Understanding the Impact of Unregistered Dealers on GST and Pricing

When an unregistered dealer supplies goods to a person, the implications on GST (Goods and Services Tax) compliance, pricing, and comparative advantage are significant. This article delves into these aspects, explaining the legal framework and providing real-world examples to clarify common doubts.

Legal Framework and GST Implications

Under the GST framework, unregistered dealers with an annual turnover below the threshold limit are exempt from paying GST. Therefore, they are unable to charge GST on their sales. However, they still need to account for the impact of GST on pricing and their business operations.

Key Points:

Unregistered dealers cannot charge GST as they are not registered under the GST regime. The price of the product may appear lower due to the lack of GST, but it is not a clear-cut advantage for consumers, as GST was likely already accounted for in the pricing process. Unregistered dealers try to gain an advantage by offering cheaper prices, but this is an incomplete picture since they do not get input tax credit (ITC) for products they purchase. This means the price may reflect only a minimal reduction in cost.

Unregistered Dealers and Registered Dealers

When unregistered dealers supply goods to registered dealers, the concept of Reverse Charge Mechanism (RCM) comes into play. Under RCM, the registered dealer has to pay GST and can claim input tax credit (ITC) on the purchase.

Key Points:

A registered dealer can claim ITC on purchases from unregistered dealers, thereby offsetting their input taxes. An unregistered dealer who supplies goods directly to consumers (unregistered or registered with composition scheme) does not have to worry about charging or claiming GST, but still, the effective price may be the same as the GST-registered dealer due to the nature of transactions.

Government Revenue and Value Chain

The GST is structured to ensure that the tax is ultimately borne by the consumer, whether the dealer in the supply chain is registered or unregistered. This is because manufacturers always pay GST upfront when they sell their goods, and the tax is recovered gradually at each stage.

Example:

Scenario: A manufacturer like Samsung pays GST on its sales and passes the cost along the supply chain. Distributor Stage: The distributor buys the product from Samsung and sells it to an unregistered dealer (UD/CSD). The distributor, being a registered dealer, claims ITC on the input tax paid to Samsung but pays the remaining difference in GST from its own pocket unless the UD/CSD also registers for GST. UD/CSD Stage: The UD/CSD resells the product to an end customer, adding their own margin but not charging GST since they are unregistered. The total cost to the end customer includes the original price plus their margin and any additional GST they may need to recover from the end customer.

Even though the UD/CSD does not charge GST, the aggregate GST liability is recovered at every step of the supply chain, ensuring that the government does not lose revenue.

Conclusion and Practical Tips

While unregistered dealers offer a potentially cheaper price due to the absence of GST, this is not necessarily an undue advantage. The overall cost structure and tax recovery mechanisms ensure that the consumer pays similar prices, albeit without the direct visibility of GST charges in the transaction.

For those considering operating with unregistered status, it is crucial to understand the long-term implications. Smaller traders often seek to remain below the threshold to avoid the complexities and costs associated with registration. However, as business scales, registration for GST becomes more advantageous, ensuring full compliance and avoiding potential penalties.

Lastly, the understanding of GST and its application in various supply chain scenarios can be clarified through resources such as the videos by Shri Pradeep Malviya on Financial Tax Help.

Stay informed and compliant to navigate the evolving landscape of GST effectively.