CA Jatin Grover

Jatin Grover Author of Article on Reverse Charge MechanismIntroduction to Reverse Charge Mechanism

In order to explain the topic of Reverse Charge Mechanism under Service Tax, first I am going to give brief explanation of Normal Charge Mechanism . Generally service tax is payable by the provider of Service. For eg:- When service is provided by a Chartered Accountant to its client then in this case service provider i.e Chartered Accountant is liable to pay Service tax and comply with other general provisions of return filing etc.

However in Reverse Charge Mechanism under Service Tax, Service Receiver is made liable to pay service tax and comply with other provisions of Finance Act, 1994. Further the scope of Reverse Charge Mechanism was extended vide Notification no.-07/2015 and now persons other than service receiver and service providers are also made liable to comply with Finance Act, 1994 provisions.

Initially Reverse charge mechanism under Service Tax was introduced w.e.f 01-01-2005 vide Notification No.- 36/2004, with effect from 01-07-2012 a new mechanism of reverse charge (RCM) and partial reverse charge or we can call it joint charge (PRCM/JCM) was introduced vide Notification No.- 30/2012 which was further amended by Notification No.- 45/2012, 10/2014 and recently by 7/2015.

WHY REVERSE CHARGE MECHANISM UNDER SERVICE TAX

To collect Service tax under RCM or PRCM power was drawn from Section 68(2) of Finance Act, 1994. Motive of this charge is mainly more tax compliance and increased tax revenues. Government was unable to collect service tax from various unorganised sectors but through Reverse charge mechanism compliance has gone up.

DETAILS OF SERVICES COVERED UNDER REVERSE CHARGE MECHANISM UNDER SERVICE TAX

There are total 15 Services on which Reverse charge mechanism is made applicable out of which on 2 services concept of Partial Reverse charge mechanism applies. Under Partial Reverse charge mechanism both service provider and service receiver are jointly made liable to pay service tax. The details of Reverse charge in respect of 15 services provided or to be provided are as under:

Services on which 100% Reverse charge Mechanism under Service Tax is applicable:

  • Services by an insurance agent to any person carrying on insurance business
  • Services by a recovery agent to a banking company or a financial institution or a non-banking financial company
  • Services by a mutual fund agent or distributor, to a mutual fund or asset management company
  • Services by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent
  • Services by a goods transport agency in respect of transportation  of goods by road
  • Services by way of sponsorship
  • Services by an arbitral tribunal
  • Services by individual advocate or a firm of advocates by way of legal services
  • Services by a director of a company or a body corporate to the said company or the body corporate
  • Services by Government or local authority by way of support services excluding,- (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994
  • Services by way of supply of manpower for any purpose or security services
  • Import of servicese Services by any person who is located in a non-taxable territory and received by any person located in the taxable territory
  • Services by a person involving an aggregator in any manner

Services on which Partial Reverse Charge under Service Tax is applicable:

  • Rent-a-cab service if Service provider is not availing abatement then Service provider is liable to pay Service tax on 50% and on rest Service receiver is liable to pay on rest under Reverse charge mechanism. However if Service provider is availing abatement then Service receiver is liable to pay 100% of service tax payable on abated value.
  • On service portion in execution of works contract service provider is liable to pay service tax on 50% portion and on rest, service receiver is liable to pay under reverse charge mechanism.

REVERSE CHARGE MECHANISM PROVISIONS APPLICABLE ON FULFILLMENT OF CERTAIN CONDITION

  • If Service Receiver- Business Entity registered as Body Corporate and Service Provider – Individual, HUF, proprietary or partnership firm, AOP then only Reverse charge mechanism applies in following services:
    • Rent-a-cab
    • Works Contract
    • Supply of manpower for any purpose or security services
  • If Service Receiver is Business Entity:
    • Services of Arbitral tribunal
    • Legal Services of Advocate or Advocate Firms
    • Support Services by government

The term Body Corporate as defined in rule 2(1)(cd) of Service Tax Rules refer to the definition in Companies Act. Now a question arises whether LLP is a body corporate? My interpretation based on definitions given in Service tax Rules, Companies Act and LLP Act is that “LLP is Body corporate only for LLP Act”. Hence LLP is not Body Corporate in my opinion. Hence if a proprietor is providing works contract service to LLP then Proprietor is liable to pay service tax under normal charge mechanism.

