What is Reverse Charge Mechanism?

Generally, the service provider has to collect and pay Service Tax. When service receiver is required to pay Service Tax then it is called Service Tax under Reverse Charge Mechanism.

By which provision reverse charge mechanism is applicable?

The Section 68(2) of the Finance Act, 1994 is the enabling provision for Reverse Charge Mechanism. The Notification No. 30/2012 S.T dated 20.06.2012 issued under this Section states the services to which the Reverse Charge Mechanism applies.

What is full reverse charge?

Under full reverse charge 100 % Service Tax needs to be paid by service receiver.

What is partial reverse charge mechanism?

Under partial service charge both service receiver and service provider are liable to pay Service Tax on pre defined ratio.

Partial Reverse Charge

Which are the services where partial reverse charge mechanism is applicable?

1. Rent-a-cab Service

2. Security or Supply of manpower Service or Security service

3. Works Contract Service

Applicability of Reverse Charge Mechanism in case of Rent-a-cab service, Security service or Supply of manpower service or works contract service.

Meaning of Body Corporate

What is meaning of "Body Corporate”?

The term “Body Corporate” has not been defined under Finance Act, 1994.

Body Corporate as per As per section 2 (7) of Companies Act means,

"body corporate" or "corporation" includes a company incorporated outside India but does not include -

(a) a corporation sole ;

(b) a co-operative society registered under any law relating to co-operative societies ; and

(c) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf

Reverse Charge Mechanism in case of Manpower Service or Security Service provided to Body Corporate (Up to 31.03.2015)

Reverse Charge Mechanism in case of Manpower Service or Security Service provided to Body Corporate (On or after 01.04.2015) 

Reverse Charge Mechanism in case of Works Contract Service Provided to Body Corporate

Reverse Charge Mechanism in case of Service by way of Renting of Motor vehicle designed to carry passengers provided to Body Corporate [Abatement is taken]

Service by way of Renting of Motor vehicle designed to carry passengers to Body Corporate [Abatement is not taken]

Full Reverse Charge

Meaning of Insurance Agent

As per Rule 2 (cba) of Service Tax Rules 1994, “insurance agent” has the meaning assigned to it in clause (10) of section 2 of the Insurance Act, 1938.

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Meaning of Support Service.

Support services have been defined in section 65B (49) of the Act as ‘infrastructural, operational, administrative, logistic marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of movable or immovable property, security, testing and analysis.

Thus services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services e.g. grant of mining or licensing rights or audit of government entities established by a special law, which are required to be audited by CAG under section 18 of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statue and cannot be performed by the business entity themselves and thus do not constitute support services.)

Meaning of Business Entity

As per Section 65 B (17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.

Services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government;

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii) transport of goods or passengers; or

With effect from 01.07.2012, Service Tax is applicable on services provided by Director of a company.

With effect from 07.08.2012, reverse charge mechanism has been made applicable in case of Service provided by director of the company to the said company.

Scope of service tax on services provided by Director?

Salary of Director: No Service Tax as employer-employee relationship is out of purview of Service Tax.

Sitting fees and commission: Liable to service tax under reverse charge.

Meaning of aggregator

As per Notification no. 5/2015 dated 1st March 2015, “aggregator” means a person, who owns and manages a web based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator.

Frequently asked Questions:

Whether Threshold limit of Rs. 10 Lakh is applicable to services provided by director?

Threshold limit of Rs. 10 Lakh is not applicable for services provided by Director to company.

What if Service provider is enjoying small service provider exemption?

The liability of the service provider and service recipient are different and independent of each other.

Hence in case the service provider is availing exemption owing to turnover being less than Rs 10 lakh, he shall not be obliged to pay any tax.

However, the service recipient shall have to pay service tax which he is required to pay under the partial reverse charge mechanism.

Example: Mr. Ram (individual) provided Security Service to Rahim Private Limited Company and charged him Rs 8,00,000/-.

Mr. Ram does not provide any other taxable service and also enjoying small service provider exemption.

Solution: Mr. Ram will not charge service tax on invoice as he is enjoying small service provider exemption.

However, Rahim Private Limited has to pay service tax of its share.

Hence, Rahim Private Limited will pay Service Tax of Rs 74,160/-

Can we pay such tax as service receiver by using balance of CENVAT?

No. Tax needs to be paid by service receiver through challan only.

Can service receiver take credit of such tax paid?

Yes. Service receiver take credit of such tax paid subject to Cenvat Credit Rules, 2004.

What are the documents on the basis of which credit can be availed?

1. Cenvat Credit of tax paid by service provider

The credit of tax paid by the service provider would be available on the basis of the invoice

2. Cenvat Credit of tax paid by service receiver

The credit of tax paid by the service recipient under partial reverse charge would be available on the basis on the tax payment challan

What shall be the point of taxation for the service provider and service recipient? When will they need to pay the service tax in respect of his liability?

Point of Taxation in case of Service provider:

Point of Taxation is the date of invoice or date of receipt of payment whichever is earlier. (please refer chapter of point of taxation for more clarity)

Point of Taxation in case of Service receiver:

Point of Taxation in case of service receiver shall be date of payment.

Eg. If Invoice is generated in July 2012 and payment is made in August 2012

Then service recipient will discharge his liability by 5th/6th September.

In case of Partial reverse charge, if due date of payment of service tax of service provider is quarterly then whether company has to pay service tax monthly or quarterly?

Liability of service receiver and service provider is independent of each other. Company has to pay service tax monthly only.

From which date reverse charge on security service and services provided by director is applicable?

It will be applicable from 07.08.2012 and prior to this period liability to pay service will be of Security agency and directors, as the case may be.

Do I need to amend service tax registration certificate, if I am liable to pay service tax as a service receiver (reverse charge mechanism)?

Yes, you need to amend your service tax registration certificate and have to select “person liable to pay service tax as service receiver”.