Reverse charge mechanism under GST: A boon or bane for small players

 

Any taxes are generally being paid out by seller of goods and services. Under reverse charge mechanism, the tax payment is made by buyer instead of supplier. There are many instances under which one needs to pay tax under reverse charge. In this article, we will analyse the most important section for reverse charge, we will analyse Section 9(4) of CGST Act, which requires payment of tax by registered dealer on any taxable supplies received from unregistered dealers.

 

“The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

 

This wasn’t a condition in earlier draft model GST law and has been incorporated in revised version of law. The recipient of goods or services needs to pay this tax and claim the amount paid as input. Though it doesn’t increase any tax liability of recipient but will increase administrative and compliance hassle for him. The prescribed process requires one the recipient to raise an Invoice for such transaction and pay the tax. Due to this reason, this move of imposing tax is being considered as unfriendly for small business man.

 

However, this will be a very peculiar position in case the unregistered dealer is dealing with dealers under registered under composition scheme. Under the composition scheme, the dealers are not entitled to claim any input tax and they straight away needs to pay a fixed lowered percentage of tax on total turnover. In such cases for recipient, any such transaction with unregistered dealer becomes a straight forward cost.

 

Let’s see the positive side of RCM provisions, if we deep dive the situation, this may prove as a blessing in disguise for small unregistered players for the reasons as under:

 

  1. If small supplier doesn’t file his GST return, the large players will hesitate to deal with him. Thus, GST restricts business between small and big player.

 

  1. With the introduction of RCM, any small player who generally doesn’t have any input as such is free to remain unregistered. But still the large player can deal with him and pay tax on their own. With the introduction of RCM provisions, now large player don’t need to depend upon tax payment and return filing by such small unregistered suppliers.

 

  1. One also needs to check the cost benefit analysis of GST compliance for a small player vis-a-vis the amount of benefit of GST input availed by him before commenting upon tax efficiency.

 

Thus in our view, though RCM it is being considering as show stopper, it is rather an enabler for small business man and one needs to carefully analyse the matter on highlighted parameters before reaching the conclusion.

NGO Registration choices in India

NGO’ are formed for the welfare of deprived, promotion of education, research, sports or such other objects. These are non-profit organisations which work for social cause and address various causes. There are many options available in India for incorporating a NGO.

 

NGO’s tax and other benefits:

The NGO’s are given benefit in Income tax and service tax. The basic criteria are mentioned as under to avail the benefits.

  1. NGO should have any business income. In case of business income, separate records are mandatorily required
  2. The bye laws of organisation should not allow spending of income and assets of NGO other than charitable.
  3. NGO should maintain regular accounts.
  4. NGO should not work for benefit of any particular religious community or caste.

 

With this article, we believe you should be able to appreciate the select right mode of organisation for your planned NGO venture and plan your NGO incorporation steps effectively.

Incorporation:

Description Society Trust Company (Section 8)
Applicable Act The Society Registration Act, 1860 The Registration Act, 1908 The Companies Act, 2013
Approval o name Name is generally granted if available Not required Separate application for name approval with strict guidelines
Minimum number of subscribers required 7 2 2
Voting Rights All members have equal rights All trustees have equal rights The voting rights may vary on the basis of shareholding.
Governing structure Two tier structure
a. General Body
b. Managing body
All trustees have equal rights Two tier structure
a. General Body
b. Board of directors
Transfer of membership Not transferable Membership can be transferred, however company may choose to provide restrictions on transfer
Annual documents to be filed under the Act above List of general body, list of managing body, annual audited accounts, Chairman’s report to be filed every year. None Annual return and audited accounts
Income tax return Audited accounts to be filed every year
Penal consequences in case of any default Moderate High

 

Funds of NGO:

The organization must spend 85% of its income in any financial year (April 1st to March 31st) on the objects of the organization. The organization has until 12 months following the end of the financial year to comply with this requirement. Surplus income may be accumulated for specific projects for a period ranging from 1 to 5 years. No part of the income or property of the organization may be used or applied directly or indirectly for the benefit of the founder, trustee, relative of the founder or trustee or a person who has contributed in excess of Rs. 50,000 to the organization in a financial year. NGOs can be incorporated with minimum amount of capital.

 

Name of NGO:

For the companies under Section 8, the name shall include the words Foundation, Forum, Association, Federation, Chambers, Confederations, etc. Limited or Pvt. Ltd will not be suffixed with name.

 

Process of Incorporation:

The process of incorporation involves submission of ID, address proofs of subscribers and address proofs of office. The documents are filed along with charter of the organisation for requesting for incorporation. In case of Section 8 Company, one also has to apply for licence under Section 8 of Companies Act prior to incorporation.  The process required submission of business plan of the proposed NGO along with other documents.

 

After incorporation:

 

  • PAN  & TAN Application:

The organisation must apply for PAN number for Income tax filing and TAN (tax deducted at source number) for deduction of TDS for payments to vendors above the threshold defined.

 

  • Income tax registration as charitable organisation:

Application (Form 10A) for registration with Income tax for charitable activities under Section 12AA is a must for NGOs. In order to avail income tax exemption, the organisation must obtain this registration.

 

  • Application for 80G certification under Income Tax Act:

Donor’s get tax advantage if the organisation is registered under Section 80G. Form 10G is used to apply for registration by organisation.

 

  • Service Tax: The entities registered under Section 12AA of the Income Tax are exempt for service tax. In case, the organisation achieves Rs 9 lacs threshold before grant of Income tax registration, the organisation should apply for service tax registration.

 

  • VAT (Value Added Tax): VAT would be applicable in state of Haryana if the sales exceed Rs 500,000 or at the time of any inter-state sales.

 

  • GST (Goods and Service tax): As soon as the GST is implemented, any registration taken in Service tax or VAT would be required to be shifted to GST.

 

Foreign contributions: In order to receive any foreign contributions registration under FCRA would be required.

 

Choosing between above three options:

It’s a difficult choice. The comparative advantages and disadvantages are not alarming enough to recommend any particular for of registration. Registration as company would be more professional and organised way of working, entailing more paper work and compliances. On the other hand, registration as trust would be simplest way with minimal paper work and procedural hassles. Registration as a society will come in between; which is generally the popular choice.