Section 9(4) of CGST, RCM in case of purchase from unregistered supplier

Will RCM be applicable in case of Purchase from unregistered supplier?

As you might be aware that, as per Section 9(4) of CGST Act, 2017 , RCM is to be paid in case of intra-state purchase from unregistered supplier was suspended till 31^st March 2019 through different notifications which have been issued by the government from time to time.

After a long gap, Sub-section (4) of Section 9 of CGST Act 2017 vide NotificationNo. 07/2019- Central Tax (Rate) has been effective from 01^st April, 2019 and will be applicable on “Promoters” only for the specified supplies.

 

Before discussing the same, let’s briefly discuss about Section 9(4) of CGST Act, 2017 which was amended in Central Goods and Service Tax (Amendment) Act, 2018

“The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, 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 such supply of goods or services or both.”

In simple terms: RCM is applicable on the specified class of registered persons in case they purchase specified goods and services from an unregistered person, and all the provisions of the Act i.e. return filing, issue of invoice, deposit tax to government etc. shall apply to such registered person.

On 29^th March, 2019 vide Notification No. 07/2019- Central Tax (Rate), government notified that sub-section (4) section 9 of CGST Act, 2017 will be applicable only for “Promoter” and for the following supplies made by unregistered suppliers.

The above Supplies are described as below:

1. For Input and input Service:

If ‘Promoter’ (Recipient) purchased input goods and services used in the construction of project from the unregistered person, the he is liable to pay GST under RCM on the supplies made from unregistered supplier under Section 9(4) of CGST Act, 2017 I respect of shortfall from the minimum value of goods or services or both required to be purchases for construction of project.

Also, the term used in the notification “shortfall from the minimum value of goods or services or both required to be purchased by a promoter” means, minimum 80% of input and input services or both required to be purchased from registered person and 20% can be purchase from unregistered person. Also, if this condition gets failed, promoted has to be pay RCM on the shortfall from 80% threshold.

2.  For Purchase of Cement:

The Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019 has amended the category of Cement from NotificationNo. 07/2019- Central Tax (Rate)

“Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975).”

In simple terms: RCM will be applicable on any amount of purchase of ‘Cement’ by the “promoter” from an unregistered supplier for the construction of project during the financial year, irrespective of the condition of 20/80%, as in case of input goods and services at point 1 above i.e on any purchase from unregistered person, RCM is applicable.

 3. For Purchase Capital goods:

As per Notification No. 07/2019- CentralTax (Rate), “promoter” is liable to pay GST under RCM for purchase of any capital goods from any unregistered supplier for construction of project during the financial year.

Let's understand this by Example:

Particulars	Case-1	Case-2	Case-3
Purchase from Registered person	60%	50%	55%
Purchase from unregistered person	25%	20%	20%
Cement from unregistered person	15%	15%	10%
Capital goods from unregistered person	NIL	10%	5%
Purchase under Section 9(3) of RCM	NIL	5%	15%
Purchase from composition person	NIL	NIL	5%
Total purchase for calculating limit of 80%	75% (60%+15%)	80% (50%+15%+10%+5%)	90% (55%+10%+5% +15%+5%)
Condition of 80% threshold	No	Yes	Yes
RCM  on	5% Purchase from unregistered Person	15% Cement 10% Capital goods	10% Cement 5% Capital goods

Important points that need to be consider before calculating total purchase from input and input services:

• Expenditure such as salaries, wages etc should not be considered in calculating the 80% threshold of  input and input services because these are not supplies under GST Schedule III.
• Inward supplies of exempted goods/services shall be include from unregistered person while calculating 80% threshold.  
• Transaction by way of grants of development rights, long term lease, FSI etc. are not required for calculation 80% threshold.
• The calculation of 80% threshold has to be done in every financial year i.e.no benefit will not be carry forward to next year if there is any excess purchase from registered person in the financial year.

For more issues relating to estate sector:https://www.cbic.gov.in/resources//htdocs-cbec/gst/FAQ(II)-Real-estate-sector-1405.pdf

Writer Opinion:

As per my opinion, “promoter” should purchase the ‘cement’ and ‘capital goods’ from the registered supplier as these are the major cost which incurred in the construction of  project. Also, purchase from registered supplier will reduced the cost of project, as the tax paid on inward supplies will be utilised against the outward tax liability and this will not become the part of cost.

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