CA Jatin Grover
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.
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.
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:
REVERSE CHARGE MECHANISM PROVISIONS APPLICABLE ON FULFILLMENT OF CERTAIN CONDITION
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.
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;
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.
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 firstname.lastname@example.org