himself under the act and pay tax under RCM because X has sourced his supplies from a registered supplier (and has discharged the price at MRP). Y here is registered under section 10 of the Act.

(D) Supplier registered as composite supplier purchases goods from un-registered supplier.

X is registered supplier under section 10 of the act and opts to pay tax accordingly. Y is un-registered supplier under the act. X purchases goods from Y and discharges the value of goods at MRP. No tax invoice is given by Y. Y handovers a slip after jotting down the price which he has charged X. Should X pay tax under RCM.

Technically speaking yes since he has purchased goods from un registered supplier. If he does so, he is paying taxes twice. Once to X and second time under reverse charge mechanism. Thinking that the tax has been paid by him (X) to Y as part of MRP, X does not registers himself under section 24 of the CGST Act and does not pays tax under RCM. What will happen to the tax collected by Y.

Further, if X decides to pay tax under reverse charge basis, can he issue a tax invoice to Y. In my opinion he cannot issue a tax invoice. (Section 31(3)(c)). He can only issue a Bill of Supply which will not contain the details of tax (Rule 49 Central Goods And Services Tax (CGST) Rules 2017)

(E) Supplier registered as composite supplier purchases goods from another supplier registered as composite supplier.

X and Y both are registered under section 10 of the act and opt to pay tax accordingly. X purchases goods from Y and discharges the value of goods at MRP. No tax invoice is given by Y. Y handovers a slip after jotting down the price which he has charged X. X is not required to register himself for paying taxes under RCM since he has sourced his supplies from a registered supplier ??

Y is not supposed to collect tax from X but he has done so.

Since X is the person who has received inward supplies, should he register himself under the act and pay tax under RCM. Keeping in view the objective of the act, yes

Y discharges his tax liability on outward supplies as per the provisions of the act by paying tax at the rate of specified percentage. What will happen to the difference of tax held in the hands of Y.

If X registers and pays tax under RCM then he is paying tax twice.

(F) Supplier registered as composite supplier purchases goods from registered supplier.

Registered supplier will raise a tax invoice on his outward supplies and pay tax accordingly.

(G) A registered supplier purchases goods from another registered supplier.

Registered supplier will raise a tax invoice on his outward supplies and pay tax accordingly.

(H) A registered supplier purchases goods from the un-registered supplier.

Registered dealer will pay tax on reverse charge mechanism.

(I) A registered supplier purchases goods from supplier registered as composite supplier.

X is a registered supplier. Y is registered as a composite supplier. X sources his supplies from Y and discharges the value at MRP. Should X pay tax under reverse charge mechanism.

Going by the provisions of the act, no. Because the purchases have been sourced from the registered supplier.

Going by the spirit or objective of the act, yes. Since the supplier registered under composite scheme cannot issue tax invoice and can issue only a bill of supply and cannot pay tax on his outward supplies at normal rates.

(J) X is a trader and deals in taxable goods and his aggregate turnover is below the threshold limit and hence has not sought registration under the act. He sources his supplies from un-registered supplier and registers himself under section 24 of the Act for making payment under reverse charge mechanism.

Should X collect GST on his outward supplies also and pay taxes OR should he pay taxes only under RCM on his inward supplies from un-registered supplier and file nil return for his outward supplies.

In my opinion registration under the act should be allowed both under section 22 and section 24 of the CGST Act. Application For Registration should specifically ask the applicant the section under which they are seeking registration.

In this particular example I am of the opinion that he should pay taxes under the RCM for the inward supplies from un-registered supplier and is not required to charge tax on the outward supplies. However the department might take a different view which could lead the case into legal tangle.

Having discussed as above, In my opinion, the provisions of Consumer Goods (Mandatory Printing Of Cost of Production And Maximum Retail Price) Act 2006 should be amended and different MRPs should be printed OR different packing’s should be devised in respect of the following persons / suppliers and for the benefit of the end consumers :: (a) for registered suppliers – since they can collect tax and pay tax and issue tax invoice. (b) for un-registered supplier – since they cannot collect tax and cannot issue tax invoice. (c) for suppliers registered as composite supplier – since they cannot collect tax and has to pay tax at specified percentage and can issue bill of supply.

