Section 68(2) of Finance Act, 1994 Read with Notification no. 30/2012 - ST

Reverse Charge under Service tax

Reverse Charge Mechanism

Reverse Charge Mechanism

Full reverse charge

mechanism

The entire service tax liability is on the

service recipient

Partial reverse charge

mechanism

Sharing of service tax liability by

service provider and service recipient

Services under Full Reverse Charge Mechanism

1. Insurance Agents Services2. Goods Transport Agency Services3. Sponsorship Services4. Legal Services5. Support Services by government or local

authority6. Director Services7. Import of Services

Services under Partial Reverse Charge Mechanism

1. Rent - a - Cab Services2. Manpower supply services3. Works Contract Services

Full Reverse Charge Mechanism1. Insurance Agent Services

Full Reverse Charge Mechanism –Insurance Agent Services

Taxable services are provided by Insurance agent to any person carrying insurance business

The word used is any person carrying insurance business (Not necessarily insurance company, but IRDA, accepts registration for running insurance business only for companies)

Actually, Services are provided by insurance agent to insurance company but not by insurance agent to insured i.e. client

Full Reverse Charge Mechanism2. Goods Transport Agency

Full Reverse Charge Mechanism –Goods Transport Agency Services

GTA means any person who provides services in relation to transportation of goods by road and issues consignment note by whatever name called.

Service tax is payable by Consignor or Consignee, who is paying freight or is responsible for paying freight

Generally services in relation to transportation of goods by road is specified in negative list but it excludes Goods transport agency services & accordingly GTA Services are taxable

Full Reverse Charge Mechanism –Goods Transport Agency Services

But such consignor or consignee should be • Any Factory registered under Factories Act•Company established under companies Act•Corporation established by or under any law•Any Society or Cooperative society•Any dealer of excisable goods•Any body corporate•Any partnership firm (includes AOP, BOI, LLP)

Therefore for the case of an individual/unregistered firm/HUF/ Governmental agency that are not covered by the above, the GTA would be liable to discharge the service tax

Full Reverse Charge Mechanism –Goods Transport Agency Services

Whether following are covered?1) A truck owner transporting goods directly without involvement of goods

transporting agency Not Covered2) A manufacturer transporting goods to there dealer through their own

transportation. Not Covered3) Transportation on bullock cart, Tonga, rickshaw, etc Not Covered4) Farmers transporting goods fellow farmers after harvest from farm to

sugar mill. Not Covered

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

DELTA Ltd. a Company, registered under the Companies Act is transporting goods to an Individual Y, on “To Pay”basis. Who is liable for payment of Service Tax?

Since the consignor is a Company (i.e. falling under the specified category), the liability is on Consignor or consignee, paying the freight i.e. “Y”, notwithstanding that he is an individual. But “Y” would request DELTA Ltd. to pay service tax.

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

DELTA Ltd. a Company, registered under the Companies Act is transporting goods to an Individual Y, on payment of freight. Who is liable for payment of Service Tax?

Since the consignor is a Company (i.e. falling under specified category), the liability is on Consignor (or) Consignee, paying the freight i.e. DELTA Ltd.

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

Y – an individual is transporting goods to a company, DELTA Ltd. on payment of freight. Who is liable for payment of Service Tax?

Since the consignee is a Company (i.e. falling under specified category), the liability is on Consignor (or) consignee, paying the freight i.e. “Y”, notwithstanding that he is an individual. But “Y” requests DELTA Ltd. to pay service tax

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

DELTA Ltd. an individual is transporting goods to a company, “X” on “To pay” basis. Who is liable for payment of Service Tax?

Since the consignee is a Company (i.e. falling under specified category), the liability is on the person paying the freight i.e. X Ltd.

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

DELTA Ltd. a Company based in Chennai, has its consignment Agent at Delhi. The Company transports goods to him, on “To Pay” basis. The Transport Agency raises the bill in the name of DELTA Ltd., but the freight is paid by the consignment agent, directly to the GTA. Who is liable for payment of Service Tax?

In as much as the bills are raised against DELTA Ltd, the consignment agent is paying the freight, only on behalf of DELTA Ltd. In other words, company is paying the freight, through the consignment agent. As such, the liability for payment of Service Tax is on DELTA Ltd.

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

DELTA Ltd., a Company sells the goods to “Y”. The freight for the movement of the goods has been paid by company. It collects this freight from “Y”, by showing it in the invoice, which is paid by “Y”, to company. Who is liable for payment of Service Tax?

