GST's Rs 20-lakh threshold exemption means little

Big firms asking vendors to register even if exempted, to shift compliance burden

The exemption granted from registration under the goods and services tax (GST) system for entities with annual sales below Rs 20 lakh isn’t working for many of these, which supply to big companies.

For, the latter are, whatever the threshold, asking such entities to register and pay the tax. Also if the entity is registered even if its turnover is up to Rs 20 lakh, it may have to pay tax even for goods and services sold below this amount.

Any registered entity purchasing goods or services from unregistered dealers are allowed under the system to pay tax on these and then claim the credit on this, termed a reverse charge (RC) mechanism — normally, it is sellers which would be expected to pay.

M S Mani, senior director at consultancy Deloitte, says mid-size companies would not mind paying the tax and then apply for credit, if dealing with unregistered entities. They’d prefer this to waiting for dealers to pay the tax themselves and then get input tax credit; some of the vendors might not even pay. Mid-size entities would prefer the former route to a squeeze on their liquidity. Big corporate groups, however, have lots of vendors to deal with in even one part of the business. If the vendor does not pay tax, it might lose the business. So, they can compel unregistered vendors to get registered, say experts.  

"The government has added the compliance burden on the purchaser in the case of unregistered vendors. Hence, people would not want to deal with unregistered vendors," said Pratik Jain, indirect tax leader at consultancy PwC.

In other words, if the vendor is not registered, it cannot pass on the credit. "Whatever input taxes one pays on material or goods also becomes a cost on the transaction. So, this discourages a businesses to buy from unregistered vendors," Jain said. A list of goods and services under RC has been issued for the GST system. It is wider than in the earlier system of value-added tax (VAT) and service tax. There was an RC under VAT in only a few states, such as Punjab and Haryana in the case of purchase tax. In services, it was there for a few, such as manpower. Under the GST, any registered entity buying goods or services from unregistered vendors has to pay the tax on these. What has not changed is the audit process with services, explains Mani. In service tax, the authorities used to take details of unregistered entities from registered ones to check on the former. That would be there under the GST as well.

In the earlier system, there were two types of RC, full and partial, unlike now. A service such as a goods transport agency would have a full RC and a partial (40 or 50 per cent) on, for instance, a work contract service. The partial RC has been ended; it is now a uniform 100 per cent for all services and goods bought from unregistered vendors.  

Mani said, "Under a 100 per cent RC, it is easier to collect. The whole collection is from one person, the recipient.” The government’s collection cost falls and, from the perspective of the person who is paying the RC, it will also be easier, as they will pay the entire amount and get full credit. 

Jain adds, "Whether you buy any good or service, as long as they are from unregistered vendors, they have to pay a tax on full value -- a fundamental change.”

Reverse charge under GST

• Goods or services bought by registered entity from unregistered vendors
• Anyone who is located in a non-taxable territory to another located in the taxable territory other than non-assessee online recipient
• Services provided by a goods transport agency in respect of transportation of goods by road
• An individual advocate or firm of advocates to any business entity
• An arbitral tribunal to any business entity
• Sponsorship services to any body corporate or partnership firm
• Services provided by the govt or local authority to any business entity