Electronic matching of credits is one big step in that direction while taxing supplies by unregistered suppliers on reverse charge is another master stroke. It would bring supply by an unregistered supplier at the same level as supply by a registered supplier and kill all the advantages of being an unregistered supplier. In fact, it would create compliance and other issues for the registered buyer/ customer to make it further disadvantageous. Let us see how
Assume a supplier S who supplies goods worth Rs 100 to a company C. In our example, C is always registered under the GST law. If S is also registered under GST, he would charge Rs 100+ GST (which we assume is 18%) in his invoice. The customer would take credit of GST of Rs.18 if the credit is admissible in terms of GST law and cost for him would remain Rs. 100.
If the credit is not admissible (e.g. if the supply is of food products) then the cost to C would be Rs.118.
It was beneficial to buy non-creditable supplies from unregistered vendor
Now take a case where S is unregistered. When he supplies goods to C, S would not charge any GST and the cost to C would be Rs 100. Since not tax is discharged, the cost remains same irrespective of whether the supply made by S is of goods/services which are otherwise eligible for credit or not. Therefore, it would be beneficial for C to buy from an unregistered S if the goods or services are such that GST paid on them is not available as credit. These could be services like rent-a-cab service, restaurants, beautician’s services, or goods like food products etc. This is for the simple reason that the cost of supply by registered supplier would also include tax cost of Rs 18 besides base value of Rs 100 while that of an unregistered supplier will only include the base value of Rs.100.
In fact, even if the unregistered S charges Rs.110 for the supply, C may find it beneficial to buy from him as the total cost Rs.110 is still lower than Rs118 if he purchases from a registered S.
Now Government has dictated that any supplies by unregistered S to a registered C would require C to pay GST on reverse charge basis. C can, of course, take credit if otherwise eligible. [refer Section 9(4) to CGST Act / Section 5(4) of IGST Act]
Let us now consider two situations to understand impact of this reverse charge provision –
- In case of a supply where GST paid is available as credit to C, the cost to C would remain the same irrespective of whether he purchases from a registered S or an unregistered S. However, C would desist buying from an unregistered S as it would increase his pain of making all compliances of tax determination, payment and recording.
- In case of supply of goods/services where GST paid is not available as credit, the situation suddenly becomes unfavorable to the unregistered S. If the price is same, his relative advantage is removed and his cost becomes equal to that of the registered supplier. However if the ex-GST price is even slightly more than that of the registered S, (Rs 110 as in the example above) the total cost would become 110+ 19.8 = Rs.129.8 which is more than the cost of Rs.118 of a registered supplier.
Many companies are now asking their vendors to register with the GSTN and are taking stock of their existing vendor list to weed out unregistered vendors. But the provision has much far reaching impact in other cases. Look at the following concerns that many companies may have –
For every purchase from an unregistered vendor, the registered customer would be required to follow below mentioned steps:
- Determine whether such supply is liable to tax. For that, he would have to know the classification of the product or service and know the rate of tax Flowers purchased from a local vendor could be exempt while stationery purchased from a local shop may attract varying rates – envelops may attract 18% while writing paper may attract 12% GST. One must therefore master classification of many products and services that are consumed, if the company purchases from unregistered vendors.
- Once the tax rate and classification has been determined, the next crucial aspect would be to determine eligibility for input tax credit. For each procurement, one would have to decide if the same has been used during furtherance of business. For instance, would the flowers purchased for the reception desk or repair services by a carpenter be in the course or furtherance of business and be eligible for credit?
- Further, section 31(3) to CGST Act 2017 requires C to issue an invoice in respect of goods/services procured from unregistered vendor and issue of a payment voucher in such cases at the time of making payment to such unregistered supplier. It should be ensured that ERP of the company can generate these documents. Would this invoice show the unregistered supplier as a supplier – and if so, will my IT system accept this change and allow someone else’s name as a supplier?
- It is still unclear if entry for supplies under reverse charge will be made as an outward supply in GSTR 1 or as an inward supply under GSTR 2 or both.
Determining Place of Supply (PoS)
Another concern would be the determination of PoS for each such transaction. If purchases are made within the State the treatment normally would get covered under CGST +SGST. However, when supplier or place of supply is in another State (e.g. employee eating at a restaurant or staying in a Hotel in another State where the company is not registered) the situation may be quite complicated. See the example below:
Take the case of a Company registered in Maharashtra whose employee goes to Gujarat to meet a client and stays in a hotel which is unregistered. In case of hotel accommodation, the place of supply is where the hotel is i.e. Gujarat. The location of supplier is also Gujarat. The tax leviable in the normal course (when both supplier and customer are registered) is therefore CGST+SGST. If the hotel is unregistered, and the tax to be charged is CGST+ GST, would the Maharashtra Company have to take a registration in Gujarat to discharge the tax liability on reverse charge? Or, can we say that, since the Maharashtra Company is not registered in Gujarat, it is a supply between two unregistered persons and hence not liable to GST under reverse charge?
Let us take another case where a Maharashtra company procures services from a Delhi consultant who is an unregistered supplier. In the normal course the location of the supplier would have been Delhi and the place of supply would have been the place of recipient i.e. Maharashtra. The tax payable would thus be IGST. Now, since the supplier consultant is not registered, the company has to discharge GST on reverse charge. The law mentions that all the provisions of the Act will apply to the recipient as if he is the person liable to pay the tax. There can be two interpretations of this:
- The recipient would step into the shoes of the supplier for all purposes and therefore the location of the supplier will become Maharashtra, and since place of supply is Maharashtra, the tax discharged on reverse charge be CGST+SGST
- The recipient would step into the shoes of the supplier only for payment of tax, and the location of supplier will remain as Delhi and IGST would be charged.
Second option looks to be more logical, Of course, the question would be whether the recipient can pay Maharashtra IGST?
Also in a case where employee incurs some business expenses in his own name (like eating at a restaurant) and gets the same reimbursed from the Company, can it be called supply between two unregistered persons viz. the unregistered vendor and the unregistered employee? Or would it be right to say that since the employee and the Company are the same, the food consumed by the employee is effectively consumed by the Company who is registered and the Company should pay tax on reimbursements to employees under reverse charge?
Unregistered dealer as a concept is not new to Indian taxes but tax on reverse charge for procurements from an unregistered person is new to all of us. It also means a lot of change in the processes, systems and the costs. Would steering away from unregistered vendors be beneficial to my business is what one must examine in the coming days.
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