• May
  • 16
  • 2013

Service Tax Reverse Charge Mechanism – Chart, Accounting Entries & issues

 A Presentation on Reverse Charge & Joint Charge – Updated till 31-03-2013

Section 68 of Finance Act, 1994

• Sec 68 (2) provides legal backing for the levying of Service Tax under reverse charge mechanism. Sec 68 (2) is worded as follows:-

- “In respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

Brief History of Reverse Charge

The Reverse Charge was introduced in Service Tax vide Budget of the year 2005-2006. At that point of time there was only one service which was covered under Reverse Charge. However, with the passage of time this list has been expanded and at present this list contains 11  services into it which covers both Reverse Charge and Partial Reverse Charge.

Notification No. 30/2012-ST, dated 20th June, 2012

In order to charge service tax under reverse charge mechanism the Central Government is required to provide the list of taxable service by the way of notification. The notification no. 30/2012-ST provides for the list of service that will be taxable under reverse charge mechanism.

List of Services under RCM

S.

No.

Description of Services Provided By Provided To % of ST payable by Provider % of ST payable by Receiver
1 Insurance Auxiliary Service Insurance Agent Person carrying on Insurance business NIL 100%
2 Sponsorship Service By any service provider Body Corporate or Partnership firm NIL 100%
3 Transport of goods by Road Good Transport Agency Consignor or consignee in organized sector NIL 100%
4 Legal Service Arbitral Tribunal Business Entity NIL 100%
5 Legal Service Individual advocate or firm of advocates Business Entity NIL 100%
6 Support Service by

Government or

local authority

Government

or Local

Authority

Business

Entity

NIL 100%
7 Any Service Person in Non  Taxable territory Person in Taxable Territory NIL 100%
8 Any Taxable

Service

Director of

the company

Company NIL 100%
9 Renting or hiring of motor vehicle to carry passenger on abated value. (60% abatement) Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate NIL 100% (i.e. 40% of liability)
10 Renting or hiring of motor vehicle to carry passenger on non abated value Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 60% 40%
11 Supply of Manpower Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 25% 75%
12 Security Service Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 25% 75%
13 Work Contract

Service

Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 50% 50%


Other Relevant Aspects

1. Business Entity and Body Corporate

-Business Entity– means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. [Government, charitable organization is not a “business entity”].

- Body Corporate Company is a Body Corporate – Firm, HUF, Trust is not a body corporate. [Society registered under Societies Act is legally not ‘a body corporate’].

2.  Partial RC on Renting or Hire of Motor Vehicle designed  to carry passengers

- Reverse charge when renting to a person who is not engaged in  similar line of business

- Service Provider should be HUF, Individual, firm.

- Service Receiver – Business entity registered as body corporate

- If motor vehicle is taken on hire without driver it is ‘transfer of right in goods’. It is deemed sale of goods VAT will apply – Service Tax will not be charged.

3. Partial RC on Manpower Supply Service

- “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. [Rule 2(g) of Service Tax Rules, inserted w.e.f 01.07.20 12].

- 75% of ST shall be paid by service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 25% of ST shall be paid by service provider.

- Security Service, cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.

- Service tax in such cases shall be payable on – SALARY + PF + ESI + Commission of labour contractor.

4. Partial RC in Work Contract Service

- 50% of ST shall be paid by the service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 50% shall be paid by service provider.

- Service Receiver is a business entity incorporated as body corporate.


Utilization of CENVAT credit by Service Receiver

 RCM

Accounting Entries

  • In the following example, the service recipient should pay 25% to the service provider and should pay remaining 75% to the service tax authorities directly.
  • Accounting entry in the books of Service Provider:-
Particular Debit Credit
Service Receiver a/c 1,03,090.00 -
Sales - 1,00,000.00
Service tax payable (1,00,000 X 12.36% X 25%) - 3,090.00
  •  Accounting entry in the books of Service Receiver:-
Particular Debit Credit
Service Received a/c 1,00,000.00  
Service Tax Credit (25%) 3,000.00  
E-Cess Credit a/c 60.00  
SHEC Credit a/c 30.00  
Service tax recoverable a/c (75%) 9,000.00  
E-Cess Recoverable a/c 180.00  
SHEC Recoverable a/c 90.00  
Service Provider a/c   1,03,090.00
Service Tax Payable   9,000.00
E-Cess Payable   180.00
SHEC payable   90.00