Since this is a case of pure sale, DELTA Ltd. cannot be said to be paying the freight on behalf of “Y”. DELTA Ltd. is only getting reimbursement of the freight paid by him, initially. As such, the liability for payment of Service Tax will only be on DELTA Ltd.

Full Reverse Charge Mechanism – Goods Transport Agency Services - Illustration

“X”, an individual is transporting goods to another Individual, “Y”. Who is liable for payment of Service Tax?

Since, both the consignor and the consignee are notfalling under the specified categories, the liability ison the Goods Transport Agency.

Full Reverse Charge Mechanism – Goods Transport Agency Services - Exemptions

Transportation of the following goods by a goods transport agency have been exempted from service tax:1. The following essential goods

• Agriculture produce• Foodstuff including flours, tea, coffee, jaggery,

sugar, milk products, salt and edible oil, excluding alcoholic beverages.

• Chemical fertilizer and oil cakes• Newspapers or magazines registered with the

registrar of newspapers• Relief materials meant for victims of natural or

man-made disasters, calamities, accidents or mishap• Defence or military equipments

Full Reverse Charge Mechanism – Goods Transport Agency Services - Exemptions

Transportation of the following goods by a goods transport agency have been exempted from service tax:2. Goods where gross amount charged for the transportation of goods on a consignment transported in a single goods carriage does not exceed `1,500(i.e. total freight charged does not exceed 1,500)3. Goods, where gross amount charged for transportation of all such goods for a single consignee does not exceed ` 750 (i.e. there will be goods of other consignees)

Full Reverse Charge Mechanism – Goods Transport Agency Services – Exemptions (Illustration)

Raj transports his goods in a goods carriage. No other goods are loaded in the goods carriage. Raj pays a freight of Rs.1300.

Raj transports his goods in a goods carriage. He pays a freight of Rs.1300. Some other goods are also being transported in the same goods carriage, involving a freight of Rs.500.

Full Reverse Charge Mechanism – Goods Transport Agency Services – Exemptions (Illustration)

Consignor Consignee Freight Eligibility for Exemption

Full Reverse Charge Mechanism – Goods Transport Agency Services - Abatement

Transportation of the following goods by a goods transport agency have been exempted from service tax:1. The following essential goods

• Agriculture produce• Foodstuff including flours, tea, coffee, jaggery,

sugar, milk products, salt and edible oil, excluding alcoholic beverages.

• Chemical fertilizer and oil cakes• Newspapers or magazines registered with the

registrar of newspapers• Relief materials meant for victims of natural or

man-made disasters, calamities, accidents or mishap• Defence or military equipments

Full Reverse Charge Mechanism3. Sponsorship Services

Full Reverse Charge Mechanism –Sponsorship Service

In case of sponsorship service provided or agreed to be provided by way of sponsorship to any body corporate or partnership firm located in taxable territory receiving the service is liable – Notification no. 30/2012

Full Reverse Charge Mechanism –Sponsorship Service - Illustration

Full Reverse Charge Mechanism –Sponsorship Service - Illustration

Full Reverse Charge Mechanism –Sponsorship Service – Exemption

Full Reverse Charge Mechanism –Sponsorship Service – Exemption

The following Services by way of sponsorship of tournaments or championships organised are exempted:(a) By a national sports federation, or its affiliated federations, where

the participating teams or individuals represent any district, state or zone

(b)By association of Indian universities, Inter university sports board, school games federation of India, All India sports council for the deaf, paralympic committee of India or special Olympics bharat

(c) By central civil services cultural and sports board(d)As part of national games, by Indian Olympic Association(e)Under panchayat yuva kreeda aur khel abhiyaan (PYKKA) Scheme.

Full Reverse Charge Mechanism –Sponsorship Service – Exemption

Full Reverse Charge Mechanism –Sponsorship Service

What if receiver of service is not body corporate or partnership firm

What if receiver of service is a body corporate or firm and is not located in taxable terriotry

Advertising Services – It is not covered in reverse charge, but discussed here Negative list – Entry (g) of Sec. 66D Selling of space or time slots for advertisements other than

advertisements broadcast by radio or television. ‘Advertisement’ MENAS any form of presentation for

promotion of, or bringing awareness about, any event, idea, immovable property, person, service, goods or actionable claim through newspaper, television, radio or any other means but does not include any presentation made in person

Advertisement is not specified in negative list but sale of space or time for advertisement is specified and hence, it is not taxable

Advertising Services – What is sale of space or time for advertisement?

