GST liability in case payment to Unregistered Service Provider exceeds Rs. 20 Lakhs

[Ashish Gupta]

Ours is a Private Limited Company and we are registered dealer under GST. We have made payment to a labour contractor for repairs work done in our factory. Payment is in excess of Rs. 20 Lakhs in 1 financial year. He is an individual and is an unregistered dealer under GST. We want to know what impact it will have on us with respect to GST.

[Amit Agrawal]

From13.10.2017, service receiver (i.e. Pvt. Ltd. Co.) is not liable to pay GST under RCM in given situation.

Till 12.10.2017, service receiver (i.e. Pvt. Ltd. Co.) is not liable to pay GST under RCM in given situation where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day

Of-course, service provider (i.e. an individual) is liable to get himself registered and pay GST under forward charge in given situation.

So, non-payment of gst by the service provider will not have any legal impact on the service-receiver in given case. This is subject to presumption that contract between two is drafted in such a way, where price is inclusive of all taxes as applicable and / or service provider does not have recourse to seek reimbursement of gst in future from service receiver in any circumstances.

P.S. On good faith basis & for maintaining cordial business relations etc., one can / should always educate concerned vendor about his liabilities under GST, as same will be detected by Dept. sooner or later (specially if you are deducting TDS there-against). But, if vendor still does not want to comply gst law, he will be at very serious risk (for taxes, interest & penalty u/s 74 etc.) and not the service-recipient in given case.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Padmanathan KV]

Agree with the views of Ld Amit sir. Assuming this repair was done and payment was made after 13-10-2017, there will not be any RCM liability to the service recipient i.e. Pvt Ltd Company. However, the contractor is exposing himself to the huge risk by not registering and paying GST. Please educate the contractor about the potential risk of Deppartment demanding the tax, interest and penalty from him for non-compliance. Also see how the contract is worded, ie whether the contractor has any recourse to collect tax from you at later point of time in case it is demanded by department.

[Shilpi Jain]

Also the contractor could be eligible for composition scheme if his turnover does not exceed Rs. 50L in the year. He could consider opting for this.

Also ensure that you have some written communication with this person to indicate that he should register.

There is a provision in section 122 which levies a penalty of Rs. 50k if any person

(c) receives or is in any way concerned with the supply of, or in any other manner deals with any supply of services which he knows or has reasons to believe are in contravention of any provisions of this Act or the rules made thereunder;

[KASTURI SETHI]

As and when the records of Private Ltd. Co. (receiver of service from the contractor) are examined by the Range Office/Audit Wing/Preventive Branch of the department, non-payment of GST by the Contractor will be detected(nabbed) and the Contractor (Supplier of service) will have to face the music. The contractor cannot conceal his income. He must have shown his receipts in Income Tax Returns. Timely compliance by the Contractor on his own will prove his bona fides.

I agree with the views of the experts.

AI Summary

Reverse charge inapplicable where unregistered service provider supplies labour; supplier remains liable for GST and penalties.
Under the post-13-10-2017 regime the service recipient is not liable to pay GST under the reverse charge mechanism for payments to an unregistered individual contractor; the supplier is obliged to register and pay GST under forward charge. The contract should state that prices are tax-inclusive and bar later reimbursement, and the recipient should obtain written communication urging supplier registration because the supplier remains exposed to tax, interest and penalty for non-compliance.