• Dec
  • 26
  • 2013

Reverse Charge Mechanisam (RCM) – Understanding Service Tax Law Nuances

Posted In Service Tax | | 19 Comments » Print Friendly and PDF
Dr. Sanjiv Agarwal
Who can be person liable
  • Every person providing taxable service (service provider) shall pay tax @ prescribed rate , to be collected in prescribed manner. [section 68(1)]
  • Service recipient is a person liable to pay service tax in certain cases [section 68 (2)]
  • Defined in rule 2(1)(d) of Service Tax Rules, 1994 and 2(m) of POP Rules, 2012
Person liable to pay service tax u/s 68 read with rule 2(1)(d) of ST Rules, 1994
  • Service provider
  • Specified service receivers [Rule 2(1)(d)(i)(A to G)]
  • Importer of service

 Person  liable to pay Service Tax under Section 68

In case of services covered under Section 68(2) read with 2(1)(d)

Service Liable to pay service tax
Insurance agent Service Recipient (i.e. Insurance company)
GTA Specified personsIn other case Person liable to pay fright GTA
Sponsorship service to body corporate / firm Recipient of service
Arbitral tribunal / individual advocate/ firm of advocate Recipient of service
Support service to Govt. / local authority subject to other conditions Recipient of service
Director’s  services to Companies Recipient of service  (i.e. Company )
Rent-a-cab service subject to other conditions Recipient of service
Supply of manpower service subject to other conditions Recipient of service
Works contract service subject to other conditions Recipient of service
Services provided from non-taxable territory to any person in  taxable territory Recipient of service
Registration under Service Tax 
  1. Every person who is liable to pay service tax shall take registration under service tax as per section 69 of Finance Act, 1994
  2. Service recipient shall obtain registration under service tax as recipient of service, pay service tax and file return
  3. Assessees who have to take registration
  • Service provider who has provided a taxable services of value exceeding Rs. 9 lakhs in the preceding financial year
  • Service receiver liable to pay service tax under reverse charge mechanism u/s 68(2) / rule 2(1)(d)
  • Input service distributor
  • Importer of service being person liable u/s 68(2)

Service tax payment  – different scenarios

RCM 1

Reverse Charge Mechanism
  1. Normally, service tax is payable by person who provides the service
  2. Section 68(2) makes provision for reverse charge i.e. making person receiving the service liable to pay tax
  3. Authority for reverse charge u/s 68(2) of Finance Act, 1994
Person liable to pay tax – Rule 2(1)(d) of Service Tax Rules, 1994
  • W.e.f. 1.7.2012, a new scheme of taxation is applicable whereby the liability of payment of service tax shall be both on the service provider and the service recipient (Notification No. 30/2012-ST, dated 20.6.2012 )
  • The extent to which tax liability has to be discharged by the service receiver is specified in Notification No. 30/2012-ST dated 20.6.2012.
Liability to pay tax under Reverse Charge by Service Receiver
Under Partial Reverse Charge (Proportional / Joint)
  • Renting of motor vehicles
  • Manpower supply & security services
  • Works contracts
Under Full Reverse Charge (100%)
  • Insurance related services by agents
  • Goods Transportation By Road
  • Sponsorship
  • Arbitral tribunals
  • Legal services
  • Company director’s services
  • Services provided by Government / local authority excluding specified services
  • Services provided by persons located in non-taxable territory to persons located in taxable territory.
Important Points in Reverse Charge Mechanism
  • Liabilities of both the service provider and service receiver are statutory and independent of each other
  • Liability cannot be shifted by mutual agreement
  • Reverse charge will not apply where the service receiver is located in non-taxable territory
  • Reverse charge shall not be applicable if provider of service was liable before 1.7.2012
  • Service Tax will not be payable by service receiver under reverse charge, if service was provided prior to 1.7.2012, even if payment is made after 30.06.2012
  • Credit of tax paid can be availed by service recipient if it is input service for him
  • The credit of tax paid by the service recipient under partial reverse charge would be available on the basis on the tax payment challan (but invoice required)
  • Service provider under RCM may claim refund of tax paid under rule 5(b) of CCR, 2004
  • Service Tax under reverse charge to be paid within 6 months on actual payment (Rule 7 of POT Rules, 2011)
  • Small scale benefit is available only to service provider (not to service receiver), if entitled
  • Service receiver under reverse charge cannot avail exemption of Rs. 10 lakh under Notification No. 33/2012-ST dated 20.06.2012
  • Valuation of services by services provider and service receiver can be on different principles, if permitted by law (e.g. works contract – Refer Notification No. 30/2012-ST, explanation II)
  • Invoice to be prepared as per Rule 4A of Service Tax Rules, 1994
  • It is a statutory obligation (not contractual) on the service recipient to pay Service Tax, whether under full or proportional reverse charge
  • Service Tax under reverse charge has to be paid only by cash vide GAR Challan No. 7 and it cannot be paid by way of utilization of Cenvat Credit.
  • Once paid, Cenvat credit can be taken for paying eligible input service
  • Service receiver liable only for his portion

