Reverse Charge Mechanism

[Submitted by CA. Kushal Khanna,
B.Com., CA,
New Delhi]

November 19, 2012

General Provisions relating to Reverse Charge Mechanism

1. (a) Section 68 provides for the person liable to pay service tax.

(b) Section 68(1) provides for the liability of service provider to pay service tax.

(c) Section 68(2) makes provision for liability of any person other than service provider (means service receiver) for payment of service tax, also called as REVERSE CHARGE.

[Under the Reverse Charge, Service receiver has to register himself under Service Tax and will be liable to file his Service Tax Return also. If you are already registered under Service Tax Act and receiving one of new service added under reverse charge then you have to add this specific service in your service tax registration certificate i.e. you need to amend your S.T-2. Herein provisions can also be made that part of the tax will be made by service receiver and part by service provider.]

With effect from 1.7.2012 a new scheme of taxation is being brought into effect whereby the liability of payment of service tax shall be either on the service provider or the service recipient, but in specified services and in specified conditions, such liability shall be on both the service provider and the service recipient.

2. Provisions relating to Reverse Charge are contained in notification no. 30/2012-ST dated 20-06-2012. These provisions are applicable from 1.07.2012. Provisions are as follows:

  1. Reverse charge is applicable only when Service Provider is Individual, HUF, Partnership Firm and service receiver is "business entity" registered as body corporate**.
     
  2. Benefit of Small Service Provider exemption of Rs. 10 Lakhs is not
    available when tax is payable under reverse charge. It has been clarified under the Guidance Paper issued by the Central Board of Excise & Customs that even where the service provider avails of the turnover-based exemption (since his turnover is less than Rs10 lakh), then also service provider is required to discharge the prescribed portion of tax under the reverse charge mechanism.
     
  3. Tax should be paid under service tax registration number of service receiver and included in his return as he is liable to pay service tax.
     
  4. Service tax is payable by service receiver when actual payment is made to service provider and not on receipt of Invoice from service provider i.e. Point of taxation will be the date on which payment is made to service provider.
     
    However, if payment is not made to service provider within 6 months of the date of the invoice, service tax is anyway payable by service receiver (Invoice must be issued within 30 days of completion of service). Interest is also payable in such case.
     
    “Exception is that when service provider is outside India is Associated Enterprise (group company with at least 25% common interest), the service receiver is liable to pay service tax as soon as the account of service provider is credited in books of account of service receiver.”
     
  5. The service recipient would need to discharge liability only on the payments made by him. Thus the assessable value would need to be calculated to arrive at the amount of service tax to be paid. The invoice raised by the service provider would normally indicate the abatement taken or method of valuation used for arriving at the taxable value. However since the liability of the service provider and service recipient are different and independent of each other, the service recipient can independently avail or forgo an abatement or choose a valuation option depending upon the ease, data available and economics.
     
  6. Service provider should charge only his part of service tax.
      
  7. Service receiver liable for only his part and not entire amount, even if service provider does not charge his portion of service tax.
     
  8. Service receiver has to pay service tax of his part by GAR-7 challan.
     
  9. Cenvat Credit cannot be used to pay Service Tax by service receiver. Service tax is to be paid in Cash only.
     
  10. Once paid, Cenvat Credit can be taken of the amount so paid under reverse charge (if otherwise it is his eligible input service).
     
  11. A statutory liability cannot be shifted by mutual agreement. If statutory liability is of service receiver, he alone is liable.
     
  12. In some services (e.g. GTA, renting or hire of motor vehicle designed to carry passengers), the abatement is subject to condition of non-availment of Cenvat credit by service provider (not by service receiver). A certificate should be obtained by service receiver from the service provider about non-availment of Cenvat credit. Such certificate is not required in case of hire or renting of motor vehicle, but still advisable to get it. In case of renting of motor vehicle, in most of the cases, Cenvat credit is not available. Hence, it is cost to company.
     

Applicability of above provisions does not arise if liability to pay service tax has been affixed before 1.07.2012, even if payment is made after 1.07.2012.

“Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, Government, charitable organisation is not ‘business entity’.

**Body Corporate – Company, LLP, Cooperative Society is Body Corporate. Firm, HUF, Trust is not ‘Body Corporate’ [Society registered under Societies Act is legally not ‘body corporate’].