Tax payable on purchase from an unregistered dealer
In GST if you are a registered dealer and you are purchasing goods from a unregistered dealer in that case registered dealer have to pay GST (Goods and Service Tax or tax) and selling unregistered dealer is not liable to pay tax.
Under section 9(4) registered dealer will have to pay tax at the time of purchasing the goods from an unregistered dealer and this is commonly known as reverse application of tax or RCM.
For example, there is a large company and the company is registered with GSTN and this company is purchasing goods from an unregistered person for example, petty expenses like tea etc. from the tea vendor or office stationary for an office then register company is only liable to pay tax on that petty expense
How to make payment of taxes in case of RCM (Reverse charge mechanism):
The payment of taxes can be made under GST out of two types of ledger:
- Electronic Credit ledger: This ledger gets credit with the taxable supplies received by the registered taxable person each time purchase tax invoice are updated by registered dealer.
- Electronic Cash ledger: This ledger gets credits with the taxes paid in cash / banking channel through challan.
Registered person purchasing goods from unregistered person can not pay tax under RCM using credit ledger. He have to pay RCM liability in cash and immediately take ITC of such taxes paid if the procurement so made is eligible for input tax credit.
Unregistered dealer cannot make invoice (means tax invoice). However, he can pass on the commercial invoice to registered dealer.
On receipt of goods registered person shall make another invoice (tax invoice) based on commercial invoice issued by registered dealer as if he himself is supplying good to him. This means in such special case it shall be presumed that such registered supplier supplies goods / services to himself.
Blockage of working capital:
There is a time limit of one month approximately for availing ITC of GST paid in cash under reverse charge mechanism. Thus, there is blockage of working capital to that extent.
A big relief is given by government to the assessee. There is a limit of Rs. 5000 per day per unregistered supplier for applicability of RCM. Thus, this is big relief to small tea vendors and dhaba walas which supplies in small quantities valuing rupees five thousand or less.
However, once the limit of five thousand is crossed for any unregistered vendor GST would be payable on total value including rupees five thousand for supplies made from that particular vendor.
Another relief is given by government is that the tax liability under RCM for supplies made from unregistered dealer is now suspended till sept., 2018 as of now.