Reverse charge mechanism

[Vishal mandaviya]

Reverse charge

Lets start with an example of person doing trading of cotton.
For example Mr. A is cotton trader. He has GST number.
Lets say this is July 2017 and Mr. A purchase some amount of cotton from farmers (i e. Unregistered dealer). He buys a cotton worth of ₹ 1 Crore and sale it.
Now for GST he will need to pay 5 lakh for sales and 5 lakh as a reverse charge. So he pays total 10lakh of GST into which 5 lakh will be saved as an ITC.
Now the next month i.e. August.

This time Mr. A purchase cotton worth of 20lakhs and sell it.
Now this time he will pay 1 lakh on sales and 1 lakh on purchase (i.e. reverse charge) but he will get ITC reduce from sales GST so he will need to pay only reverse charge that is 1 lakh (ITC remain 4 lakh). But paid 1 lakh as reverse charge so again ITC will be 5 lakh in next month.

So by this mechanism Mr.A's ₹ 5 lakh will always remain as GST credit. This amount can increase but never can decrease.

It means if you are doing business with unregistered dealer your some amount of money will always remain to government unless you stop the business.

Correct me if I'm wrong anywhere!! (Please forgive my english, hope you understand the point)

AI Summary

Understanding GST Reverse Charge: Cotton Trader's Use of Input Tax Credit to Manage Payments and Liabilities A discussion on the reverse charge mechanism under the Goods and Services Tax (GST) system highlights how a cotton trader, referred to as Mr. A, manages GST payments when buying from unregistered dealers. Initially, Mr. A pays GST on sales and a reverse charge on purchases, but he can claim Input Tax Credit (ITC) to reduce his liability. The reverse charge ensures that some funds remain as GST credit, which can accumulate but not decrease unless business with unregistered dealers ceases. A reply clarifies that this mechanism aims to widen the tax base, but the provision was suspended until June 2018. Additional replies explain how ITC can be used to offset GST liabilities, minimizing cash outflow.