What is reverse charge? How will it affect doing business with unregistered?
Reverse charge is what the recipients pay as usually the supplier pays for supplies and goods. Hence, when the receiver pays tax the tax gets reversed thus it is called reverse charge. It is a new concept in India as GST is a newly passed bill. The purpose of this charge is so that the tax revenues and tax compliance increases. Earlier, government was unable to collect service tax from various unorganized sectors like goods transport. Hence, the collection of tax is increased through reverse charge mechanism. The reverse charge mechanism is already present in service tax. In GST reverse charge may be applicable for both the services and goods.
What is the current scenario of reverse charge?
The reverse charge provisions are similar to that of a service tax like:
• Manpower supply
• Services involving aggregators
• Goods transport agencies
• Non resident service providers
• Services of a director to a company
• Insurance agent
There is no reverse charge mechanism in supply goods at the moment.
Reverse charge under GST
This charge means the liability to pay tax is by the receiver of the goods and services instead of the supplier. Reverse charge can be applicable for both services as well as goods.
Where are reverse charge applicable?
• When unregistered dealer is selling to a registered dealer
• There are business that provide services through an e-commerce operator
The constitution (122nd amendment) Bill, 2016 for introduction of goods and services tax GST in the country was granted by the president Pranab Mukherjee on September 8 and the same has been notified as the constitution (one hundred and first amendment) Act, 2016 which was ratified by more than 50 percent state assemblies.
GST will replace multiple indirect taxes levied by both centre and states creating one common market. This common market is expected to raise the GDP by 2%
The GST council is a body of states and centre that is constituted with union finance ministers as it’s members. The centre will have one third weight in the cousin while the states will take up the remaining two third. The decisions will have to be passed by three fourth vote, implying the need for consensus. Hence opinion of both centre and state will be significant.
How will it affect doing business with unregistered customers?
Not every business is going to be registered with GST hence during the ourselves of your us in essence you will come across business that are unregistered hence this will lead to you paying thee tax on behalf of him.
Registered person is a person who is registered under section 25 and reverse charge is the liability to pay tax by the recipient of supply of goods or services or both instead of supplier of such goods or services or both under the sub sections 3 or 4 of section 9 or 3 or 4 of section 5.
Section 9 talks about the levy and revenue collections it specifies that a s registered person must pay the tax in case of reverse charge if the supplies have been received by u registered person.
The sub section under section 9 mentioned that the central tax in respect of the supply of taxable goods or services both by an unregistered supplier 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 that is liable for paying the tax relation supply of such items and services.
The main impact on dealing with a person that is unregistered with reverse tax will be that an unregistered person will face difficultly in trading with a registered person as the tax liability and compliance liability will get shifted on the recipient and the registered person will avoid dealing with him/her. The tax compliance will shoot up for the registered person as only he is to pay the taxes
If the cost is 10,000 for both registered and unregistered person and tax charged are 1,800 for both of them yet the input will be only from the registered person. And let us assume the cash flow out u 11,800 for both while tax input is only from the registered person thus the impact of tax outflow is also only from the registered person that is -1800. The interest expensive for one month is nil for the registered person while it is 15 for the unregistered. And the net cost of the registered 10,000 and for unregistered it is 10,015.
The example proves that the indirect purchase from an unregistered person will have a negative impact on the cost of supplies.
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