GST Impact: MSMEs learn to deal with reverse charge mechanism the hard way

Larger firms are pruning vendor lists, weeding out small suppliers who are yet to register under GST

The new indirect tax regime is having the effect akin to setting a cat among pigeons for thousands of micro and small businesses across the country. This is largely on account of a provision to collect and pay tax on behalf of unregistered vendors and suppliers under the reverse charge mechanism (RCM). A concept borrowed from service tax, RCM is now applicable also to supply of goods. However, higher compliance costs, including larger working capital requirement, is causing a shakeout in the procurement chain of businesses, with smaller businesses, operating largely in the unorganised space, losing out.

Consider this: