I Am an Interstate Unregistered Buyer, and My Seller is Not Registered – What Does It Mean for GST?

In India, the Goods and Services Tax (GST) framework is designed to promote transparency, reduce the cascading effect of taxes, and ensure seamless movement of goods and services across state boundaries. However, businesses often face confusion when dealing with interstate transactions, especially when one party (either the buyer or seller) is unregistered.

If you are an interstate unregistered buyer and the seller is also unregistered, it raises several questions regarding your tax liability, GST compliance, and how the Goods and Services Tax (GST) regime will apply in such a scenario. In this blog post, we will discuss the implications of this situation, including how GST affects interstate transactions when neither the buyer nor the seller is registered.


Understanding the Basic GST Registration Rules

Before delving into specific scenarios, it’s important to first understand the GST registration requirements for businesses.

  1. Mandatory GST Registration for Inter-state Suppliers:

    • GST registration is mandatory for businesses that cross a certain threshold turnover limit (₹40 lakhs for goods or ₹20 lakhs for services). For businesses dealing in interstate supply of goods or services, GST registration is compulsory, regardless of their turnover.

  2. Unregistered Buyers and Sellers:

    • If both the buyer and the seller are unregistered, it means that the transaction occurs without the involvement of any GST-registered parties. This can raise questions about who will pay the tax and how the transaction will be treated under GST.

Implications of Interstate Transaction between Unregistered Buyer and Unregistered Seller

Let’s break down how interstate transactions work in this case, particularly when both the buyer and the seller are unregistered under GST:

1. Applicability of GST on Interstate Supply

  • Interstate Transactions: As per GST laws, interstate transactions are subject to Integrated Goods and Services Tax (IGST). Typically, if either the buyer or the seller is GST-registered, the supplier (seller) is responsible for collecting the IGST and remitting it to the government.

  • Both Parties Unregistered: In the case where both the buyer and seller are unregistered, the key issue is that the seller is not liable to collect or remit IGST, and the buyer (unregistered) is also not required to pay the tax. GST law does not impose tax when both parties are unregistered, and there is no mechanism for tax collection in such a scenario.

2. RCM (Reverse Charge Mechanism) Does Not Apply

  • Reverse Charge Mechanism (RCM) allows tax liability to be transferred from the supplier to the recipient in certain circumstances. However, RCM is applicable when the recipient is a registered taxpayer, and the supplier is unregistered. Since both the buyer and seller are unregistered in this case, RCM does not apply to such transactions.

  • RCM Not Triggered: Since the buyer is also unregistered, the recipient cannot be subjected to RCM because RCM generally applies to transactions between a registered buyer and an unregistered seller.

3. Tax Liability and Compliance

  • No Tax Collection: Since the seller is unregistered, they will not be collecting any IGST on the interstate sale. Similarly, the unregistered buyer has no obligation to pay GST on the transaction, nor is there any requirement for them to remit the tax.

  • Invoice and Documentation: Even though there is no GST collection or payment, the buyer should ensure that the transaction is documented. In the absence of GST registration, the seller might issue a non-tax invoice or a bill of supply indicating that no tax is charged on the sale.

  • Tax Compliance Issues: While no taxes are being collected or paid, this can lead to potential compliance issues, particularly if the buyer wishes to claim any Input Tax Credit (ITC) in the future or if the transaction is part of larger business operations.

4. Business Risks and Challenges for Unregistered Parties

  • No Input Tax Credit (ITC): If you are an unregistered buyer, you cannot claim ITC on any input taxes even if GST were applicable. This could result in higher overall costs since unregistered buyers will not be able to benefit from the input tax paid on purchases.

  • Lack of Documentation: If both parties are unregistered, there may be a lack of proper documentation that would typically be required to validate the transaction under the GST system. This can lead to issues in case of an audit or tax investigation in the future.

  • Potential for Future Registration: If the business grows or if the buyer’s turnover exceeds the GST registration threshold, there might be a need for GST registration. The unregistered buyer may need to reconsider their compliance strategy and plan for proper registration to avoid tax issues.

5. Impact on Future Transactions and Growth

  • GST Registration of Seller: If your business continues to grow, the seller may eventually become liable for GST registration due to increased turnover or other business requirements. In such cases, the tax structure would change, and the seller would be required to collect IGST on interstate supplies.

  • GST Registration of Buyer: If the buyer’s turnover crosses the GST threshold or if they decide to register voluntarily, they may become eligible to claim Input Tax Credit (ITC) on future purchases. This could result in tax savings and improve cash flow for the business.


What Should You Do in This Scenario?

While there are no immediate tax obligations for both an interstate unregistered buyer and an unregistered seller under GST, there are several steps that should be considered:

  1. Understand GST Compliance: Both parties should understand the GST registration requirements. If you plan to expand your business or if your annual turnover crosses the prescribed limit, obtaining GST registration will become mandatory.

  2. Document Transactions Properly: Even if no GST is applicable, maintaining proper documentation such as bills of supply or non-tax invoices will help in the event of a future audit or tax inspection.

  3. Monitor Business Growth: If the buyer’s or seller’s business turnover exceeds the GST registration threshold, it may be necessary to register under GST and comply with all tax collection, reporting, and remittance requirements.

  4. Consider Voluntary Registration: If the business is growing, both parties should consider voluntary GST registration. This allows the buyer to avail Input Tax Credit (ITC) and encourages smoother tax compliance as the business expands.


Conclusion

As an interstate unregistered buyer dealing with an unregistered seller, the current GST regime does not require you to pay any tax or fulfill any tax compliance obligations. However, this situation is far from ideal for long-term business sustainability. While there are no immediate GST implications for this scenario, both buyers and sellers should consider future business plans and growth to ensure they are prepared for when the GST registration threshold is crossed.

In the future, when either the buyer or seller becomes registered under GST, the process will change, and taxes like IGST will be applicable to interstate transactions. To avoid any legal or compliance issues, it’s essential to stay informed about the requirements of the GST Act and take the necessary steps when your business grows.

Comments

Post a Comment

Popular posts from this blog

GST Registration for Non-Resident Taxable Persons in India

India's Goods and Services Tax (GST) system aims to create a single, unified tax structure to streamline the collection of taxes on goods and services. While most businesses in India are required to register for GST if they meet specific thresholds, there are unique provisions for Non-Resident Taxable Persons (NRTPs) under the GST framework. These provisions cater to businesses or individuals located outside India but engaged in the supply of goods and services in India. In this blog post, we will explore what constitutes a Non-Resident Taxable Person (NRTP) , their GST registration requirements, and the relevant provisions that businesses need to follow to ensure compliance under GST in India. Who is a Non-Resident Taxable Person (NRTP)? A Non-Resident Taxable Person is defined under Section 2(77) of the Central Goods and Services Tax (CGST) Act, 2017 , as a person who: Is not a resident of India , Supplies goods or services in India , either directly or indirectly, or Engage...
Read more
  Eligibility Criteria for the Composition Scheme To be eligible for the GST Composition Scheme, businesses must meet the following criteria: Turnover Limit : The business must have a turnover of up to ₹1.5 crore (₹75 lakhs for special category states). Type of Business : The business should be a  manufacturer ,  trader , or  restaurant  (not providing services like consulting or professional services). No Inter-State Supply : The business must not be involved in inter-state sales, i.e., selling goods across state borders. No E-Commerce : Initially, businesses involved in  e-commerce  were not eligible for the Composition Scheme. However, there are provisions that allow certain e-commerce businesses to opt for it, which we will discuss next.
Read more
tell me about gst registration requirments for interstate service providers (is there any threshold of Rs. 10 lac)
Read more