 Important Points in Joint Reverse Charge Mechanism

In respect of manpower supply and security services, works contract services and renting of motor vehicles to carry passenger, reverse charge shall be applicable only when following two conditions are satisfied –
1. service receiver is a business entity registered as a body corporate, and
2. service provider is any one of the following entities –
  • Individual
  • Hindu undivided family (HUF)
  • Firm (including limited liability partnerships)
  • Association of persons

If both the above conditions are not satisfied in respect of these three services, Service Tax shall be payable by the service provider in ordinary course.

Joint Reverse Charge Obligations
Service  Provider Service Receiver Service Tax Payable by
Individual /HUF/ Partnership firm /AOP Business entity – body corporate  Joint
Individual /HUF/ Partnership firm /AOP Individual /HUF/ partnership firm /AOP 100 % by service provider
Business entity –Body Corporate / Company Individual /HUF/ Partnership firm /AOP 100 % by service provider
Business entity –Body Corporate Business entity – Body Corporate 100 % by service provider
  • For three specified services provided by business entities being company, society, co-operative society, trust etc, reverse charge will not apply.
  • Reverse charge will also not apply where the service recipient is any person or business entity not being a body corporate in case of three specified services
  • “Business Entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession
  • “Body Corporate” means the meaning assigned to in clause (7) of Section 2 of the Companies Act, 1956 and section 2(11) of 2013 Act.
    • Company , corporation and LLP are ‘body corporate’
    • Firm, HUF, Trust and Co-operative society are not ‘body corporate’
    • But firm includes LLP for Service Tax

Reverse Charge Mechanism under various Services

Sr. No

Description of Service

Service Provider

Service

Receiver

1.

Services provided by an insurance agent to any person carrying on insurance business

Nil

100%

2.

Services provided by a goods transport agency in respect of transportation  of goods by road

Nil

100%

3.

Services provided by way of sponsorship

Nil

100%

4.

Services provided  by an arbitral tribunal

Nil

100%

5.

Services provided by individual advocate or a firm of advocates by way of legal services

Nil

100%

5A.

in respect of  services  provided or agreed to be provided  by a director of a company to the said company ( w.e.f  7.08.2012)

Nil

100%

6.

Services  provided  by Government or local authority by way of support services excluding,- 

1.      renting of immovable property,

2.      postal services

3.      transport of goods / passengers

4.      air craft or vessel

Nil

100%

7.

Hiring of Motor Vehicle

(a)  renting of a  motor vehicle  designed to carry passengers on abated value to any person not engaged in the similar line  of business

(b) renting of a  motor vehicle         designed to carry passengers on non abated value to any person who is not engaged in the similar  line of business

Nil

60%

100 %

40%

8.

Services provided by way of supply of manpower for any purpose or security services (w.e.f 07.08.2012)

25%

75 %

9.

Services  provided in service portion in execution  of works contract

50%

50%

10.

