GST on purchases from Unregistered Suppliers

GST on purchases from Unregistered Suppliers

Reverse Charge Mechanism under GST and implications of exemption upto Rs. 5000 per day

Let's look at the critical provisions of the GST law which have enabled reverse charge mechanism :-

Compulsory Reverse Charge even if the supplier is registered - 

Sec 9(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both 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.

The above section primarily covers services availed from Goods Transport Agency, Lawyer, government, corporate sponsorships, director etc.

Reverse Charge if the supplier is unregistered - 

Sec 9(4) 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.

Central Government had come up with an exemption to the small miscellaneous transactions from unregistered persons.

Notification No. 8/2017- Central Tax (Rate) dt 28.06.2017 issued by Central Government has exempted intra-State supplies of goods or services or both received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017).

The said exemption shall not be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day.

To sum up, the supply should be intra state supply (within the state) and can be for goods as well as services or both. Moreover the supply should be received by the registered person from an unregistered dealer only and upto a daily limit of Rs. 5000/-

Example:-

Mr. X  purchased following items from unregistered dealer, all are dated 01.07.2017 as under:

1st bill - From Ram: Stationery = 2000/-
2nd bill - From Shyam: Lunch = 1000/-
3rd bill - From Madhu : Books = 3000/-

In this case, The bills of Mr. X will not get covered under this notification as aggregate value of all supplies exceeds 5000/- on a single date (01.07.2017)

Exemption would have been available if:

1) Bill dates are different (So that it will come under 5000/- day limit, say bill date of Ram is 02.07.2017)
2) Any of the bills are 1000/- less than the mentioned value(Say Bill of Madhu is Rs 2000/-
3) If the one of the bills in the same of other person (say, one of the bill is in the name of Mr. Y)

FAQ's

Whether these 5000 limit be availed for those cases where compulsory tax is payable in RCM basis as per section 9(3) of CGST act?

Where Compulsory tax is to be paid under the Reverse Charge Mechanism under 9(3) of CGST Act, and as per Notification N0o. 13/2017- Central Tax (Rate) dt 28.06.2017 the benefit of this limit cannot be availed. Reason being these notification cover only cases of 9(4) and not 9(3).

Mr. X purchased following items from unregistered dealer, all are dated 01.07.2017 as under:

1st bill - From Ram: Stationery = 2000/-
2nd bill - From Shyam: Lunch = 1000/-
3rd bill - From Madhu: Goods Transport Agency = 3000/-

In this case, The bills from Mr Ram and Mr Shyam will get covered under this notification as aggregate value of all supplies does not exceed 5000/- on a single date (01.07.2017). For the Third bill from Madhu Reverse charge is payable u/s 9(3) without any exemption threshold.

Whether this daily limit benefits would be available if the goods/services received from persons covered under 9(4) are blocked credits?

The benefit of daily limit would be available. Output Tax under reverse charge would be payable if it crosses the daily limit even though they are covered under blocked credits.

What if the limit crosses 5000 in a day, is GST payable over and above the value or from rupee 1?

If the value of taxable supplies exceeds Rs5000 per day for all suppliers, then GST would be payable on the Total value of the supplies received from unregistered persons.

Is this limit applicable to all supplies?

The limit is applicable to only taxable supply of goods or services or both. Exempt supplies are out of the preview of this notification.

Mr. X purchased following items from unregistered dealer, all are dated 01.07.2017 as under:

1st bill - From Ram: Stationery = 2000/-
2nd bill - From Shyam: Hotel Room = 1000/-
3rd bill - From Madhu: Books = 3000/-

In this case, the bills of Mr. X will not get covered under this notification as aggregate value of all supplies does not exceed 5000/- on a single date (01.07.2017) as the supplies from Shyam for Hotel room booking are exempt under Entry 14 of the exemption notification (12/2017).

What if the supplies are procured from Interstate supply from unregistered?

Benefit of this notification is available only for Intra State Purchase. If any transactions are done on an interstate basis the same are covered under the forward charge and in any case the reverse charge provisions are not applicable.

Goods and services both inclusive 5000 or separate?

Yes, the benefit is inclusive for all goods or services or both.

What rate GST should be payable then?

GST should be payable as per the schedules rate of the product/service.

What if procured from Composition persons? 

Since Composition persons are registered person, reverse charge is not applicable on such supplies.

Can credit be availed for these taxes paid and on what basis, any invoice issue requirement?

Credits can be availed on payment of GST in cash. A consolidated monthly tax invoice can be raised if supplies are received from a single vendor. The Invoice shall be raised on the date of receipt of goods or services or both. Also a payment voucher needs to be issued on the date of making any advance payment as the time of supply is invoice of payment whichever is earlier.

