Introduction: Service Tax is a vital part of Indirect Tax Structure of India. In simple words it can be spelled as tax on specified services provided by the Service Provider. Usually the person providing the Services is liable to pay Service tax but here comes an exception, where the service provider is not liable or is partially liable to pay service tax & the recipient has to bear the liability to pay the tax to the Government on behalf the Service Provider. This concept with dual understanding is discussed as follows:
Reverse Charge Mechanism:
Services Covered by Reverse Charge Mechanism:
Following are the Services covered by Section 68(2) of the Finance Act, 1994 as the services where the service recipient shall be liable to pay service tax entirely or partially:
The aforementioned Services are discussed as follows:
A) Services Having Reverse Charge:
These are the services for which Service Receiver pays 100% service tax on behalf of Service Provider. The services forming part of this Section are discussed with brief explanation herewith:
Type of Service
| Description of Service|
Explanation Point covering the Service (Explained below the Table)
|Service by an insurance agent to a person carrying on insurance business||–|
|Sponsorship Services, to any body corporate or partnership firm located in the taxable territory||–|
Services by Arbitral Tribunal or Advocate
|Services by Arbitral Tribunal or Individual Advocate or firm of Advocates by way of legal services to any business entity located in the taxable territory||Explanation No. I|
Services by Director of a Company (Applicable with effect from 07th August,2012)
|Services provided by director in case where he/she is not in a full time Employment||Explanation No. II|
Goods Transport Agency(GTA)
|Services in respect of transportation of goods||Explanation No. II|
Support Services Provided by Government & Local Authorities
|Support Services by Government or Local Authority excluding Renting of immovable property and services by department of posts; in relation to Aircraft or vessel, transportation of goods or passengers as specified in clause (a) Section 67D (i) to (iii) of the Finance Act, 1994||Explanation No. III|
Service recipient located in Taxable Territory, service provider located outside Taxable Territory (formerly 66A)
|Import of Services by service recipient in taxable territory||Explanation No. IV|
I. Services by Arbitral Tribunal & Advocate:
II. Services by Director of a Company:
For e.g.; sitting fees paid to directors for attending meetings of the Board and Committees of the Board, on commission or other remuneration paid, if any.
III. Goods Transport Agency:
A goods transport agency in respect of transportation of goods by road, where the person liable to pay freight is,—
a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;
c) any co-operative society established by or under any law;
d) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made there under;
e) any body corporate established, by or under any law; or
f) any partnership firm whether registered or not under any law including association of persons;
i. Vide Notification No. 25/2012-ST dated 20th June, 2012, service tax has been exempted, in relation to-
- Services provided by a goods transport agency, for the transportation of fruits, vegetables, eggs, milk, food grains or pulses.
- Goods where the gross amount charged on a consignment in a single goods carriage does not exceed R1,500/- or goods for a single consignee does not exceed Rs. 750/- are also exempt.
ii. It is clarified as per Notification 26/2012-ST, that service tax is payable only on 25 % of freight. Such liability on 25 % of freight amount shall be discharged in full by the service recipient provided CENVAT credit has not been availed by him/her.
IV. Support Services provided by Government or Local Authority:
V. Service recipient located in Taxable Territory, service provider located outside Taxable Territory (formerly 66A):
For the purpose of this service,
B) Services Having Joint Charge (partial reverse charge):
These are the services where Service provider & Receiver, Jointly bears the Service Tax Liability.
Joint charge is applicable to specified services where the service provider is an individual, HUF or a partnership firm, whether registered or not, including association of persons and the recipient is an entity registered as a body corporate.
The three specified Services Covered under Joint Charge are discussed as follows:
Type of Service
|Description of Service|
% of service tax payable by Service Provider
% of service tax payable by Service Receiver
Explanation Point Covering the Service (Explained below the Table)
Hiring or Renting of Motor Vehicle
|Hiring a Motor Vehicle,With Abatement (60% – Notification No. 26/2012- ST dated June 20, 2012)|
|Explanation Point No. I|
|Explanation Point No. I|
Supply of Manpower
|Supply of Manpower in any manner|
|Explanation Point No. II|
|Services in execution of works contract|
|Explanation Point No. III|
Body Corporate Includes-
I. Hiring or Renting of Motor Vehicle: In case, the aforesaid services are provided to a Company, by any person, who is not engaged in the similar line of business, the responsible person to pay service tax shall be Service Provider.
II. Supply of Manpower: The concept of Joint charge is not applicable in case, the aforesaid service is provided by a Company i.e., Company would have to pay entire tax of 100% and recipient would not be required to pay.
III. Works Contract:
Benefit of Threshold Limit:
Interest on non payment or late payment of Service Tax: In a case where payment is not made as stipulated interest will have to be paid under Rule 14 of the Cenvat Credit Rules (CCR) read with Section 75 of the Finance Act.
CENVAT Credit Availability:
The above discussion is a small attempt to explain the broad purview of Reverse charge Mechanism. It plays a vital role as a part of Service Tax practice & broadens its scope to the large economy of India.
(Article is Authored by Roshni Panchal A CA Final Student from Vadodara)