Services  provided  by any person who is located in a non-taxable territory and received by any person located in the taxable territory

Nil

100%

 Service Specific Issues under RCM 

Director’s Services

  • Vide entry No. 5A of N. No. 30/2012 as amended by N. No. 45 and 46/2012
  • Service tax is payable under reverse charge by companies who receive services from their directors who are not in employment
  • Sitting fees, commission, bonus, etc. are subject to service tax
  • WTDs /MDs /EDs who are under contractual employment with the company and receive salary or remuneration from the company will not be covered – considered as employees of the company
  • Director can be appointed either in an individual capacity or as a nominee for company , association or any other entity including Government.
  • Interest on loan by director to company, dividend on shares, other professional charges on account of services not rendered as a director (in professional capacity) are not liable to Service Tax
  • In case of nominee director, the nominating company who receives fees will be liable to pay service tax.
  • The invoice / receipt to be issued by the directors within 30 days
  • In case of nominee directors, the invoice will be issued by the nominating company
  • In the case of Government nominees, the services shall be deemed to be provided by the Government but liable to be taxed under reverse charge basis

Particulars

Position upto  6.8.2012

Position  w.e.f. 7.8.2012

Individual Director  in his individual capacity

To be registered and  pay service tax

Service tax paid by the company

Nominee Director

Paid by the nominee director’s company 

Paid by the nominee director’s company 

Manpower Supply Services

  • Service is manpower supply service if under command of principal employer
  • Cleaning service, piece basis / job basis contract is not manpower supply service
  • Service tax will be applicable on salary plus PF, ESI, commission of labour contractor and other chargesž
  • Employees sent on deputation are also covered under manpower supply services

Security Services

  • Security services means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity
  • CA services are not security services
  • Distinction between manpower supply & security services

Rent-a-cab Service

  • In case of renting of motor vehicles to carry passengers where abatement is also available, reverse charge basis is proportional depending upon the abatement on the condition that no Cenvat Credit has been availed. The service provider should provide a certificate, either in the invoice itself or separately.
  • In case of renting of motor vehicle to carry passengers, reverse charge applies only where service receiver is not engaged in same business.
  • Reverse charge will be applicable when renting to a person who is not in similar line of business
  • Service receiver will pay on 40% in every case whether abatement is claimed or not
  • No Cenvat credit (not an input service)

Goods Transport Service

  • Service tax liability arise when consignment note is issued
  • GTA will be liable to pay tax only when both service provider and service receiver are individuals
  • Tax on 25% (abated value), if GTA does not avail Cenvat Credit, otherwise tax on 100% value

Legal Services

Service Provider Service Receiver
Individual Advocate   / Firm / LLP Business entity with turnover > Rs 10 lakhs in preceding financial year
Arbitral Tribunal Business entity with turnover > Rs 10 lakh in previous financial year

Works Contract Services

RCM 2

Services provided by Government / local authority

1. Reverse charge applicable to all services except specified services

2. Government Department needs to be registered and pay tax on support services of –

  • Renting of immovable properties
  • Speed post, express parcel, life insurance.
  • Transport of goods and/ or passengers
  • Services in relation to vessel or aircraft

3. Services to be provided to any business entity located in taxable territory

Invoice/ Bill/ Challan in RCM

Additional information suggested on the invoice –
  • Amount of Service Tax based on his share of Service Tax liability, if any, (which service recipient is required to pay to the service provider) – in case of joint or proportionate reverse charge liability.
  • Fact that entire amount of Service Tax on the invoice is payable by the service recipient under reverse charge (if so).
  • Invoice amount is inclusive / exclusive of applicable Service Tax.
  • Alternatively, in case of proportionate reverse charge, service provider should charge Service Tax only on that part of the invoice for which he is liable to pay and wants to recover from the service recipient and mention that balance amount is payable by the service recipient.

19 Responses to “Reverse Charge Mechanisam (RCM) – Understanding Service Tax Law Nuances”

  1. Sajal Sharma says:

    Dear Sir,
    thank u very much 4 ur article. But, i have an query…..
    what if, under 100% reverse charge, SERVICE PROVIDER charged service tax in the invoice and paid to the government?????

  2. Madhu says:

    Sir,
    Your article is very nice.
    Pls clarify whether a State Govt department who is the service receiver of manpower from a partnership firm is liable to pay service tax under joint reverse charge mechanism? If has to pay, will the departement has to take separate PAN Card? Or the TAN of the DDO is sufficient for registration?

  3. Ankit says:

    Its very well drafted, please confirm Reverse charge on manpower and security service etc applicable to LLP.

  4. Ashutosh Sharma says:

    Sir, I have a query regarding manpower supply ( Security Services) service provider & receiver both are the Pvt. Ltd. Company. Pls tell me a the service tax liability of service taker or giver.