We have compiled the daily expenses which would be liable to GST if procured from unregistered supplier as below:-

Sr.No.	Nature of Expenses	GST Rate	GST IMPACT / OTHER REMARKS Supplies from UR (RCM Applicable)
No GST / NIL GST or EXEMPTED :-
1	Electricity Charges	0%	Out of GST
2	Water Charges	0%	Out of GST
3	Bank Interest	0%	Out of GST
4	Professional Tax	0%	Tax levied by local body / other association out of GST
5	License renewal like Pollution, Factories & Boilers & Local Bodies	0%	Tax levied by local body / other association out of GST
6	Building or Property Tax	0%	Tax levied by local body / other association out of GST
7	Rent Deposits	0%	If adjusted with rent or forfeited - GST applicable
8	Other Deposits	0%	If adjusted with other expenses or forfeited - GST applicable
9	Petrol Expense	0%	Petrol & Diesel out of GST
10	Salary	0%	Out of GST
11	Staff Amenities	0%	Out of GST if in lieu of salary.
12	Gifts to Staff	0%	Gifts by employer of value above Rs. 50000/- shall be liable to GST as outward supply.
13	Staff Mediclaim Contribution	0%	Out of GST if in lieu of salary
14	Allowance & incentive to employees	0%	Out of GST if in lieu of salary
15	Stamp & Registration Fees	0%	If only a pure agent service - ensure GL balance Nil
16	Provision for Doubtful Debts	0%	No credit / deduction shall be allowed
17	Bad Debts Written Off	0%	No credit / deduction shall be allowed
18	Warranty Labour Charges	0%	If there is no supply element & no consideration
19	Donation	0%	If there is no supply element & no consideration
20	Labour Welfare Fund Contribution	0%	Out of GST
21	Staff Medical Expenses	0%	Employee service without any margin
22	Fine & Penalties by Government	0%	Out of GST
23	Discounts - shown in bill	0%	GST applicable is after all discount - if shown in the bill
24	Free Gifts, Gold Coin to Customers	0%
25	Interest on Service Tax/ TDS	0%
26	Interest on Vehicle Loan	0%
27	Interest Others	0%
28	Local Conveyance	0%
29	Transportation Charges - Non GTA / Trucks	0%
GST Applicable & No ITC :-
28	Food Expense	12% /	No ITC
29	Travel claims - Radio Taxi (Rent-a-cab)	5%	No ITC
30	Transportation Charges - GTA	5%	No ITC
31	Club & Membership fees	18%	No ITC
32	Life Insurance Exps for Employees	18%	No ITC
33	Work Contract Services - Construction of Building	18%	No ITC if not supplied for outward works contract services
GST Applicable / RCM supply of URD :-
34	Advertisement Charges	18%
35	Advertisement in Magazine,	18%
36	Advertisement in Media	18%
37	Discounts - after issue of invoice (Post supply discount)	GST Impact	Credit note has to be issued, liability will be reduced to extent of GST on discount.
38	Annual Maintenance Charges	18%
39	Bank Charges - Service charges recovered	18%
40	Broker Fee & Charges	18%
41	Call Centre Expense	18%
42	Customer Schemes by MSIL	18%
43	Construction Work	18%	GST amount - no ITC - for immovable property (Building)
44	Consumables Paint material & Other Consumables	28%
45	Customer Welfare expense	18%	Food charges - No ITC
46	Contract Labour Expense	18%
47	Extended Warranty Cancellation Charges	18%
48	Free Service Camp Expense	18%	If any third party bill comes
49	House Keeping Charges	18%
50	Insurance Charges	18%
51	Legal charges to advocate	18%	Advocate raise bill without GST component - RCM to us
52	Loading & unloading Charges	18%
53	Local Conveyance	5% / 12%
54	Mediclaim Policy Premium Contribution A/ c	18%
55	Mobile Allowance	18%	Pure Agent Service / If margin then GST applicable
56	Other Training Expense	18%
57	Postage and Courier Charges	18%	Subject to certain exemptions
58	Printing & Stationery(Flex Printing, Broad Printing, Notice Printing)	18%
59	Rates and Taxes	Actuals	Depends on case to case basis
60	Recruitment Expenses	18%
61	Rent Paid	18%
62	Rent Paid for Mess (Employees)	18%
63	Repair and Maintenance - Building / Electrical / P& M / Others	18%
64	RTO Expenses	18% or 28%
65	Sales Promotion - Others / SSI / Display	18%
66	Sponsorship services	18%	Reverse Charge to Service Receiver - ITC can be availed
67	Security Charges	18%
68	Staff Recruitment	18%
69	Staff Training Expenses	18%
70	Staff Uniform Expenses	18%	If a third party bill comes
71	Stationery Expenses	18%
72	Subscription & periodicals	18%
73	Telephone Charges	18%
74	Transportation Charges - GTA	5%
75	Travelling Expenses Interstate	5%/18%	Services from Tour operators / Agencies
76	Travelling Expenses International	28%

Note: The above expense heads are for illustrative purpose only. The applicability of GST on a particular expense has to be checked on case to case basis.