Learn the essentials of Reverse Charge Mechanism under Service Tax. Get to know what is Reverse Charge Mechanism. Check the RCM in Service Tax as per Finance Bill 2016.
Service tax is the tax levied by the government on taxable services. Service Tax is guided by the provisions of Chapter V of the Finance Act, 1994 and the service tax rules, 1994. Thus, the Finance Act amendments to the finance act provided in every annual budget and the corresponding service tax rules define the scope, extent and other conditions of levy of service tax under Service tax Reverse Charge Mechanism.
What is Service Tax Reverse Charge Mechanism?
Under Section 68(1) of the Finance Act, 1994, every individual providing taxable services to others shall pay Service tax at the rate specified in [Section 66]. The liability to pay service tax lies with the Service Provider (SP). The Service Provider shall collect the service tax from the service recipients and thus pay it to the account of government.
However along with this, Section 68(2) states that Central Govt may report any other individual who shall be liable to pay service tax, and thus all provisions of service tax shall apply normally. This implies anyone other than a service provider, (i.e., the Service Recipient-SR) shall be made liable to pay the Service Tax. This phenomenon of transferring the service tax liability from Service Provider (SP) to the Service Recipient (SR) is known as Service Tax Reverse Charge Mechanism.
Reverse Charge Mechanism Eligibility
The Reverse Charge Mechanism is applicable for certain specified classes of businesses where Service Recipients (SR) are required to pay service tax instead of service providers. The insight of such specified levels is as follows.
Import of Services
In case the service provider is situated outside India, and any individual is importing his services, then such person importing the services, i.e., service recipient shall be liable to pay service tax for such services. You can also check our guide on Service tax exemption. The standard rate of 12.36% applies to 100% liability of service recipient.
Services of Insurance Agent
Where an insurance agent is providing his services to a person/company carrying on insurance business, i.e., services of an insurance agent to the insurance company, service recipient shall be responsible for paying service tax. A liability of 100% lies with the insurance company, and the standard rate of 12.36% shall apply.
Must Read: Point of taxation rules under service tax.
Services of goods transport agency (GTA)
GTA are a major component of reverse charge mechanism. GTA provide the service of transportation of goods by road by issuing a consignment note. The person paying the freight shall be the service recipient who shall be liable to pay service tax on such service. The effective rate applicable is 3.09%. GTA doesn’t include courier cargo.
Services of sponsorship
Under service tax reverse charge mechanism, providing support is also considered a service which is covered under reverse charge mechanism. This means, the person receiving the sponsorship shall pay the service tax on the same. The applicable rate is 12.36%.
- Sponsorship to promote sports and sponsorships to promote business are not included under these provisions of reverse charge.
Services of a tribunal
Tribunal or the arbitral tribunal is the panel of persons who solve disputes by way of arbitration (settlement). Services of a tribunal are one of the services considered under service tax reverse charge mechanism. Thus, the person receiving the services of the tribunal, i.e., whose conflict is getting resolved will be the service recipient and will be liable to pay service tax. The rate applicable is 12.36%.
Services of advice or consultancy related to any law or representation before the court or any other authority from the advocates are also included under reverse charge mechanism. The person receiving such services shall pay service tax @ 12.36%.
Services of Manpower Supply
Providing manpower by any agent for any business entity where labor work with the business entity while being on the roll of agent company is also a service which is covered under reverse charge mechanism. The business entity receiving manpower is the service recipient liable to pay tax. 75% liability of service tax lies with service recipient while 25% lies with the service provider. So, the recipient shall pay 9.270%, and the provider shall pay 3.090% of total billed amount.
- Placement agencies are not included under service tax reverse charge mechanism.
Services of renting motor vehicle
Hired cabs, cars, and buses are included under this service. But it doesn’t include metered cab, public transport, etc. There can be two cases given this service.
- Service provider availing input credit liability of service receiver is 40% while that of the service provider is 60%.
- Service provider not availing input credit-100% responsibility lies with service recipient.
Services of directors of company
After the introduction of negative listing approach, services of directors have also been made taxable and covered under reverse charge mechanism applicable from 07.08.2012. So, any payments made to nonexecutive directors such as sitting fees, etc. are taxable. 100% liability lies with service recipient.
Support services by authority
Any life support services provided by the local authority or government are also taxable w.e.f. 01/07/2012 and the full liability lies with service recipient.
- Support services by authority exclude postal services, insurance, and other public utility services.
There can be three cases of works contract-
- For new construction, addition, erection or commissioning of plant & machinery- Both, service provider and service recipient, have 50% liability each. The applicable rate is 2.472%.
- Maintenance or repair or reconditioning services- Both, service provider and service recipient, have 50% liability each. The applicable rate is 4.326%.
- Works contract other than mentioned in (a) and (b)-for completion and finishing services like plastering, tiling, etc. – Both, service provider and service recipient, have 50% liability each. The applicable rate is 3.708 percent.
- Superseding the above provisions, following are the situations where service tax liability will remain with the SP-service provider only if the service provider is an organization or company.
- Works Contract.
- Renting of a Vehicle.
- Manpower Services.
Service Tax Reverse Charge Mechanism standard provisions
- The taxable event in case of reverse charge mechanism shall be the completion of provision of service. The liability to pay service tax arises as soon as the service provider has if the services are under service tax reverse charge mechanism
- The point of taxation shall be the date of payment to the service provider. If the payment is not made within six months of the issue of invoice, date of invoice shall be considered the point of taxation.
- There is no minimum exemption limit in the case or reverse charge mechanism. So, the service tax will be levied even if the value of services provided by the service provider doesn’t exceed Rs. 1,00,000/- and thus he is exempt from service tax.
- The service recipient can claim the tax credit of service tax paid by him on input services. For this, he shall be required to produce tax payment challans as proof of payment.
- The service provider shall be required to pay the tax to the government even if he doesn’t collect it from the service recipients. So the actual burden is irrelevant.