In the GST era, a business will broadly be classified under two brackets – registered and unregistered. Within the registered bracket, there will be two possibilities – either the business may be a regular dealer, or under composition scheme. Assuming that you are a regular dealer, you may thus be interacting with all 3 types of suppliers. There may be situations where you need to choose between compliance benefit and existing business relations. Thus, it is advisable that you are completely clear about the implications of purchasing from all 3 types of suppliers.
Here’s a quick view of the 3 scenarios you might encounter under GST:
Situation 1: When you purchase from a regular dealer
When you purchase from a registered regular dealer, he will collect GST on his outward supplies. Thus, you will be able to claim Input Tax Credit (ITC) on the GST paid to your supplier, and use the same to offset your output tax liability.
Impact for you – In this scenario, you will be able to get the full ITC against the GST that you pay, it will have a positive impact on your cash flow.
Situation 2: When you purchase from a composition dealer
When you purchase from a registered dealer, who has availed the composition scheme, the situation is slightly different. Since a composition dealer does not charge GST under the specified rates, but has to pay GST at flat rate, he will not be able to issue a tax invoice to you. Instead, he will issue you a bill of supply. If the composition dealer has purchased from a regular dealer, the GST charged will be passed on to you as his cost. As a result, you will not have any ITC to claim.
Impact for you – These types of purchases will increase the cost of the product for you, and may impact your competitiveness in the market place.
Situation 3: When you purchase from an unregistered dealer
When you purchase from an unregistered dealer, you will be liable to pay GST under Reverse Charge Mechanism (RCM). Under this, tax payment is made by the recipient on the purchase of any goods or services. As per GST provisions, each taxpayer can take the input tax credit – but in order to avail the credit of tax paid, he needs to pay the taxes first to avail the credit on all those purchases in the next month. Full credit of GST paid on goods on reverse charges is available, whereas, reverse charge is restricted to nil, partial or full in case of specified services.
In the provisions, it is clearly mentioned that GST credit cannot be availed on food and beverages, building, passenger vehicle, even if the tax is paid on reverse charge basis. This means, the burden of such tax shall be borne by the taxpayer.
Liability of Reverse Charge – Goods
The duration of supply in a matter of purchasing of goods in reverse charge mechanism will be earlier in the following:
- Date of receipt of goods, or
- Date on which payment is made, or
- Date immediately following 30 days from the date of issue of invoice.
Liability of Reverse Charge – Services
The duration of supply in a matter of purchasing services in reverse charge mechanism will be earlier in the following:
- Date on which payment is made, or
- Date immediately following 60 days from the date of issue of invoice.
Exemption from Reverse Charge
As per the GST law, reverse charge shall not be applicable where aggregate value of such supplies of goods or services, or both, received by a registered person from any or all the suppliers who are not registered, does not exceed INR 5,000 in a day.
Impact for you – The following is how a reverse charge transaction will impact you:
- You will need to issue invoice as per invoice rules on purchase of goods or services.
- You will need to include that in your purchase return, and file the same as per the due date
- You will not be eligible to use Input Tax Credit (ITC) to pay this liability. You need to pay it by cash.
- After paying the tax liability to the government, you can take the ITC of this amount. In other words, this will have a negative impact on the cash flow of your business.
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