Reverse Charge Liability (RCM) on Metal Scrap: Supplied By Unregistered Suppliers To Registered Traders From October 10, 2024 Onwards.

As of October 10, 2024, there are significant changes to the Goods and Services Tax (GST) framework concerning the purchase of metal scrap from unregistered suppliers by registered traders. The introduction of the Reverse Charge Mechanism (RCM) in this sector aims to bring more accountability and prevent tax evasion in the metal scrap trade. The GST Council\'s decision at its 54th meeting mandates that traders purchasing metal scrap from unregistered suppliers must now comply with the Reverse Charge Mechanism, which places the onus of GST payment on the buyer instead of the seller.

Key Changes in the GST Provisions for Metal Scrap Purchases

Registered traders who purchase metal scrap from unregistered persons must adhere to the following key provisions to comply with the GST law:

1. Reverse Charge Mechanism (RCM) on Metal Scrap Purchases

• The Reverse Charge Mechanism (RCM) is a taxation concept where the liability to pay tax on a transaction is shifted from the supplier to the recipient of the goods or services.
• Under this mechanism, the registered trader becomes liable to pay GST instead of the unregistered supplier.
• As per the new rules, when a registered trader purchases metal scrap from an unregistered person, the buyer must declare and pay 18% GST under the Reverse Charge Mechanism.
• The RCM provision applies to all transactions involving the supply of metal scrap, provided the supplier is not registered under GST.

2. Self-Invoicing Requirement

• Section 31(3)(f) of the CGST Act, 2017, mandates that when a registered trader purchases goods from an unregistered supplier, the trader must issue a self-invoice.
• A self-invoice is a document generated by the buyer (registered trader) in place of the supplier’s invoice, as the unregistered supplier is not legally authorized to issue tax invoices.
• The self-invoice must:
  • Reflect the transaction details, including the description and quantity of the metal scrap purchased.
  • Include the 18% GST on the transaction value.
• This self-invoice serves as proof of the purchase and the tax declaration made under RCM.

3. Payment of GST via GSTR-3B

• The registered trader is responsible for paying the GST on the purchase of metal scrap through the GSTR-3B return.
  • GSTR-3B is a monthly GST return used to summarize sales, purchases, and tax liabilities.
  • The trader must report the transaction in the Reverse Charge section of the GSTR-3B return.
  • The 18% GST must be paid via the cash ledger in the GSTR-3B return.
• Compliance Note: Failing to declare this transaction or pay the GST under RCM may lead to penalties under the GST law.

4. Input Tax Credit (ITC) Eligibility

• After paying the GST under the Reverse Charge Mechanism, the registered trader can claim Input Tax Credit (ITC) on the tax paid, provided the metal scrap is used for further taxable supplies in the trader\'s business operations.
• The ITC allows the trader to offset their GST liability from other sales with the GST paid under RCM.
• Benefit: This reduces the overall tax burden for traders engaged in the business of metal scrap.

5. Legal Framework for Trade and Transportation

• From October 10, 2024, the trade and transportation of metal scrap between registered traders and unregistered suppliers will only be legally valid if the following conditions are met:
  • The registered trader must issue a self-invoice.
  • The 18% GST must be paid under RCM.
  • The transaction must be reported and declared in the GSTR-3B return.
• Non-compliance: If the registered trader fails to issue a self-invoice or pay the GST under RCM, the trade will be deemed illegal, potentially resulting in penalties and legal action.

Special Implications for Different Business Types:

1. Composite Dealers:
2. Exempt Supply Providers:
3. Manufacturers and Recyclers:

• Composite dealers must pay 18% GST under RCM on metal scrap purchases from unregistered suppliers.
• Since composite dealers cannot claim ITC, the cost of the tax will add to their expenses, increasing their financial burden.
• Registered traders engaged in supplying exempt goods or services must still pay the 18% GST under RCM on metal scrap purchases.
• While they can technically claim ITC, it offers no practical benefit if their output supplies are exempt from GST, resulting in higher operational costs.
• Manufacturers and recyclers buying metal scrap from unregistered suppliers are liable to pay GST under RCM.
• They can claim ITC on the GST paid if the metal scrap is used for producing taxable goods, which can help reduce their tax burden.

Impact of Cash Ledger Requirement Under RCM on Metal Scrap Purchases: Strain on Cash Flow and Working Capital.

