The GST implication in case of unregistered dealers has always been a matter of concern for small businesses. Under the Goods and Services Tax (GST), every registered dealer must comply with invoicing, tax collection, and filing returns. But what happens when a business deals with suppliers who are not registered under GST?
To answer this, we need to look at the reverse charge mechanism (RCM), compliance rules, and the impact on input tax credit (ITC).
Who is an Unregistered Dealer under GST?
An unregistered dealer is a supplier who is not registered under GST because their turnover falls below the threshold limit or because they have chosen not to register. Many small traders, artisans, and service providers fall into this category.
While buying from such dealers is not prohibited, the GST implication in case of unregistered dealers requires buyers to bear certain compliance responsibilities.
Reverse Charge Applicability
One major rule is that registered buyers must pay GST on behalf of the unregistered dealer under the Reverse Charge Mechanism.
| Situation | GST Treatment |
|---|---|
| Purchase from registered dealer | Dealer collects and pays GST. |
| Purchase from unregistered dealer | Buyer must pay GST under RCM. |
Therefore, even if the seller is not registered, the government does not lose tax revenue. The buyer pays GST in cash and later claims Input Tax Credit, if eligible.
Input Tax Credit on Purchases from Unregistered Dealers
The GST implication in case of unregistered dealers also affects ITC claims. When the buyer pays GST under RCM, the amount becomes available as Input Tax Credit in the same month. However, ITC can only be claimed if the buyer uses goods or services for business purposes.
For example, if a registered company buys raw cotton from an unregistered farmer, the company must pay GST under RCM. After paying, the company can claim ITC and adjust it against its output liability.
Impact on Businesses
When dealing with unregistered dealers, businesses must remember a few key points:
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Reverse charge liability increases working capital requirements.
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Proper self-invoice must be raised by the buyer.
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RCM liability cannot be adjusted with ITC—it must be paid in cash first.
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Non-compliance may result in penalties and interest.
As a result, while buying from unregistered dealers may sometimes be cheaper, the compliance cost can increase the overall expense.
Key Takeaways
The GST implication in case of unregistered dealers mainly revolves around reverse charge. Registered buyers must:
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Pay GST on purchases under RCM.
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Issue a self-invoice when buying from unregistered suppliers.
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Claim ITC after making payment.
Thus, businesses should carefully evaluate vendor choices. Whenever possible, sourcing from registered suppliers reduces compliance burden and cash flow issues.
Conclusion
The GST implication in case of unregistered dealers ensures that the government collects tax, regardless of supplier registration. Buyers who deal with unregistered parties must pay GST under RCM, issue self-invoices, and comply with filing rules.
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