The Goods and Services Tax (GST) mechanism in India is one of the primary roads maps with a view to integrate the taxation system of the country. Where the tax laws of GST are particularly peculiar is through the so called Reverse Charge Mechanism (RCM) which makes it mandatory that the buyer pays the tax instead of the seller. It operates where the transaction is with an ‘unregistered’ person for the supply of goods and services. Late and the Central Board of Indirect Taxes and Customs (CBIC) has issued the Notification No. 06/2024 (CGST Rates) on 8th October 2024 where metal scrap transactions with unregistered persons have been brought under RCM.

But in this article let us demystify this notification, reasons why metal scrap has been classified under RCM, implications for business and GST compliances.

Understanding Reverse Charge Mechanism (RCM) Under GST

The concept of reverse charge mechanism (RCM) means shifting of burden of paying the GST to the recipient of goods or services. This departure from the conventional tax system is expected to cover many areas where its application may otherwise be complicated like acquiring goods from unregistered dealers. RCM is very important in helping government recover taxes so that there be no instances of tax evasion particularly industries including scrap metal companies which are many with a very winding supply chain.

The recent Notification No. 06/2024 (CGST Rates), dated 8th October 2024 has also made submission of RCM for purchase of metal scrap from an unregistered person which has made simplification of GST compliance in this sector easier.

The major highlights of Notification No. 06/2024 are: Rates of CGST

The new notification extends reach to new supplies involving metal scrap with unregistered persons through the reverse charge mechanism. Key aspects of Notification No. 06/2024 (CGST Rates) include:

√Applicability of RCM

With effect from October 8, 2024, any registered person acquiring metal scrap from an unregistered person, has to pay GST under reverse charge mechanism. This implies that the recipient of metal scrap in this scenario has to pay for the tax as it deposits with the government.

√Scope of Metal Scrap Transactions

In this notification, it is stated all types of metal scrap be it the derivative of ferrous, non ferrous metals or any recyclable form of metal. This applies where the business is dealing with the buying, sorting or the processing of metals scraps.

√Reason for Including Entities Under RCM

The government of Vietnam has been trying to protect the revenue collection by introducing the RCM to include metal scrap for purchases from unregistered persons in order to curb tax evasion. Recycling industries may also be scattered with many informal and unregulated sources of scrap supplies. Under RCM, registered buyers are required to pay GST, therefore, compliance is made easy.

Why Metal Scrap Transactions Are Covered Under RCM

Unfortunately, the scrap metal industry in India is huge, and a large number of suppliers are unlicensed or loosely documented and can be small traders and merchants. In this kind of industry, many suppliers of supply their products without being registered under GST because they are considered small and most of the times this result to some form of tax leakages. That is why the government employs RCM to shift the tax burden to the registered buyer where the suppliers are not registered.

This gap may be closed by the government because the reverse charge on metal scrap transactions will make registered buyers that buy from these unregistered suppliers to take the responsibility of GST compliance.

GST Compliance and Filing for Metal Scrap Purchases

Purchases from unregistered dealers have now introduced the reverse charge mechanism into many businesses operating in the metal scrap industry. Here’s a step-by-step guide to managing RCM on such transactions:

√Calculate Tax Liability

Where metal scrap is acquired from an unregistered person, work out the GST for each acquisition at the rates applicable, as if the registered buyer is the supplier.

√Self-Invoice Generation

Since the unregistered supplier will not be preparing a GST compliant Tax invoice the buyer has to prepare a self generated self invoice. This document should capture the particulars of the transaction, the supplier and GST amount.

√Maintain RCM Records

Note all metal scraps acquired under RCM by writing down every purchase made. This record shall help in accurate filing for Goods and Services Tax and compliance with the same.

File in GSTR-3B Monthly

File these RCM transactions in the GSTR-3B form monthly, of course. Enter the total RCM amount and pay the tax to the government.

Claim Input Tax Credit (ITC)

When the recipient pays tax on the purchase of metal scrap under RCM, he is entitled to avail Input Tax Credit (ITC) for this tax. See whether the ITC claim is correctly recorded and reported in the GSTR-3B return file.

Implications for Businesses

The inclusion of metal scrap transactions from unregistered suppliers under RCM has implications for businesses in several ways:

• Increased Compliance Requirements: Newer forms such as self-invoicing and timely RCM reporting have to be adopted at the GST filing level at businesses.
• Cash Flow Impact: Since the tax is collected end the buyer, in a way, it affects the cash flow of the business for a short while but Input Tax Credit is availed thereafter.
• Accounting Adjustments: Accounting departments in firms need to adapt to RCM transactions reporting for improved account recognition and ease of compliance requirements.

Conclusion              

Metal scrap transactions are included under reverse charge mechanism through Notification noteworthy Number 06/2024 :(CGST Rates) is above marked effort of the government for extending theircle of tax payers across more sectors of the economy where registered players coexists with unregistered and small players. The underlying message of this notification is to directly target the registered buyers in an attempt to simplify GST collection as well as minimise tax evasion.

Companies that are in the metal scrap business should therefore note this new compliance regulation and change their GST modus operandi. To successfully implement the evolving RCM regime businesses should –

1. Manage RCM transactions effectively to minimize penalties and
2. File timely GSTR-3B returns and
3. Keep proper records properly to avail the correct Input Tax Credit to support efficient tax compliance.