Sale of time for advertisement in television

Sale of time for advertisement in Cinema

Sale of Space for advertisement -Hoardings

Sale of Space for advertisement –

Publicity in internet

Advertising Services – Question Hour?Activity Taxable / Not taxable

Sale of space for advertisement in print media.Sale of space or time for advertisement to be broadcast

on radio or television.Sale of time slot by a broadcasting organization.Sale of space for advertisement in bill boards public

places, buildings, conveyances, cell phones, automated teller machines, and internet.

Aerial advertising.Making or preparing advertisements (i.e. Designing)Commissions received by advertisement agencies from

the broadcasting or publishing companies for facilitating business.

Canvassing advertisement for publishing on a commission basis.

Full Reverse Charge Mechanism –Sponsorship ServiceWhat if Sponsorship Service is converted into advertisement service.In that case there is no reverse charge and the person receiving the amount (Service provider) can claim the amount as for sale of space for advertisement.There will be no service tax on service provider also.

Full Reverse Charge Mechanism4. Legal Services

Full Reverse Charge Mechanism –Legal Services - Illustration

Harish salve, leading advocate

Full Reverse Charge Mechanism –Legal Services Legal Services provided by Advocate or Advocate firms to

business entity having turnover exceeding 10 lakhs per annum, located in taxable territory is covered under reverse charge mechanism and the business entity is liable to pay entire service tax.

Business entity means ANY PERSON ordinarily carrying out any activity relating to industry, commerce or any other business or profession.

Full Reverse Charge Mechanism –Legal Services - ExemptionsThe following services are exempted.Services provided by an individual as an advocate or a

partnership firm of advocates by way of legal services to(i) An advocate or partnership firm of advocates providing

legal services (or)(ii) A person other than business entity(iii) Business entity with a turnover upto 10 lakhs in the

preceding financial year

Full Reverse Charge Mechanism – Legal Services - Illustration

Service Provider Service Recipient Taxability

Individual Advocate Individual Exempted

Individual Advocate Individual Advocate Exempted

Individual Advocate Business Entity(Turnover during PY ≤ 10 lakhs)

Exempted

Individual advocate Business Entity(Turnover during PY > 10 lakhs)

Taxable (SR liable to pay)

Individual Advocate Firm of advocates Exempted

Full Reverse Charge Mechanism – Legal Services - Illustration

Service Provider Service Recipient Taxability

Firm of advocates Individual Exempted

Firm of advocates Individual Advocate Exempted

Firm of advocates Business Entity(Turnover during PY ≤ 10 lakhs)

Exempted

Firm of advocates Business Entity(Turnover during PY > 10 lakhs)

Taxable (SR liable to pay)

Firm of advocates Firm of advocates Exempted

Full Reverse Charge Mechanism – Legal Services - Illustration

Service Provider Service Recipient Taxability

Advocates practicing as company

Individual Taxable (SP liable to pay)

Advocates practicing as company

Individual Advocate Taxable (SP liable to pay)

Advocates practicing as company

Business Entity(Turnover during PY ≤ 10 lakhs)

Taxable (SP liable to pay)

Advocates practicing as company

Business Entity(Turnover during PY > 10 lakhs)

Taxable (SP liable to pay)

Advocates practicing as company

Firm of advocates Taxable (SP liable to pay)

Full Reverse Charge Mechanism –Support Services

In case of support services provided by government or local authority to business entity in taxable territory, the business entity is liable to discharge the service tax liability on full taxable value.

In respect of the following services, government or local authority is liable to pay service tax but not the business entity

1. Renting of immovable property2. Speed post, express parcel post, life insurance and agency

services provided by department of post3. Service in relation to aircraft or a vessel, inside or outside

the precincts of a port or airport by government4. Transport of goods or passengers by government

Full Reverse Charge Mechanism –Support Services - Illustrations

Infrastructural services Logistics and marketing Advertisement and promotion Construction or works contract Renting of immovable property Security Testing and analysis

Full Reverse Charge Mechanism –Directors Services to company

Services of director to company is covered under the provisions of reverse charge by amending noti. 30/2012 w.e.f 7/8/2012 and remuneration to directors is as follows:

Service Provider - Director (Service Tax liability= 0%) Service Recipient - Company (Service Tax liability = 100%) Director INCLUDES Non-executive, Nominee, Public interest

and Independent directors Director DOES NOT INCLUDE Managing Director, Whole time

director and Executive director, who are in full time employment of the company (Therefore no service tax as it is contract of service).

Full Reverse Charge Mechanism –Directors Services to company

Remuneration INCLUDES sitting fees, travelling expenses and incidental expenses for attending the meetings of Board and their committees and commission or other remuneration paid.

Remuneration DOES NOT INCLUDE travelling expenses other than for board meetings and committee meetings.

