Reverse charge mechanism in service tax ( RCM) (section 68 (2) ) has been introduced with effect from 1/7/2012. With its introduction, service receiver is also liable to file return and pay service tax on the portion of service tax.
Motive of this change is mainly more tax compliance and increase tax revenue but it is giving hardship to service receiver as if your liability for payment of service tax under reverse charge is small amount like Rs. 1000 or Rs. 100, you have to get registration under service tax act and pay service tax and file return.But rules are rules and we have to follow it.
Applicability of reverse charge mechanism in service tax ( RCM):
Not all service receiver are liable to pay service tax under reverse charge. Only on receiving specific services , reverse charge mechanism is applicable.
Is service receiver paying extra service tax due to reverse charge mechanism?
No, amount of service tax payment is remained the same but liability to pay tax to government is apportioned between service receiver and service provider.
Example OF RCM:
If work contractor has rendered services and charged bill of Rs. 100000. Service tax liability is Rs. 1,00,000*14%*70% = 9800. (30% abatement)
Suppose service receiver is liable to pay 50% of service tax under reverse charge mechanism. which is 4900 ( 9800/2).
Service provider will charge bill of Rs. 104900 (100000+ 4900)
So he is collecting half of the service tax and paying to government. Remaining service tax liability will be paid by service receiver.
Small service provider exemption:
small service provider exemption is not available under reverse charge mechanism and service receiver has to register himself under reverse charge mechanism without considering how much amount he is required to pay under RCM. Sometimes service provider is availing SSI exemption and does not charge service tax in bill. Still you are required to pay service tax as service receiver if RCM is applicable.
When to pay tax under reverse charge?
Service receiver has to pay tax on reverse charge only on making payment to service provider. The condition is that service receiver should pay within 6 months from issuance of invoice.
Payment of Tax:
Tax should be paid in cash and you can not utilize cenvat credit for payment of service tax under reverse charge.
TDS in RCM:
The big question is ‘should service provider deduct TDS on whole bill inclusive service tax or on amount of services provided?’
This question is solved by circular no 1/2014 dated 13th January , 2014. It clarifies that TDS should be deducted only on amount of service and not on service tax collected if service tax amount has been shown separately in invoice. otherwise TDS should be deducted on whole amount including service tax.
Benefit of abatement is also available in reverse charge. Service receiver and provider has to pay service tax on the value of services after considering available abatement for service.
IF work contract service provided is Rs. 2,00,000. Service tax amount is Rs. 19600*50% = 9800.
Total bill is Rs. 209800.
In this case, TDS should be deducted on Rs. 2,00,000 if service tax is shown separately in bill. Otherwise TDS should be deducted on Rs. 209800.
Center credit availability:
Service tax paid under reverse charge mechanism is available for cenvat credit if the service received is included in definition of input service. Service receiver should keep GAR 7 challan ‘ as proof of payment.
Reverse charge mechanism in various services:
|Services||Service provider||Service receiver||Tax payable by service receiver||Tax payable by service provider|
|Insurance agent services||Insurance agent||Insurance company||100%||0%|
|Sponsorship service||Any person||Body corporate/partnership firm||100%||0%|
|Arbitral tribunal services||Arbitral tribunal||Business entity||100%||0%|
|Legal services||Individual advocate/firm of advocate||Business entity having turnover exceeding 10 lacks p.a.||100%||0%|
|Support services by government or local authority||Government or local authority||Business entity located||100%||0%|
|Renting of motor vehicle designed to carry passengers to any person who is not in same business (when service provider has not availed abatement)||Individual, HUF, proprietor /partnership firm, AOP||Business entity registered as body corporate||50%||50%|
|Supply of manpower service||Individual, HUF, proprietary, partnership firm, AOP||Business entity registered as body corporate||100%*||0%*|
|Work contract service||Individual, HUF, proprietary, partnership firm, AOP||Business entity registered as body corporate||50%||50%|
|Service received from non taxable service||Located in non taxable territory||Located in taxable territory||100%||0%|
* As per budget 2015 changes, supply of manpower service is covered under full reverse charge mechanism.
Meaning of important words:
Business entity :
(Definition in section 65B (17) of financial act, 1994.
Business entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.
In short, if any service is provided for personal use of individual ,it is not taxable. Likewise charitable organisation is not covered under business entity if it does only charitable activity and no business.
A company and LLP is a body corporate. A cooperative society, society and proprietary firm are not body corporate.
- Liability of payment of service tax is individual and service receiver is not liable for liability of service provider or vice verse.
- Reverse charge will not apply when service receiver is in non taxable territory. In that case, whole amount of service tax should be collected and paid by service provider.
- Service receiver and service provider can do valuation of services on different principles.
What if service provider has paid service tax ( portion which should be paid by service receiver under RCM)?
In that case, service receiver is not liable to pay service tax again due to double taxation. So by mistake, your service provider paid service tax himself which you need to pay under RCM, you are not required to pay service tax again under RCM.
Supporting case laws :
- M/S Lilason Breweries VS CCE bhopal
- CCE vs om tea company
I have tried my best to explain main points of reverse charge mechanism in service tax. Still if you have any query, ask me through comments. Don’t forget to share this post on social media to encourage me to write more.