GST Impact: Procurement from Unregistered Vendors

  • Contributed by CA Vikash Parakh

    Procurements play a vital role in any organization, and such procurements when made from unregistered vendors will have tax implications under reverse charge mechanism leading to impact on the entire working capital flow.

    Under the current scenario, VAT is liable to be paid on purchase of taxable goods made by a registered person from unregistered persons in certain states. As far as services are concerned, reverse charge mechanism is only applicable on certain specified services such as transportation charges, legal charges, etc. wherein liability to pay Service Tax rests on the service recipient irrespective of whether the service provider is registered or not.

    The GST regime continues with the concept of Reverse Charge Mechanism (RCM) albeit with some changes. As per GST Act, Reverse Charge means the liability to pay tax by the recipient of supply of goods/services instead of the supplier of such goods/services in the specified cases.

    • GST to be paid on purchase of goods from unregistered persons
    • GST to be paid on receiving of services from unregistered persons.
    • So RCM also applicable on purchases of petty items such as stationeries, consumables, etc. from unregistered persons
    • Similarly GST to be paid on all services such as retainer ship, maintenance, carriage inward, loading/unloading, etc. availed from unregistered services.
    • Reverse charge mechanism not applicable on purchases made from persons registered under composition scheme
      gst-community-services
      Under GST regime a service recipient will be liable to pay GST under Reverse Charge Mechanism in the following cases:Imports – GST on the import of goods and/or services will be required to be paid by the recipient along with Basic Customs Duty as applicable on such imports.

      Specified goods/services
      – Government will notify certain goods/services on which GST will paid by the recipient irrespective of fact that the supplier is registered or unregistered. These may include services such as transportation, legal services, etc. which are presently taxed under reverse charge mechanism under the present service tax law. Certain categories of services supplied through an electronic commerce operator will also fall under this mechanism. The goods and services under the purview of reverse charge mechanism will be known only when notified by the Government.Goods/Services received from unregistered persons – There may be suppliers of goods/services who are not registered under GST for their turnover being less than threshold exemption limit, or for other reasons. The persons registered under GST might purchase goods and/or avail services from such unregistered persons. In such cases, GST will be required to be paid by such recipients at the rates applicable on such goods/services.COMPLIANCES ON PROCUREMENT FROM UNREGISTERED PERSONS 

      INVOICING

      • Tax Invoice to be issued by the recipient in respect of goods/services procured from unregistered persons
      • All prescribed particulars to be mentioned on Invoice
      • No tax invoice required to be issued for supplies valued less than Rupees Two Hundred

       

      RETURNS

      • Details of all such inward supplies under Reverse charge mechanism to be included in the Returns

      POINT OF TAXATION

      • Point of Taxation (RCM cases) to be earliest of following:
      • Date of Receipt of Goods
      • Date of Receipt of payment
      • 30/60 Days from invoice of goods/services respectively
      • GST liability accrues on the advance payments made by recipient to such unregistered vendors.
      • Credit of the GST paid under reverse charge mechanism on procurements of goods/services from unregistered persons will be available if such goods/services are used for business purpose, subject to prescribed conditions.
      • Procurements from unregistered persons should be avoided where credit not available.

       

      Conclusion

      As mentioned above, GST payment will be applicable on all purchases of goods and receiving of services from unregistered suppliers. In spite of such GST payments, credit of the same may not be allowed if it pertains to blocked input credit items. Moreover, such payments might lead to huge working capital blockage for exporters. Government should review the aforesaid provisions and consider some minimum threshold limit above which such reverse charge mechanism should apply.

    Note:
    Views presented in this article are personal view of the author. Information presented in this article is intended for information purpose only and does not constitute any legal opinion or advice. Readers and Users are requested to seek formal legal advice prior to acting upon any of the information provided herein.