Why Reverse Charge under GST Will Hurt Small Businesses
Reverse Charge Mechanism under Service Tax and Purchase Tax under VAT has been present for some time now. These provisions are applicable on ‘Services’ provided under Service Tax and purchases made under some state VAT laws. With the introduction of Goods & Services Tax (“GST”), the provisions of Reverse Charge will also change and increase its applicability from only ‘Services’ to both ‘Goods & Services’.
These basic provisions will impact the small businesses (Unorganised Sector, Small Scale Industries, less than compliant entities) in a very significant way.
Registration under GST (Section 22 of CGST Act) is compulsory for all those suppliers having aggregate turnover of Rs. 20 Lakh (Rs. 10 Lakh in special category states). Further, any person making Inter-State taxable supply or who are required to pay tax under reverse charge shall also be required to be registered under GST (Section 24 of CGST Act).
Reverse Charge under GST:
- Supply of Goods or Services or both as specified by the government by notification, (Section 9(3) / 5(3) of the CGST / IGST Act) and
- Supply of Goods or Services or both by an unregistered supplier to a registered supplier (Section 9(4) / 5(4) of the CGST / IGST Act)
Unregistered dealer has not been defined under GST. It can be assumed that those suppliers who are not registered are unregistered suppliers. Inference can be made from above provisions that where an unregistered supplier supplies goods or/and service to a registered supplier in the same state then the registered supplier shall have to make payment of GST under Reverse Charge mechanism.
| A simple example – Say, A trader with an annual turnover over mere Rs. 50 Lakhs buys stationery and food for an office party from a local shop or procures services of a small service provider. The trader will be required to pay GST at applicable rates under reverse charge. Availability of Input Tax Credit is also in question as proving these purchases are used or intended to be used in the course or furtherance of his business (Section 16 of CGST Act) is a tricky situation and the buying dealer may be registered under Composition scheme as well where the Credit is not available. |
One view can be that even Travelling & Refreshment bills submitted by employees for reimbursement shall also make the employer liable to pay GST under Reverse Charge.
Reverse Charge payment can only be through Cash i.e. no ITC can be utilised for its payment (Increased Working Capital Requirement).
The compliance requirement under GST for Reverse Charge transactions will take a huge leap and will require consistent tracking of all the expenses, knowing their correct HSN code, paying tax on proper point of taxation.
The intention of keeping a threshold limit should be that no tax should be levied on transactions below that defined limit. The threshold of Rs. 20 Lakhs/10 Lakhs is virtually of no use in Intra State transactions as one way or the other GST will be levied on supply of Goods or/and Services (except where both the parties are unregistered).
The Government needs to address this issue before the implementation of GST as these provisions will directly affect majority of businesses in India.
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