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
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.

More Under Service Tax

Posted Under

Category : Service Tax (3411)
Type : Articles (18224)

35 responses to “Reverse Charge Mechanisam (RCM) – Understanding Service Tax Law Nuances”

  1. ANIL MADGAVKAR says:

    I have paid service tax in 2012 to a service provider. But he did not pay the amount to the govt. I have received notice from the dept. to pay the service tax because of default of the service provider, because he has not registered nor paid the tax collected by him from me. Am I liable to pay the service tax alongwith interest,almost 5 years later ?

  2. Chetan says:

    Is RCM applicable on rent paid?
    The owner of the building is exempted from GST as his turnover is less than 20 lakhs.
    The payer of the rent is registered under GST

  3. Chetan says:

    Is RCM applicable on rent paid?
    The owner of the building is exempted from GST as his income is less than 20 lakhs.
    The payer of the rent is registered under GST

  4. Jagannath says:

    Depends upon which type of service u (individual) provided ????

  5. Ashok Sharma Himachali says:

    Dear sir,
    We have recruited a new employee in our organization through placement agency. Sir please let me know who is responsible to pay service tax. There is no service tax registration number on the bill of placement agency.
    Plz. clarify.

  6. Ram Pendyala says:

    Good evening sir, could you please clarify me in this regard. i am proving the turnover details

    Total Turnover : Rs. 15Lakhs
    Service provider : Individual
    Service Recievers :
    1) XYZ Ltd
    2) Individual
    Reciepts From XYZ Ltd — RS. 8,00,000 /-
    Reciepts from Individual —- Rs. 7,00,000 /-
    —————
    — Rs 15,00,000 /-

    Now the XYZ Ltd is paying Service Tax on Reverse Charge Basis on the amount of Rs.8,00,000/-

    is it need to pay Service Tax on balance Rs.7,00,000/- from service provider point of view ?, as reverse charge is not apply to individual (service Reciever) and service Tax registration is applicable to Service Provider, if it first year in which the Service Provider crossed 9 lakhs Turn over ?

  7. Ankit Goel says:

    Dear Sir
    i have received GTA service and then given same GTA service to another client, the another client is covered under reverse charge mechanism and i also covered under same mechanism. can i pay service tax under reverse charge under similar service

  8. Sunman says:

    With reference to the Sr. No. 10 in table “Reverse Charge Mechanism under various Services” copied below, it is mentioned that it is the responsibility of service recipient to register and pay 100% of the service tax to the department.

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

    Is this applicable to any kind of service? Service in my case is renting of commercial building. I am the service provider not living in India.

    1) As per my tax consultant: I don’t have to register for service tax, don’t have to collect and pay the same. Per RCM the tenant should register and pay service tax directly to the department.
    2) Tenant is saying they can’t register and can’t pay the service tax to the department. They want me to send them invoice for service tax.

    Who is correct?
    Appreciate your views.

  9. manish jain says:

    sir Thanks for ur wonderful article , i have one query in case of partial reverse charge is compulsory to follow or it is optional i means if service provider want to paid wholle amount then is any problem in this …… pls suggest me one of my clinet collect whole amont of service tax ……..

  10. CA MANISH KOTHARI says:

    My client is a pvt. ltd.company and has been paying service tax on 25% of freight under GTA but as u mentioned above that liability to service tax will arise if both the service provider and receiver are individuals which means my above client is exempt from paying service tax under RCM being a pvt. Ltd.company. Kindly clarify.

  11. Amjad Khan 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 service receiver paid 100% to service provider?

  12. Nirmal Dutta says:

    We are service recipient (Pvt. Ltd.) under GTA service. Earlier we are paying service tax to transporter due to service tax claim & charge on Consignment Note. We have paid the amount against money receipt & details are disclosed on that money receipt. When we asked to transporter then they said we have already paid service tax centrally. Now department had claim repayment the service tax amount & reverse the input credit to department. Please advice in this situation what we shall do?

  13. Sanjay says:

    As a director I am getting sitting fees of Rs. 12,00,000/- from a Co. where Co. pays service tax to Govt. on my director sitting fees and I am also providing professional services of Rs.3,00,000/- to others.
    So my question is that I have to get Service Tax Registration or not. ??
    Will my director sitting fees be consider for getting Service Tax Registration or will I be covered within the exemption limit??

  14. R Vaidyanathan says:

    “Body Corporate” has the meaning assigned to it in clause (7) of Section
    2 of the Companies Act, 1956 (1 of 1956);Hence LLP is considered as body corporate and not as firm for payment of service tax under reverse charge mechanism.

  15. sribivas says:

    sir , we are (pvt Ltd)service receiver of manpower from propriter ship concern, they are charging service tax on 25% of service value, can i take that much service input

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