Trading with unregistered person under GST and levy under reverse charge

Last udpated: Nov. 4, 2017, 9:12 p.m.

A registered person is one who has registered under GST and unregistered person is one who is not registered under GST. This is a simple definition of registered and unregistered person in a layman language.

As a registered person to comply correctly with GST law, you must understand certain requirements applicable when dealing with an unregistered person.

gst unregistered person

During the course of your business you might purchase certain items, for example papers, pens etc. from a local vendor who is not registered under GST. You need to pay tax on his behalf.

Before we move to depth of this concept, first understand certain words used in CGST Act, IGST Act and other GST acts.

Registered person means a person who is registered under section 25 but does not include a person having a Unique Identity Number.

Reverse charge means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act.

I have taken these 2 definitions because every time a registered person deals with an unregistered person, registered person becomes liable to pay tax on these supplies.

Section 9 of CGST Act, which talks about levy and collection of taxes, specifies that a registered person has to pay tax under reverse charge if supplies are received from an unregistered person.

(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.

What is Reverse Charging under GST?

It is a provision contained under GST where upon certain supplies, the recipient becomes liable to pay tax instead of supplier.

This is not a new concept, even under VAT and Service Tax regime the concept existed but under service tax a list of persons was specified unlike in GST everyone has to comply with sub-section 4 of section 9 of CGST Act.

In state where I practice (Karnataka), if one purchased goods from an unregistered dealer (URD purchase), the buyer was liable to pay tax on such purchase.

Tax liability if goods or services are purchased from an unregistered person?

I have quoted section 9 above, as per this section government will issue the list of nature of transaction on which tax will be levied and collected on reverse charge basis.

However issued GST laws already contains provisions for supplies by an unregistered person to a registered person. For example, section 9(4) of CGST Act, specifies that registered person shall pay the tax in case supply to him is made by an unregistered person. Further all provisions are applicable to him as if he is the supplier discharging tax liability.

If you buy any product or service from an unregistered person, then you have to pay tax.

Input credit on tax paid under reverse charge basis will be available?

Input tax credit against the tax charged on supplies from unregistered person is available however to claim the input credit, registered person first has to pay the tax.

Input tax credit of tax paid on behalf of unregistered person can be availed but first the tax should be paid to government.

You can claim the input against tax payment, so practically you will be able to avail credit only at the time of filing GST return for next month.

What will the impact of reverse charge provisions on dealing with unregistered person?

The major impact will be that most of the registered person will avoid dealing with unregistered parties. The registration ratio will go up due to limited scope of trade partners.

An unregistered person will find it difficult to trade with registered persons. Due to tax liability and compliance liability gets shifted on recipient, registered persons will avoid dealing with unregistered suppliers.

Tax compliance cost will go up if a registered person deals with an unregistered dealer.

Example to show cost impact due to dealing with unregistered person:

Particulars Registered Person Unregistered Person
Cost 10,000 10,000
Tax charged 1,800 1,800
Input in same month 1,800 -
Cash outflow 11,800 11,800
Tax input 1,800 -
Impact on Tax outflow -1,800 -
Interest expense for one month - 15
Net cost on purchase 10,000 10,015

With help of above example, you can understand that indirectly purchasing from an unregistered person will have negative impact on cost of supplies.

To the above cost also add the cost that will be incurred on compliance shifted to buyer due to reverse charge provisions.

Posted by Pulkit Sharma under GST

A Chartered Accountant by qualification. Love to code and share knowledge. On a mission to create the largest knowledge library for finance and taxation professionals. Check Profile


Comment by GST Payer

Trading with unregistered businesses will be a big risk. I think the tax consciousness will increase under GST.

Comment by Gawde Electricals

I have received a bill on advance of rs 15000 paid for inter state purchase of service from urd . Will I be liable to pay igst . If yes then will i have to pay igst on the suppliers behalf. Can I get the tax benefit in the next month.

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