Service tax should be paid @12.36% on gross value of services and not by back calculations.

Service tax should be computed on the amount of remuneration and TDS should be calculated on the same amount but not afterincluding service tax.

Details in Invoice under RCM

Governing Rule: Rule 4A of the Service Tax Rules 1994.

Invoice shall indicate the name, address and the registration number of the service provider and person receiving taxable service; the description and value of taxable service provided or agreed to be provided; and the service tax payable thereon.

As per clause (iv) of sub-rule (1) of the said rule 4A "the service tax payable” thereon' has to be indicated. The service tax payable would include service tax payable by the service provider.

Service tax Vs. TDS CBDT vide Cir. 1/2014 clarified that no TDS is required to be made on

service tax component, if service tax is shown separately in invoice. TVS Motor Co. Ltd. V CCE (2012) (CESTAT) - Service tax is payable

on amount inclusive of income tax TDS Example: Professional services by Mr. A to Mr. B is ₹1,00,000. Service tax payable @ 12.36% is ₹12,360 Invoice by Mr. A to Mr. B = ₹1,12,360 TDS @ 10% should be calculated on ₹1,00,000 but not ₹1,12,360 Payment made by Mr. B to Mr. A = ₹1,02,360 Service tax payable to Govt. is ₹ 12,360 but not on ₹ 1,02,360

(Reverse working should not be done)

Service tax Vs. TDS – In case of reverse Charge In case of reverse charge the service recipient has to pay service tax and

at the same time has to deduct TDS on the payment made by him to service provider.

There was confusion till 2014 as to whether TDS should be calculated on the amount including service tax as service tax is paid by the service recipient.

But CBDT vide its circular no. 1/2014 dated 6.1.2014 has clarified that while computing TDS, service tax element should be excluded as service tax is not the income part but is a statutory liability.

Service provider under reverse charge will raise invoice only on the service portion excluding service tax and service recipient has to calculate service tax as well as TDS on the same amount and pay to the respective authorities accordingly.

Even if service provider charges in his invoice only his part of service tax (in case of partial reverse charge), TDS should be computed only that service value excluding the part amount of service tax.

Case 1 Where Service Tax has been charged fully in Invoice

Debit Credit Expense A/c Dr 100.00 -Service Tax Input Credit A/c Dr 7.42 -Service Tax Deferred Input A/c Dr 4.94 -

To Vendor A/c - 105.42To TDS Payable A/c - 2.00To Service Tax Payable A/c - Reverse Charge - 4.94

112.36 112.36

Case 2 Where Service Tax has not been charged in InvoiceExpense A/c Dr 100.00 -Service Tax Deferred Input A/c Dr 12.36 -

To Vendor A/c - 97.75To TDS Payable A/c - 2.25To Service Tax Payable A/c - Reverse Charge - 12.36

112.36 112.36

Case 3In case of Abatement ( e.g. 40%)

Debit Credit Expense A/c Dr 100.00 -Service Tax Input Credit A/c Dr 4.94 -

To Vendor A/c - 98.00To TDS Payable A/c - 2.00To Service Tax Payable A/c - Reverse Charge - 4.94

104.94 104.94

Important Points relating to RCM

Cenvat can not be availed for discharging the ST Liabilities on RCM

ST Paid under RCM can be utilize towards the discharge ST on output services

Threshold exemption of upto Rs.10 Lac is not applicable here in RCM except Legal services

Allowed Refund of unutilized cenvat credit availed from input services as per Rule 5B of Central Exice Rules,2004

Partial - Reverse Charge Mechanism

PARTIAL REVERSE CHARGE MECHANISMConcept

Joint charge mechanism means a mechanism where the 'Service recipient’is also made liable to pay service tax on a specified percentage of theservice along with the ‘Service provider’ instead of the 'Service provider’being liable for the entire liability payment.

• The Notification 30/2012-ST Dated 20 June 2012, specifies the serviceson which joint charge mechanism is applicable and the proportion inwhich the 'Service recipient’ of services is liable to pay the service tax.

• Joint charge mechanism is applicable when service provided by a non-corporate service provider to a corporate business entity.

Basic Condition in Partial RCMService Provider Individual HUF Partnership Firm AOP BOI LLP

Service Receiver

Business entity registered as body corporate

He should be located in taxable territory

CENVAT Credit:• Cenvat credit of the tax paid can be availed on the part of service tax paid even

by the service recipient. (If other rules are satisfied)• However, liability under Reverse Charge cannot be paid through CENVAT Valuation:• Service recipient can opt for separate method of valuation than service provider. Liability:• Service recipient has to pay his liability in all circumstances and the benefit of

small service provider exemption is not available.