    Thanks

  5. Venkatesh says:

    Dear Sir,

    Thank you for your informative article. Request you to please put more light as to how service tax has to be paid by the recipient when they do not fall in the service tax ambit. What are the steps so that 100% of the service tax is paid by the service receipient ?

  6. ramesh says:

    i am taken service tax registration on GTA and during the year i am received rent on commercial property amounting to Rs. 120000/- . whether i am laible to pay service tax on rent.?

  7. sannidhi says:

    Sir, ours is a proprietory concern doing works contract & dealing with Government works(client is A.P.Govt) on turnkey basis. We have charged service tax 12.36% on labour portion agst bill. The Dept. has deducted service tax amount and asked us to produce serive tax challan before releasing the service tax deduction amount.

    But ours is a proprietory concern and Service tax liability is only 50%
    and balance 50% shall be paid by the Dept. Is this correct sir?

    Suppose If we do not pay service tax then the client (as mentioned above) will pay entire amount?

    Can we take input tax on that bill recovery of 50% Service tsx?

    2) If the both companies are corporate sector, giving construction of civil works to the other company.The liability of service tax should be paid by serive reciever? 50% or 100% of Service tax How much amount has ot pay? Here RCM is applicable in this case?

    Your valuable reply in this regard is highly appreicaited

  8. s.mukherjee says:

    We have paid reverse charges on manpower service on 75 % of billing can we take this amount 100% cenvat in same year?

  9. GURURAJ says:

    Thank you for you detailed explanation on RCM , OUR QUERY IS , IN CASE OF WORKS CONTRACT THE ABATEMENT AT 60% (TAXABLE VALUE AT 40% ) IS COMPULSORY OR THE CONTRACTOR CAN ASCERTAIN THE COST OF MATERIAL AND SERVICE PORTION SEPARATELY BASED ON HIS BILLING AND PAY TAX ON THE COMPONENT OF SERVICE UNDER S.TAX AND ON MATERIAL UNDER VAT

  10. gaurav says:

    Sir,
    I wanna ask that wthether a pvt. ltd. co. can apply service tax reverse mechanism on professional service received from individual and another is on rent paid by co. for office premises to an individual.

    please guide me accordingly.

  11. Amrinder Singh says:

    Sir, is Government Department is liable to pay service tax under RCM on hiring of advocate and manpower etc.

  12. Dalip Behera says:

    Sir,

    can a Service Tax Distributor pay Service Tax Under Reverse Charge Mechanism & take Cenvat Credit to Distribute to other Unit.

  13. CA Alhilesh says:

    Dear Sir
    Please explain more on the condition to make payment of reverse charge after 6 month.
    Thanks

  14. S SIVA PRASAD says:

    Dear Sir,

    our company MNC company so we want lot of manpower in the plant , one man power supplier supplied man power to our company and they rice the bill in the name of “Susheel Manpower Services” but they not mentioned Service Tax Portion because they telling not applicable for us .

    Please give a clarification for this issue

  15. Vivek Aggarwal says:

    Will GTA include courier services also. And if service tax has already been charged on consignment note by the service provider does then service receiver’s liability arise to pay service tax.

  16. Subrath says:

    Hello Sir,

    In case of services fallng under Reverse Charge Mechanism, Point of Taxation commences from the date of payment of the RCM bill provided payment is made within six months of the date of invoice as per Rule 7 of POT Rules 2011. However, if not made, whether the burden of interest payment will shift to much earlier date as Rule 7 is not applicable in such cases.

    CA Subrath Meka
    9850011996

  17. Avinash Singh says:

    Thanks u sir,for such a nice Explanation abt RCM…

  18. Suraj Singhal says:

    Sir,
    Very good overview on reverse charge mechanism.
    but
    if u can through some light also on Import of service.
    Even though it was covered under reverse charge earlier also,
    there is bit confusion being going on at many places regarding whether nexus of service being provided in India is important or just booking of expenses as import of service, by a Indian company is only a criteria.
    This is also effected also on the Place of Provision.

  19. Rajesh says:

    Thank you for the article Sir. I have a query regarding applicability of manpower supply provisions in case of piece rate basis contracts. Can you please provide any legal provisions to support the view that the same is not covered under manpower supply?

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