SERVICE TAX REGISTRATION UNDER REVERSE CHARGE MECHANISM

Under General Charge Mechanism a service provider is required to get himself registered after the limit of Rs.9 Lakh taxable service is crossed. However under Reverse Charge Mechanism a person liable to pay service tax is required to get himself registered within 30 days of the date on which liability to pay service tax arises.

SMALL SERVICE PROVIDER EXEMPTION TO THOSE COVERED UNDER  REVERSE CHARGE MECHANISM

When person receiving service is liable to pay service tax under reverse charge, he is not entitled to exemption which is available to a small service provider. Thus, the service receiver is liable to pay service tax even if value of service of service provider is less than Rs. 10 Lakhs. Further in case of partial reverse charge even if service provider does not charge service tax in his invoice, the service receiver is still liable to pay his part of service tax.

PAYMENT OF SERVICE TAX UNDER REVERSE CHARGE MECHANISM

Timing of payment is same as that of Normal Charge Mechanism i.e on monthly basis for companies and on quarterly basis for others. However there is a twist in manner of payment under reverse charge mechanism the liability of service tax has to be met in cash i.e no Cenvat credit can be adjusted against it as credit facility is available for output services only while it will be input service for service receiver. Rule 2(p) of Cenvat Credit Rules, 2004 (as amended by NN 28/2012-CE (NT) dt. 20-06-2012, the term output service means any service provided by SP located in taxable territory but shall not include a service;

  • Specified in section 66D of the Finance Act, 1994, or
  • Where whole of ST liability is of SR i.e recipient of service.

POINT OF TAXATION

Point of taxation in case of Reverse Charge Mechanism is governed by Rule 7 of Point of Taxation Rules, 2011, Rule 7 states as under:

“Notwithstanding anything [contained in rules 3, 4, or 8], the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made.

Provided that where the payment is not made within a period of three months of the date of invoice, the point of taxation shall be the date immediately following the said period of three months.”

AVAILABILITY OF CENVAT CREDIT TO SERVICE PROVIDER PROVIDING SPECIFIED SERVICES

Services on which Partial Reverse charge is applicable, Service provider can avail Cenvat credit of Service tax paid on Input services obtained. Further since in case of these service providers 100percent Input credit is available while service tax liability is on less than 100percent hence central government has introduced Rule 5B which allows service provider to claim refund.

Services on which full reverse charge is applicable are not covered by the term “Output Services” as per Rule 2(p) of CCR Rules, 2004. Hence no cenvat credit of Service tax paid on Input services is available.

CENVAT CREDIT OF TAX PAID UNDER REVERSE CHARGE MECHANISM

For service receiver who has paid service tax under reverse charge it is the service tax paid on the Input service. Hence Cenvat Credit is available but he will be eligible to avail credit, on the basis of GAR-7 challan i.e on the date when service tax is paid.

CLOSING REMARKS

GST a hot topic now a days so this article could not be concluded without sharing my views on Reverse Charge mechanism in GST Regime. In my views these provisions will be copied to GST Regime as it is or with certain small changes because RCM was introduced because of certain reasons as explained in the beginning.

(Author is a CA Final Rank holder (AIR 34) from Delhi and can be reached at jat.grover44@gmail.com

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23 responses to “All about Service Tax Reverse Charge Mechanism”

  1. Shweta says:

    RCM set off can be taken.
    if we pay RCM of rs. 300000 for the month of July’17, can we take this credit into next month RCM liability of Rs. 400000.

  2. LEELA RAM SHARMA says:

    WHAT IS RCM IN GST
    HOW TO Pass Accounting entries of RCM in GST with Example , in hindi

  3. Amit says:

    1.) Is providing manpower same as providing manpower on rent, like I am providing a maid or providng a person to clean your home,
    2.) is this covered under RCM
    3.) how do i charge if Service receiver is not a company

  4. subhash says:

    sir,
    i charge service tax on 100% of turnover @15% service tax,
    But my service gives me the payment after applying the provision of standard deduction scheme (under rule 2a(i) ie. i am liable to pay s.tax on 70% of service charge under works contract (repair and maintenance) and and i can also use the reverse charge provision notification no-30/2012, ie-i am liable to pay 50% part of s.tax, but i already paid with 100% service tax on 100% service charge ie. we paid and filed ST-3 without taking provision of the above can you suggest me to how can i rectify or use my excess payment.

