Reverse charge mechanism

[Asked by Guest]

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

Reverse charge mechanism allows same-month input tax credit set-off against output tax, limiting cash outflow.
Reverse charge obliges a registered purchaser to pay tax on purchases from unregistered suppliers and treat that payment as input tax credit which may be claimed in the same month to offset output tax; any excess credit can be adjusted against subsequent months' liabilities. The practical compliance sequence is payment of reverse charge, reflection in the GST credit ledger, same month set off against sales tax, and carry forward of residual credit.