If you are registered under GST, you are liable to pay GST on purchases from unregistered dealers under the reverse charge mechanism. This is suspended till 31st March 2018. Still, you may follow the same process for entering transactions but do not create an RCM invoice.
Your purchases are done through the following options:-
1. Purchase Invoice (Transfer In & Retail Purchase Invoice) - For saleable goods
2. GST Transactions -> GST Input (Purchase) - For expenses and capital goods.
3. Sales Return Tax Invoice - For expired goods
When you purchase from an unregistered dealer or registered dealer under composition, tax is not calculated as these dealers cannot charge tax under the GST regime. These suppliers issue bill of supply to you. Payment of GST under Reverse Charge is required only for unregistered dealers and you don't need to pay a reverse charge for purchases for composition dealers.
In some cases, for the pharmaceutical trade, only one case is there. On Freight and cartage above Rs 750 per consignment, a reverse charge is payable for purchases from any GTA (Goods transport agency). GTA can charge 5% or 12% GST if it is registered. If it is not registered, it does not charge GST in the invoice, you have to pay a reverse charge @5% and you can claim ITC for the same.
For purchases under GST, ITC is available in most of the cases but there are certain situations where ITC is not available under section 17(5). Please read the following article for more details.
You can create an RCM invoice using the GST Transactions menu. RCM invoice is required to be created if your purchases from the unregistered dealer for a single date is more than the specified limit (Rs. 5000) for this date. It includes all three purchase options mentioned above. You can see the list of transactions when you select ADD for RCM invoice and those dates when a purchase is above the specified limit, are shown as selected. A single RCM invoice can be created for the whole month's purchases. You may wish to adjust the date of entries to get maximum benefit for this specified limit.
For registered dealers under composition, ITC is not available so it is an additional tax payment over and above composition charges 1% or more as applicable. So you should avoid such purchases beyond the specified limit for the date. Generally, rent payment for the shop is not avoidable which can be adjusted by modified rent agreements (On a weekly basis or so).
For registered dealers (regular, not composition), ITC is available for tax deposited under RCM invoice. The important issue is that the RCM tax amount is to be paid in cash. So if you have no liability of tax due to ITC being available more than output tax, still you need to pay RCM invoice tax in cash every month. It creates an impact on cash flow but no real liability is there at the end as ITC is available to you except those expenses where ITC is disallowed.
To create a reverse charge invoice, you will have to enter your purchases as above, no GST to be calculated there. For GST transactions -> GST Input (purchase), you will have to create billing heads. Billing Head Master is a new master introduced for this purpose where you can specify HSN/SAC and posting account for GST billing heads/expenses/purchase of capital goods. It is required as there are multiple HSN/single posting account or Single HSN/Multiple posting account cases. You have to create a billing headmaster for everything except goods purchased through purchase invoice, whether you purchase from a registered dealer or an unregistered dealer.
You can view the RCM invoice and remove it if you want to create it again. You have to file this detail in GSTR 2. Details are filed even if ITC allowed or not. If you are under composition you have to file in GSTR 4 and pay tax under RCM invoice.
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