  5. Jatin Grover says:

    Dear All Readers,

    Thank you very much to take the views to more than 4 lakhs, it gives a lot of motivation.

    I hereby offers a sincere apology to all those who have commented here to ask queries and I have not replied to all of you.

    You all are hereby requested to send queries to my mail where I will be able to reply to your queries.

  6. Stany Dsouza says:

    I am a mutual funds distributor and have some clients from outside state. As per GST my service will be under reverse charge mechanism?

  7. Mittal Shah says:

    Sir, means an individual will never be covered under reverse charge mechanism?
    whether he is providing any ouput services or not

  8. NARESH KUMAR says:

    WHAT IS REVERSE CHARGE ABOUT IN HINDHI PLZ HELP ME

  9. BIPUL BAPARI says:

    i filled return of S.T for the period march 2017 being a recipient of service. But they show me a error in return saying that security agency service is not applicable for exemption notification no. 030/2012-ST and serial no 8. But earlier I filled return in this way. And in the form its does not shows 100% in the percentage of R.C. field.

  10. Prabhakar Parekh says:

    We hire tempos/trucks locally not from any transport agency for movement of our goods. Is RCM applicable to us.

  11. Prabhakar Parekh says:

    We use local tempos on hire on need basis and pay them on cash as and when required for carriage. Is RCM applicable to us.

  12. Dr srinivas says:

    we are providing manpower to multinational company and the terms of payment is 60 days,we have asked to pay the service tax component on onthly basis,this results in we have to take liabality of serice tax for three months and wait for payment,
    please high light solution

    regards

  13. deepak gogoi says:

    Your organisation is Govt. We receiver various type of services. Like
    1. monthly basis hiring vehicle in bill provider claim service tax
    2. consultancy service from foreign companies

    My question is that whether we deduct service tax from bill and deposit to Govt. Or service tax pay to service provider. Please clarify. ..

  14. Anup Abraham says:

    I am a freelance teacher and the organization i am involved (part time hourly basis) with deducts a TDS of 10% on the amount payable to me ever since I reached the Rs.30,000 limit.
    Now,I need to understand the following.
    1. Will this service fall under reverse charge mechanism (RCM)?
    2. Am i liable to pay additional tax (15%-10% TDS).
    2. If yes is there an exemption I can claim since my income is less than 9 lacs in the FY?
    Thank you,

    • CA Rocco says:

      1)Teaching services are not covered under reverse charge mechanism(RCM) rules.
      2)No additional tax is payable in the form of TDS ,on the contrary you will get a deduction of the tds being deducted by the organisation for whom you are providing services while filing your IT return.
      3)For services such as private tuition,the service provider can make use of the deduction of Rs 10lakhs for provision of services,if in the previous year this deduction has not been availed and one has to get registered under service tax if turnover exceeds 9lakhs but the deduction limit is 10lakhs.

  15. SAJJANRAJ says:

    Dear Sir,

    Professional Income through Architech & Interior Work, the service tax paid by the service receiver whether the Architech ( Service Provider) have to get registered under Service Tax?

  16. Amit Potdar says:

    Is Service tax under RCM is applicable to Public Charitable Trust..?

  17. Suraj Agrawalla says:

    Dear Sir,

    If service tax is paid under reverse charge mechanism and later on the service is exempted with retrospective effect then how the refund will be distributed between service provider and service receiver?

    Will the service provider claim the entire refund or partial refund which is paid by the service receiver be claimed by him(service receiver)?

  18. sanjay srivastava says:

    please help me we have given rate contract to a laundry person to clean hotel laundry is cover in RCM

  19. Hardik Thakkar says:

    Accessing database of monster / naukari is considered as ‘Manpower Recruitment services’ or not? It is just plain access of database, nothing like screening, shortlisting etc.

  20. Neeraj Singla says:

    What if we are providing Ola corporate to our employees with a pre-approved monthly budget of 3000/- per employee ? is RCM applicable?

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