Impact of GST if goods or services purchased from unregistered dealer – Reverse charge on unregistered dealer explained

1.0 Introduction

Have you ever imagine that if you went to buy goods from any dealer and government catches you and impose penalty and fines for not filing the tax? Looks weird but it is true under GST.

As per section 9(4), if you buy anything from an unregistered dealer then you are liable to pay the tax on his behalf on the goods/services purchased by you. Further, if you also an unregistered dealer and went on to buy inputs from another unregistered dealer then your exemption shall cease and you shall be liable to register under GST mandatorily and pay tax accordingly.

 This is something technical and hence we shall discuss it in details.

2.0 The Reverse Charge Mechanism (RCM) and its impact

Reverse charge means when a recipient of goods or services becomes liable to pay the GST instead of a supplier of goods and services. As a general rule, the supplier of goods and services is responsible for paying tax under GST.

However, in some cases the recipient of goods and services becomes liable. Under one of those cases, the government has included that if you buy anything from unregistered dealer/supplier, then you shall be liable to pay tax.

Let us analyse it in two cases:

• If you are registered under GST and buy goods/services from an unregistered dealer
• If you are not registered under GST and buy goods/services from an unregistered dealer

3.0 If you are registered under GST and buy goods/services from unregistered dealer

If you are registered under GST and you buy goods or services from an unregistered dealer then you are liable to pay tax on behalf of that dealer and this mechanism is called Reverse Charge Mechanism (RCM).

Further, there shall be following consequences of this transaction:

• You shall need to issue invoice as per invoice rules on purchase of goods or services.

• You shall need to include that in your purchase return and file the same as per the due date.

• You shall 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.

Any Exemption?

Yes, there is very small exemption to this section. As per notification no.8/2017, the government states that reverse charge shall not be applicable where aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers who are not registered exceeds Rs.5,000 in a day.

4.0 If you are not registered under GST and buy goods/services from unregistered dealer

If you are a small unregistered dealer/supplier purchase anything from an unregistered dealer, then you shall be liable to take GST registration and pay the taxes under reverse charge as explained in clause 3 above.

You may be surprised by reading the above point but it is true. As per section 24 of CGST, it is mandatory for a person to register if he is liable to pay tax under reverse charge even if his revenue is less than Rs.20 lakh.

In simple words, if you are a unregistered dealer enjoying your basic exemption and by mistake you went for shopping and buys certain goods from unregistered seller, then your basic exemption shall cease and you shall be liable for GST registration and to pay tax to the government.

The following consequences shall be there if you buy from unregistered seller:

• You shall be liable to register under GST (Section 24 of CGST)

• You shall need to pay tax after registration.

• Your basic exemption of Rs.20 lakh shall cease to apply.

• You shall need to file 3 monthly returns

• Other actions as explained in clause 3 above.

5.0 Examples on the above subject matter

• Suppose you a blogger having turnover of around 5 lakh per annum and you availed some services from freelancer content writer who is not registered under GST. In this case, you shall need to take the GST registration and pay the taxes under reverse charge.

• Suppose you are a business dealing in exempted goods. As per GST law, any person dealing exclusively in exempted goods does not require GST registration. One fine day, you went on to buy inputs from an unregistered seller. Now, as a result, you shall be liable to take GST registration and pay tax accordingly.

6.0 Conclusion

In case you have any query, kindly write to us at info@hubco.in.

Related Links:

• GST Registration
• GST Return Filings
• GST Software

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