Having discussed the provisions of both the acts, in my opinion, it would not be out of the way if we discuss a few cases pertaining to B 2 C transactions ::

(K) Ultimate consumer buying supplies from an un-registered supplier / supplier registered as composite supplier.

(1) A is travelling on a highway between Agra and Jaipur. Halfway he stops at a Dhabha or a shop owned by B and buys water bottle, biscuits and some other similar products. B is not a registered supplier. Both of them are not aware of the provisions of the CGST Act. B charges A the price which is equal to MRP and A discharges the same after verifying the MRP and date of expiry. No receipt or bill has been issued by B either on demand or on su moto. B has collected tax which is part of MRP and will not pay the same as he is not registered and his turnover is below the threshold limit.

(2) A has come to Madurai with his family to visit holy shrines and had a good darshan of Meenakshi Ammaal. He goes to a shop near the temple which is owned by B and buys water bottle, biscuits and some other similar products. B is not registered under the act. A and B both of them are aware of the CGST Act. B charges A at MRP and refuses to give a bill / invoice / cash paid receipt. A refuses to pay tax and tries to argue with B. A does not understands Tamil and B does not understands Hindi and or English. His children are shouting and crying and screaming on the road and his wife becomes impatient. Ultimately A discharges the MRP.

B is not registered under the act and collects the tax and retains the same.

(3) A goes to a clinic and or a small hospital to see his doctor. The doctor prescribes medicines and A purchases them from the medical shop attached to the clinic since he knows that the said medicines would not be available elsewhere / nearby shops. The medical shop keeper sells the goods at MRP and is not registered and the tax collected by the shop owner retains the same.

(4) A visits his neighborhood kirana shop owned by B. B wishes him good morning and A starts narrating the items which he needs them for his monthly consumption. Certain products are packed and printed with MRP like biscuits, hair oils, shampoos and so on. Some of the products are weighed and packed in covers made of newspapers and on being asked by A, the shop keeper tells him the rate per kilo. Some of the products are packed in polythene covers which have been purchased in bulk and repacked by the shop keeper in different quantities and a yellow sticker is pasted on such polythene covers depicting the price of that packet which is handwritten. All the items have been delivered at A’s residence along with a piece of paper which depicts the name of the product and the price charged. A in the evening pays some advance and agrees to clear the balance at the month end. B makes an entry in a register and A signs in the respective folio. B is not registered. A does not argues with B because he is enjoying credit facility, shop is close to his residence, supplies are of good quality, he does not have to carry the load as home delivery system exists and the shop keeper is trust worthy.

(5) A, a Chartered Accountant from Hospet visits Vijayawada with his team on official work and prefers to have his lunch in an air conditioned hotel since the weather in Vijayawada is very hot and the vegetarian hotel is close to his clients place. A orders South Indian Meals and five water bottles. Air conditioning unit / air conditioners are not working and on enquiry he is informed that the same is / are under repair and the technician has to come from Chennai and is expected any moment. Couple of old pedestal fans were placed in the dining hall which were making more noise than blowing air and fan blades were moving in slow motion. A and his team completes their lunch and ask for the bill. Water bottle is billed at Rs.35/- each against MRP of Rs.19/-. CSGT and SGST is collected on the entire bill at 18% including the cost of water bottles at Rs.35/- each. A tries to tell the staff that the bill is not correct and the cost of the water bottle billed is more than the MRP and he shows the MRP printed on the water bottle to the Manager and the Supervisor and also tells them that since there is no air condition the GST Should not be charged at 18%. The hotel team does not budge and they argue that they have instructions from hotel owners . On further arguments by A, the hotel team shout at A and abuse him in vernacular language. Crest fallen, disappointed, disgusted and dejected, A pays the bill.

Often it is argued by the traders / suppliers irrespective of the fact whether they are registered or not, that they have paid tax to their suppliers and what is wrong if they charge tax from the end consumers.

Thank You.

C V M Srinivas, Hyderabad.