To explain the said topic, first I am going to give brief explanation of Normal Charge Mechanism.
Generally service tax is payable by the provider of Service. For eg:- When service is provided by a
Chartered Accountant to its client then in this case service provider i.e Chartered Accountant is liable to
pay Service tax and comply with other general provisions of return filing etc. However in Reverse
Charge Mechanism Service Receiver is made liable to pay service tax and comply with other
provisions of Finance Act, 1994. Further the scope of Reverse Charge Mechanism was extended vide
Notification no.-07/2015 and now persons other than service receiver and service providers are also
made liable to comply with Finance Act, 1994 provisions.
Initially Reverse charge mechanism was introduced w.e.f 01-01-2005 vide Notification No.- 36/2004,
with effect from 01-07-2012 a new mechanism of reverse charge (RCM) and partial reverse charge or
we can call it joint charge (PRCM/JCM) was introduced vide Notification No.- 30/2012 which was
further amended by Notification No.- 45/2012, 10/2014 and recently by 7/2015.
WHY REVERSE CHARGE
To collect Service tax under RCM or PRCM power was drawn from Section 68(2) of Finance Act, 1994.
Motive of this charge is mainly more tax compliance and increased tax revenues. Government was
unable to collect service tax from various unorganised sectors but through Reverse charge mechanism
compliance has gone up.
DETAILS OF SERVICES COVERED
There are total 15 Services on which Reverse charge mechanism is made applicable out of which on 2
services concept of Partial Reverse charge mechanism applies. Under Partial Reverse charge
mechanism both service provider and service receiver are jointly made liable to pay service tax. The
details of Reverse charge in respect of 15 services provided or to be provided are as under:
Services on which 100% Reverse charge:
• Services by an insurance agent to any person carrying on insurance business
• Services by a recovery agent to a banking company or a financial institution or a non-banking
• Services by a mutual fund agent or distributor, to a mutual fund or asset management company
• Services by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent
• Services by a goods transport agency in respect of transportation of goods by road
• Services by way of sponsorship
• Services by an arbitral tribunal
• Services by individual advocate or a firm of advocates by way of legal services
• Services by a director of a company or a body corporate to the said company or the body corporate
• Services by Government or local authority by way of support services excluding,- (1) renting of
immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section
66D of the Finance Act,1994
• Services by way of supply of manpower for any purpose or security services
Import of services i.e Services by any person who is located in a non-taxable territory and received
by any person located in the taxable territory
Services by a person involving an aggregator in any manner
Services on which Partial Reverse Charge:
• Rent-a-cab service if Service provider is not availing abatement then Service provider is liable to pay
Service tax on 50% and on rest Service receiver is liable to pay on rest under Reverse charge
mechanism. However if Service provider is availing abatement then Service receiver is liable to pay
100% of service tax payable on abated value.
• On service portion in execution of works contract service provider is liable to pay service tax on 50%
portion and on rest, service receiver is liable to pay under reverse charge mechanism.
REVERSE CHARGE PROVISIONS APPLICABLE ON FULFILMENT OF CERTAIN CONDITION
i. If Service Receiver- Business Entity registered as Body Corporate and Service Provider - Individual,
HUF, proprietary or partnership firm, AOP then only Reverse charge mechanism applies in following
• Works Contract
• Supply of manpower for any purpose or security services
ii. If Service Receiver is Business Entity:
• Services of Arbitral tribunal
• Legal Services of Advocate or Advocate Firms
• Support Services by government
The term Body Corporate as defined in rule 2(1)(cd) of Service Tax Rules refer to the definition in
Companies Act. Now a question arises whether LLP is a body corporate? My interpretation based on
definitions given in Service tax Rules, Companies Act and LLP Act is that “LLP is Body corporate only
for LLP Act”. Hence LLP is not Body Corporate in my opinion. Hence if a proprietor is providing works
contract service to LLP then Proprietor is liable to pay service tax under normal charge mechanism.
Under General Charge Mechanism a service provider is required to get himself registered after the limit
of Rs.9 Lakh taxable service is crossed. However under Reverse Charge Mechanism a person liable
to pay service tax is required to get himself registered within 30 days of the date on which liability to pay
service tax arises.
SMALL SERVICE PROVIDER EXEMPTION NOT AVAILABLE
When person receiving service is liable to pay service tax under reverse charge, he is not entitled to
exemption which is available to a small service provider. Thus, the service receiver is liable to pay
service tax even if value of service of service provider is less than Rs. 10 Lakhs. Further in case of
partial reverse charge even if service provider does not charge service tax in his invoice, the service
receiver is still liable to pay his part of service tax.
PAYMENT OF SERVICE TAX
Timing of payment is same as that of Normal Charge Mechanism i.e. on monthly basis for companies
and on quarterly basis for others. However there is a twist in manner of payment under reverse charge
mechanism the liability of service tax has to be met in cash i.e. no Cenvat credit can be adjusted
against it as credit facility is available for output services only while it will be input service for service
receiver. Rule 2(p) of Cenvat Credit Rules, 2004 (as amended by NN 28/2012-CE (NT) dt. 20-06-2012,
the term output service means any service provided by SP located in taxable territory but shall not
include a service;
• Specified in section 66D of the Finance Act, 1994, or
• Where whole of ST liability is of SR i.e recipient of service.
POINT OF TAXATION
Point of taxation in case of Reverse Charge Mechanism is governed by Rule 7 of Point of Taxation
Rules, 2011, Rule 7 states as under:
“Notwithstanding anything [contained in rules 3, 4, or 8], the point of taxation in respect of the persons
required to pay tax as recipients of service under the rules made in this regard in respect of services
notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made.
Provided that where the payment is not made within a period of three months of the date of invoice, the
point of taxation shall be the date immediately following the said period of three months.”
AVAILABILITY OF CENVAT CREDIT TO SERVICE PROVIDER PROVIDING SPECIFIED SERVICES
Services on which Partial Reverse charge is applicable, Service provider can avail Cenvat credit of
Service tax paid on Input services obtained. Further since in case of these service providers
100percent Input credit is available while service tax liability is on less than 100percent hence central
government has introduced Rule 5B which allows service provider to claim refund.
Services on which full reverse charge is applicable are not covered by the term “Output Services” as
per Rule 2(p) of CCR Rules, 2004. Hence no cenvat credit of Service tax paid on Input services is
CENVAT CREDIT OF TAX PAID UNDER REVERSE CHARGE
For service receiver who has paid service tax under reverse charge it is the service tax paid on the
Input service. Hence Cenvat Credit is available but he will be eligible to avail credit, on the basis of
GAR-7 challan i.e on the date when service tax is paid.
GST a hot topic now a days so this article could not be concluded without sharing my views on
Reverse Charge mechanism in GST Regime. In my views these provisions will be copied to GST
Regime as it is or with certain small changes because RCM was introduced because of certain
reasons as explained in the beginning.