CA Gautam Joshi
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.