CA Gautam Joshi

Indirect taxes are actually on buyer/customer who actually faces the burden of the tax/duty and all the procedural aspects e.g. registration, returns, records are to be taken care off by person in the supply chain who can be manufacturer/service receiver, whole-sellers/sub-contractors, retailers etc. Behind the whole procedural structure, the concept is to collect tax on consumption of a specified destination.

Simply speaking specified destination here is India which excludes Jammu & Kashmir and foreign countries.

Why Reverse Charge Mechanism?

Service tax, being an indirect tax, is to be paid by service provider to the central government by collecting it from service receiver (customer/buyer).

However, consumption of services can include consumption of services provided from outside India and the ultimate use or benefit of such services takes place in India to the service receiver in India. In such cases, the difficulty of levying and collecting service tax arises as service provider is outside India being completely anonymous for central government to catch and ask to pay indirect taxes. Therefore, exclusive powers are given in the service tax law (Section 68(2) of Finance Act, 1994) to design a method of levying and collecting service tax in the manner as decided by central government from time to time.

This manner or mechanism is nothing but “Reverse Charge Mechanism”.

Therefore, under import of services, service receiver is liable to pay service tax under reverse charge mechanism.

Why Reverse Charge Mechanism from very first rupee?

The threshold exemption limit (currently Rs. 10 lakh) is only available to service providers and not to service receivers. In this case, service tax under reverse charge is to be paid by service receivers from very first rupee paid to service providers (given that other exemptions are not available) and the amount of turnover of service receiver or service provider is totally irrelevant.

Even under the new revised reverse charge mechanism applicable from 01-07-2012, there is no benefit categorically granted to person below 10 lakh rupees either to service providers or service receivers. Therefore, simply speaking, reverse charge service tax is to be paid from very first rupee paid to service providers.

Is service tax paid under reverse charge an additional cost?

The CENVAT Credit Rules, 2004 allows to take credit of service tax paid on reverse charge on the basis of challan paid as proof of document. However, while taking credit, other rules are also required to be read and complied simultaneously.

Does law permit such reverse charge mechanism?

There may be lot of hue and cry (whatever is the amount of turnover) on paying service tax on reverse charge mechanism but Section 68(2) of Finance Act, 1994 specifically permit it and therefore specifically advised to pay first and take the credit of it once paid.

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0 responses to “ST – Reverse Charge Applicability on entity with less than Rs. 10 Lakh Turnover”

  1. Aarti says:

    Dear All,

    Thanks for such a useful information shared.

    We are a small size recruitment vendors. We have also registered for service tax. My query is our last year turnover didn’t cross 9 lacs, and we have collect ST from our client. Are we still entitled to pay ST or we can get exemption. OR we can reverse ST received to our clients.

    Please advice

    Regards
    Aarti

  2. Vishakha says:

    Our contractors bill have crossed limits of Rs. 10 lakhs, is not charging service tax and not registered as well, whose liability will the same be in future course?
    on asking for declaration, he shows his inability to do so..

  3. Payal Lohia says:

    Dear Sir,

    We are receiving labour charges bill in our company on which some of the service provider have not charged service tax as their income is below threshold limit of Rs. 10 lacs. Are we required to pay service tax on such bills under reverse charge mechanism?

  4. Vighnesh says:

    Sir,

    I am a manpower supplier with a service tax registration. As i provide services to corporates i need to charge service tax on my invoice. my turnover is less than 10 lakh. do i need to pay the service tax collected from my clients.

  5. Nisar says:

    The person(Manpower supply) who have registered Service Tax and adding ST in his bill that case who should pay ST, the receiver or the Service provider?

  6. sagar says:

    Dear Sir,

    Please let me know whether service receiver who is not registered, is liable to pay service tax for service received under reverse charge mechanism.

  7. Ajay says:

    Dear Sir, If the service provider’s turnover below Rs. 10 lacs and service recipient turnover is nil then under reverse charge mechanism service recipient will take ST registration and discharge ST liability?

  8. sachin pappu says:

    sir i run coaching clas.during sum yrs my income exceeds ten lakhs while during some. years it doesnt.so can i claim ten lakh exempt n pay service tax on over n above ten lakhs.or im i alowed to get exemmpt in 1st year only.wat if i pay st on every Rupee colectd aftr 1st yr of exempt than wil i get that benefit in my income tax

  9. GAUTAM JOSHI says:

    Dear Mukesh,

    An advocate or his firm if provides services to a business entity and if that business entity is having less than Rs. 10 lakh turnover then service tax is exempted via entry number 6(b)(iii) of Notification No. 25/2012 dated 20/06/2012.

    When there is a specific exemption entry, question of reverse charge does not arise.

  10. GAUTAM JOSHI says:

    Hi Velu,

    Yes you shall ask for service tax registration certificate from your vendor.

    You can threat him to stop doing further business if he does not provide you service tax registration. It is not your responsibility though a good conduct for sure.

  11. Archana Chitlangia says:

    Under reverse charge mechanism, there is no relief to service receiver. Service receiver is always liable to pay service tax if service tax liability is on service receiver. The limit of Rs. 10 Lakh is only for service provider. In case of service provider, if the turnover is below Rs. 10 Lakh then he can avail exemption scheme. But for service receiver, there is no option to opt this scheme. He has to pay if he liable whether service provider pays the service tax or enjoys exemption benefit. Service receiver has to deposit service tax amount by cheque or cash. He cannot discharge his liability by debiting CENVAT Credit.

  12. Velu says:

    Dear sir,

    i have vendor and he is not registered under service tax. hence he is doing service per month appx 2 lakhs for van hiring by our company.
    i have doubt that
    1. can we need to recover ST 12.36% on entire amount
    2. can we insist him to register under ST.

    Please comment on this
    thanks

  13. CA. K S Chauhan says:

    u can also find out my article on the SSI exemption under service tax at taxguru, d link is https://taxguru.in/service-tax/ssi-exemption-service-tax.html

  14. CA. K S Chauhan says:

    Exemtion of (Rs. 10 lacs) small service provider is available to service providers only on his taxable service turnover so don’t have any misconception regarding exemption in case of partial or full reverse charge (including the case of import of services) as this liability will arise from the very first transaction. It would be clear from this fact that in case of partial reverse charge, service provider may avail exemption of Rs. 10 lacs but for the same transaction, partial reverse charge on the receiver of service will be paid in cash by the receiver of service, without any exception.

  15. cs babel says:

    this means that if the service recd is for Rs 100/- then Income is 87.64 & Ser Tax 12.36. TDS is to be deducted on 87.64

    cs babel

  16. GAUTAM JOSHI says:

    Dear Mukeshji,

    Turnover less than Rs. 10 lakh is otherwise also applicable to all service providers and not just to advocates.

  17. GAUTAM JOSHI says:

    Dear Rahul,

    Yes you are right.

    Please note that person with less than 10 Lakh Rs. turnover is required to pay service tax on reverse charge.

  18. CA.Subhash Chandra Podder says:

    Good keep it up.
    CA.Subhash Chandra Podder , FCA
    Kolkata
    09/09/2012

  19. Praveen says:

    Dear Sir, please help to know what is the section/rule regarding the applicability of Reverse Charges ST if service receiver receiving services from SEZ Location to SEZ Location or SEZ Location to non SEZ locations for read about this in detail.

  20. Mukesh says:

    With respect to the services provided by advocates, the Mega Exemption notificaiton provides specific exemption to entitles with a Turnover up to 10Lac in the preceding year.

    Your views please.

  21. Rahul says:

    Dear Sir, The 10 Lac turnover limit is avaible to small service providers but it is not available to service receivers..

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