RCM in relation to Point of Taxation Rules, 2011

  • Rule 7 of POT Rules provides for the Payment under Reverse Charge Mechanism.
  • As per Rule 7, where the service tax is payable by the recipient of service like GTA service, POT would be the date of payment of value of service, if made within 6 months from the date of invoice. In case, value of service is not paid within prescribed 6 months period, service tax would become payable as per rule 3 of POT rule.
  • Illustration:- Mr. X provided services to Mr. Y under RCM. The date of invoice is 01.01.2013.
  • Situation 1: Mr. Y made payment to Mr. X on 01.04.2013 Since the payment is made within 6 months from the date of invoice i.e. payment made before 01.07.2013. Therefore, the liability to pay service tax on part of Mr. Y will arise from the date of payment to Mr. X .i.e. from 01.04.2013. Mr. Y is liable to pay service tax by 06.05.2013 (if he pays electronically another wise 05.05.201 3 is the due date)
  • Situation 2: Mr. Y made payment to Mr. X on 01.08.2013 Since the payment is NOT made within 6 months from the date of invoice i.e. before 01.07.2013. Therefore, the liability to pay service tax will arise from 01.01.201 3. Mr. Y will now be liable to pay interest @ 18% along with service tax to the department.

Issues

Do SSI Exemption is available to Service Receiver?

Notification No. 33/20 12-ST which provides that whereby the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:

Provided that nothing contained in this notification shall apply to,-

(i)                        taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or

(ii)              such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68  of the said Finance Act read with Service Tax Rules, 1994.

Can the Service Receiver use CENVAT to pay tax under reverse charge?

Explanation to Rule 3(4) - Service Receiver cannot use the CENVAT credit to dispose off his liability. He is required to pay the amount in cash only.

Under Partial RCM, what amount do service provider is required to show on the invoice?

The service provider is required to charge only that on the invoice for which he is liable to pay. For e.g. If the service providers liability is of 25% and the remaining liability is of service receiver. Then the service provider is required to charge only 25% of the service tax amount in the invoice.

If service provider has agreed to pay entire payment of service tax liability. He is willing to give an undertaking in that regard. In that case, do service receiver is liable to pay service tax?

Only person who is liable to pay service tax should pay the same.

PREPARED BY – CA JAYANT BOTHRA – TEAM VOICE OF CA


21 Responses to “Service Tax Reverse Charge Mechanism – Chart, Accounting Entries & issues”

  1. monu jain says:

    hello sir
    wheater reverse charge on works contract applicable to PSU.here PSU recieved work contract service from contracrors

  2. margaret says:

    Hi

    Can you please let me know the reverse mechanism payable details through mail or can you for ward me this details through mail pls

    Tks……….M argaret

  3. Quintus says:

    How would you account and pass journal entry when payment is made towards legal and professional fees at 25000/- (TDS and ST under RCM)?

  4. anup sing says:

    “In respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.
    Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this chapter shall apply to such person to the

  5. anup sing says:

    Kind Attn: MS Pooja Jain —– REPLY AGST ” how to close the service tax recoverable a/c at the time of finalization of books ”

    Pass the following Entry at time of making payment of service tax liability under reverse charge through challan. It is to be noted that service tax liability for the month of March is 31st March .

    Service Tax Credit A/c Dr.
    EDU Cess credit A/c Dr.
    Shec Credit A/c Dr.

    To Service Tax Recoverable A/c

    However , availability of Cenvat Credit as above is subject to provision of Cenvat Credit Rules, 2004. Please check the revised definition of ” input Service ” .

    Further , as per my suggestion there should be a seperate ledger for reverse charge liability for Service Receivers who are also service providers. Ex Service Tax ( Reverse Charge ) Payable A/c.

  6. R.Pattabiraman says:

    what is the Entry at the time of Service Invoice booking(Rent a cab)
    Service Tax liablity is to pay when the payment made to the service provider. please advise accounting entry for this.

    1.when bill booking
    2.vendor payment
    3.service tax RCM
    4.Service tax input credit a/c

    If any body help me full accounting entries for RCM.

  7. Kamlesh says:

    Dear Sir,
    In my system, Tax control accounts are tag to the Other Current Assets and Other Current Liability Account.
    In case of reverse charge mechanism Service tax Input which is tag to Other Current Asset Account is actualy the amount needs to be paid by the servrice receiver. But the Service receiver wants to tag this amount to the expence account.Is it correct to tag the Service tax account to Expence account?
    Can you please assist me.