One of the significant burdens under the Reverse Charge Mechanism (RCM) on metal scrap purchases from unregistered suppliers is that the RCM liability must be discharged from the cash ledger only, and not from the credit ledger. This rule means that even if the registered trader has a sufficient Input Tax Credit (ITC) balance in the credit ledger, they cannot use it to offset the RCM liability. The requirement to pay from the cash ledger can strain the trader’s cash flow, as it compels them to allocate liquid cash specifically for the RCM tax payment, which could otherwise be utilized for business operations or other expenses. This restriction on credit utilization directly impacts the working capital of the taxpayer and may lead to financial constraints, especially for businesses with thin cash reserves.

Understanding the Legal Basis for RCM on Metal Scrap

• Generally, under the GST law, the supplier is liable to pay GST on the supply of goods or services. However, under Section 9(3) and 9(4) of the CGST Act, 2017, the liability to pay GST can be shifted to the recipient of the goods or services through the Reverse Charge Mechanism.
• Section 9(3) empowers the government to notify categories of goods and services on which the recipient (registered trader) would be liable to pay GST.
• Following the 54th GST Council meeting, the government notified the metal scrap sector under Section 9(3), introducing RCM for transactions between registered traders and unregistered suppliers.

Government’s Intent Behind Introducing RCM on Metal Scrap

• The metal scrap industry is one of the sectors that has seen significant non-compliance with GST regulations. By introducing the Reverse Charge Mechanism, the government aims to curb tax evasion and improve tax compliance.
• The responsibility of GST payment is shifted to the registered trader, who is more likely to comply with the GST rules and file returns regularly.
• Even if the unregistered supplier does not exceed the threshold limit for registration, the registered trader must still pay the GST under RCM.

Summary of Key Points

• GST Rate: 18% on metal scrap under Reverse Charge Mechanism.
• Self-Invoice: Registered traders must issue a self-invoice for purchases from unregistered suppliers.
• Payment: The registered trader is responsible for paying the 18% GST via the GSTR-3B return under RCM.
• Input Tax Credit (ITC): The trader can claim ITC on the GST paid under RCM if the metal scrap is used for taxable supplies.
• Compliance: The purchase and transportation of metal scrap are legal only if the registered trader complies with these provisions.

Now, the Central Government has notified the recommendation of the GST Council so far reverse charge is concerned. The Government has issued Notification No. 06/2024-Central Tax (Rate) dated 08.10.2024  which amends basic notification 4/2017- Central Tax (Rate) dated 28.06.2017 and inserts   various metal scraps falling under CTH 72, 73, 74, 75, 76, 77, 78, 79, 80 or 81 for reverse charge with effect from 10.10.2024.

The text of the Notification is as follows:

Conclusion

The introduction of the Reverse Charge Mechanism (RCM) for the metal scrap sector is a significant regulatory change aimed at bringing transparency and enhancing tax compliance. Registered traders must now ensure that they comply with the new GST provisions by issuing self-invoices, paying 18% GST under RCM, and reporting transactions in their GSTR-3B returns. This shift will not only help streamline tax collection but also reduce the scope for tax evasion in this high-value sector.

NOTIFICATION
New Delhi, the 8th October, 2024
Notification No. 06/2024-Central Tax (Rate)

G.S.R. 614(E).- In exercise of the powers conferred by sub-section (3) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby makes the following further amendments in the notification of the Government of India, Ministry of Finance (Department of Revenue), No. 4/2017- Central Tax (Rate), published in the Gazette of India, Extraordinary, Part II, Section 3, Sub- section (i), vide number G.S.R. 676(E), dated the 28^th June, 2017, namely:-

In the said notification, in the Table, after S. No. 7 and the entries relating thereto, the following S. No. and entries shall be inserted, namely: -

2. This notification shall come into force on the 10^th day of October, 2024.

[F. No. CBIC-190354/149/2024-TO(TRU-II)]
AMREETA TITUS, Dy. Secy.

Note: - The principal notification No. 4/2017-Central Tax (Rate) was published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 676(E), dated the 28th June, 2017 and was last amended by notification No. 19/2023-Central Tax (Rate), dated the 19th October, 2023, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section   (i), vide number G.S.R. 780(E), dated the 19th October, 2023.

As a result, with effect from 10.10.2024, if a registered recipient receives supplies of metal scrap from an unregistered supplier, the recipient is liable to pay GST under reverse charge.

It is significant to note that tax under Reverse Charge Mechanism can be paid through Electronic Cash Ledger only. This will impact the working capital cycle of the Metal Industry, as the tax would be payable immediately on receipt of the supplies. Though the ITC would be available against the tax paid under reverse charge, the metal scarp industry would have to streamline their inventory management as idle ITC is a financial cost.