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:
- 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.
- 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.
- 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.