PARTIAL REVERSE CHARGE MECHANISMPoints to be Remembered

PARTIAL - REVERSE CHARGE MECHANISMList of Services

Sr. No.

Description of Service Percentage of service tax payable by the recipient of services

Remarks

1 Rent-a-Cab service when not under abatement scheme and service receiver is not a ‘Rent-a-Cab’ operator.

In case of abatementAn abatement is available under Notification no. 26/2012 for renting of motor vehicle designed to carry passengers to the extent of 60%

40%

100%

The said body corporate is only liable to the extent of 40% and on balance 60% Rent-a-Cab operator will collect and pay the said liability.

However, if the service receiver and provider are both in the business of providing ‘Rent-a-Cab’ service then the reverse mechanism wouldn’t apply.

PARTIAL - REVERSE CHARGE MECHANISMList of Services

Sr. No.

Description of Service Percentage of service tax payable by the recipient of services

Remarks

2 • Manpower supply serviceprovided or agreed to beprovided for any purpose

• Security Service

75%

75%

Any person receiving suchmanpower or securityservice is required to payservice tax to the extentof 75% and balance 25%will be required to be paidby person providing suchmanpower.

3 Service portion in WorksContract Service which isprovided by (a) Individual (b)HUF (c) Partnership Firm (d)AOP located in taxable territoryto a business entity registeredas body corporate located intaxable category

50% Any person receiving suchservices being a bodycorporate would have topay tax @ 50% of thetaxable tax.

RENT-A-CAB SERVICEIn Nutshell

Renting of Motor Vehicle

If abatement of 60% claimed

S.P. is not liable to pay

any tax

S.R. is liable to pay @ 4.944%

If abatement not claimed

S.P. is not liable to pay

@ 7.416%

S.R. is liable to pay @ 4.944%

WORKS CONTRACT SERVICEIn Nutshell

Original Works

Taxable Amount 40% = 4.944% effective rate

ST = 40% x 12.36% X 50% = 2.472%

Works Contract of Movables

Taxable Amount 70% = 8.652% effective rate

ST = 70% x 12.36% X 50% = 4.326%

Any other WC for Immovables

Taxable Amount 60% = 7.416%

ST = 60% x 12.36% X 50% = 3.708%

REVERSE CHARGE MECHANISMAccounting TreatmentCase 1: Partial Reverse Charge

Debit Credit

Expense A/c Dr. 100.00 -

Service Tax Input Credit A/c Dr. 7.42 -

Service Tax Deferred Input A/c Dr. 4.94 -

To Vendor A/c - 105.42

To TDS Payable A/c - 2.00

To Service Tax Payable A/c - Reverse Charge - 4.94

112.36 112.36

Case 2: Full Reverse Charge

Expense A/c Dr. 100.00 -

Service Tax Deferred Input A/c Dr. 12.36 -

To Vendor A/c - 97.75

To TDS Payable A/c - 2.25

To Service Tax Payable A/c - Reverse Charge - 12.36

112.36 112.36

Principle of Mutuality - Meaning, Exceptions & Exemptions: Meaning: As per this principle, there must be two parties for levy of service

tax i.e. service must be provided by one person to another person.

Exceptions [Explanation 3 to Sec. 65B(44)]: An establishment of a person located in taxable territory and

another establishment of such person located in non-taxable territory are treated as establishments of distinct persons.

An unincorporated association or body of persons and members thereof are also treated as distinct persons.

Principle of Mutuality - Meaning, Exceptions & Exemptions: Exemptions [Notification no. 25/2012]: Service by an registered, unincorporated body or a non- profit

entity, to its own members by way of reimbursement of charges or share of contribution–

1.As a trade union;

2. For the provision of carrying out any activity which is exempt from the levy of service tax; or

3. Up to an amount of ₹5,000 per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex [i.e. Resident Welfare Association (RWA)]

Principle of Mutuality - Meaning, Exceptions & Exemptions: Circular No. 175/1/2014 (dated: 10/1/14) If per month, per member contribution exceeds ₹ 5,000, the

entire contribution would be ineligible for contribution and service tax would be leviable.

Small Service Provider exemption under Notification no. 33/2012 is applicable to RWA.

RWA incurring expenses viz. electricity bill, telephone bill on behalf of members is excluded as per rule 5(1) of valuation Rules, 2006 for determining the value of taxable services of RWA

RWA can avail CENVAT credit in terms of CENVAT credit rules, 2004