  8. Siva Rama Krishna says:

    If Service provider offers services by hiring motor vehicle, but the gross services provided by him not exceeded Rs. 10 lakhs in the year.

    Then Service Receiver has to pay service tax on such service received?

  9. Sivaram says:

    Dear Sir, A Case study is fyki and guidance.
    1. X (Transporter) bills to an agent without ST.
    2. Y (Agent & also Body Corporate) remits ST 25% to Govt under RCM.
    3. Y bills to final receiver of service with ST 12.36% and remit it to Govt.

    Tax mentioned under Sl no.3 is the actual liability of tax what they billed and collected. Are they losing 25% of the ST which they paid under RCM mentioned in Sl no.2? Kindly Clarify.

    Regards, Sivaram

  10. manjunatha says:

    Dear Sir/Madam

    Please clarify me

    If the Service Receiver is paying the amount to service provider less than 10lakhs . Then reverse charge is applicable or not ???

    Thanks & Regards
    Manjunatha

  11. ANAND S says:

    There is no lapsing period in Cenvat Credit Rules, 2004. Further, you can adjust the service tax credit ( cenvat ) agst service tax liability arising on providing taxable services as Service provider.

  12. CHIRAG S says:

    The service tax recoverable a/c get closed but then wht abt these accounts?
    Service Tax Credit A/c Dr.
    EDU Cess credit A/c Dr.
    Shec Credit A/c Dr.

    where would they appear in the balance sheet? if under current assets then how long it can be carried forward.

  13. s.k. adhya says:

    For closing of Service Tax Recoverable a/c you have suggested to debit service tax credit a/c and credit service tax recoverable a/c. as below.
    Ser. Tax Credit A/c Dr. 3000.00
    Edu.Cess Credit A/c Dr. 60.00
    S Higher Edu. Cess Credit A/c dr. 30.00
    To Service Tax Recoverable a/c 9000.00
    Edu. Cess Recovearable a/c 180.00
    S. Hither Edu Cess Recoverable a/c 90.00
    So how the both sides equate. There is a difference of 6180.00 in the credit. How to match it?
    While paying 75% of RCM directly to tax authorities, the service provider should give the following entry.
    Serv. Tax Payable a/c 9000.00
    Edu Cess Payable a/c 180.00
    S.Higher Edu Cess a/c 90.00
    to Bank 9270.00
    Thus also to release payment to serv. provider the serv. receiver should debit 1,03,900.00 and credit bank a/c also.
    You have not yet replied to mail of S.N.Das regd. TDS etc. Please send urgently.

  14. s.n.das says:

    In company TDS is made for RCM from contractor’s bill which is deposited to govt & cert. is issued to parties. The company is paying nothing from its pocket as service receiver. The contractors also are adding full ser. tax in the invoice ignoring 60:40 or 25:75 ratio liability. Kindly comment the right procedure for both the receiver and provider.

  15. ca nandan mishra says:

    explain why abatement is given in renting of motor vehicle and what comes in abatement?

  16. ANAND S says:

    Kind Attn: MS Pooja Jain —– REPLY AGST ” how to close the service tax recoverable a/c at the time of finalization of books ”

    Pass the following Entry at time of making payment of service tax liability under reverse charge through challan. It is to be noted that service tax liability for the month of March is 31st March .

    Service Tax Credit A/c Dr.
    EDU Cess credit A/c Dr.
    Shec Credit A/c Dr.

    To Service Tax Recoverable A/c

    However , availability of Cenvat Credit as above is subject to provision of Cenvat Credit Rules, 2004. Please check the revised definition of ” input Service ” .

    Further , as per my suggestion there should be a seperate ledger for reverse charge liability for Service Receivers who are also service providers. Ex Service Tax ( Reverse Charge ) Payable A/c.

  17. S.N.Das says:

    Whether Service Tax is a TDS item i.e. service receiver should deduct from the invoice of provider and remit to govt. or it is to be paid by service receiver from his own pocket as an expense under RCM

  18. Nirmal Singh says:

    input credit on service tax a/c DR
    To service tax recoverable

  19. Pooja jain says:

    how to close the service tax recoverable a/c at the time of finalization of books.

  20. Pooja jain says:

    How to close the service tax recoverable a/c.

  21. Rajesh Bansal says:

    What services are covered under “Works Contract”. We are registered under “Installation and Commissioning”. Are we covered under reverse mechanism

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