What is Reverse Charge Mechanism

  • 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:

  • Not all service receivers 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.

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

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.

Abatement availability:

  • Benefit of abatement is also available in reverse charge. Service receiver and provider have to pay service tax on the value of services after considering available abatement for service.

Reverse charge mechanism in various services:

S. No Services Service provider Service receiver Tax payable by service receiver Tax payable by service provider
1 Insurance agent services Insurance agent Insurance company 100% 0%
2 Sponsorship service Any person Body corporate/partnership firm 100% 0%
3 Arbitral tribunal services Arbitral tribunal Business entity 100% 0%
4 Legal services Individual advocate/firm of advocate Business entity having turnover exceeding 10 lakhs p.a. in previous FY 100% 0%
5 Director’s service Director Company 100% 0%
6 Support services by government or local authority Government or local authority Business entity 100% 0%
7 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%
8 Renting of motor vehicle designed to carry passengers to any person who is not in same business (when service provider has availed abatement) Individual, HUF, proprietor /partnership firm, AOP Business entity registered as body corporate 100% 0%
9 Supply of manpower service Individual, HUF, proprietary, partnership firm, AOP Business entity registered as body corporate 100% 0%
10 Work contract service Individual, HUF, proprietary, partnership firm, AOP Business entity registered as body corporate 50% 50%
11 Service received from non taxable service Located in non taxable territory Located in taxable territory 100% 0%

Source:1. http://taxmasala.in/reverse-charge-mechanism/

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