How to handle the tax in when availing services from unauthorized sector

How to handle the tax in when availing services from unauthorized sector

Understand the GST: Mechanisms-

Two mechanisms are there: a) Fore-ward Charge b) Reverse Charge

What is Fore-ward Charge Mechanism?

Fore-ward charge means liability to pay the taxes on the goods & services is on the supplier. E.g.: X sells goods for Rs.1 Lac to A, X will charge & pay tax on the said goods (say 5% GST) Rs 5000.

What is Reverse Charge Mechanism?

Reverse charge means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of goods or services or both. E.g.: Z sells goods for Rs.1 Lac to B, in this case B will pay tax on the said goods (say 5% GST) Rs 5000 on the basis of goods/services receipt.

On which supplies Fore-ward/Reverse charge will apply?

In case of goods right now no such goods has been notified yet particularly on which tax liability is be discharged by reverse charge mechanism. However, if the goods are bought by the registered person under GST is from the un-registered person then the liability to raise Tax Invoice & pays the liability of Tax on such goods is of receiver.

In case of Services presently 18 services has been notified on which tax liability is to be paid by the recipient of services instead of the supplier, although the supplier is registered or not. However, in rest of the services if received through the un-registered person then the liability for the payment of tax on such services is of recipient.

On further understanding of the provisions, it will be clear that it is the liability of the person who is receiving goods and services and utilizing them for the business or furtherance of business. All the business organizations whether small or big will have urgencies and necessity to use the services of small time vendors, service providers, and services of skilled man power who will be un-organized sector and will not have registration under GST.

For example:

  1. If we analyze an organization or a small business house’s small time requirements, there will be petty purchases and expenses of staff welfare, where it requires for purchase of Milk, coffee powder, tea powder, sugar etc.
  2. The supply of water to the business by a water taker provider (it is the most essential requirement in SMEs).
  3. Services of a plumber where there is water leakage.
  4. Photo copy services,
  5. Book binding services,
  6. Small electrical repair or a general up keep.
  7. Purchase of a Bulb.
  8. Purchase of Pen for office.
  9. Purchases for Puja and payments to Pundit.

How to raise & discharge the tax liability?

Every registered person availing services from an un-registered dealer or purchasing goods from un-registered dealer has to pay the GST under the respective HSN Code of the Service/Goods by raising an Invoice. It means all the registered persons, liable for GST for un-registered services/ goods are to raise Invoice on self and file returns to take Input Tax Credit.

This will be additional activity for the registered dealers who are liable to pay GST under reverse charge mechanism and are supposed to know the rate of GST and HSN code for each and every category of service or goods procured.

Usual practice of the industry is to ascertain the service category and HSN code for the Goods produced or Services rendered by that industry for billing. But the effect of reverse charge under GST will make all the Tax Payers to know the rate of GST and HSN codes for all the purchases and services (un-registered). So an expert advice will be mandatory for all the GST payers. A small size business house/SME/distributor who has employed an accountant, need to take the services of an expert.

Whether the tax paid under the reverse charge mechanism is allowed as Input Credit?

GST paid by the recipient under reverse charge on some of the purchases or services from un-registered persons, may be available Input Tax Credit, but not on all the goods and services paid under revere charge, as there are restrictions and conditions for Input Tax Credit.


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