Reverse Charge Mechanism (RCM)

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Introduction- In order to understand reverse charge mechanism, a brief of normal charge mechanism is essential. Normally service tax is payable by the person providing the service. However, under reverse charge service receiver is made liable to pay service tax.

Reverse Charge Mechanism is directed towards the motive of more tax compliance and increased tax collection from various unorganized sectors. Presently, its provisions are applicable on 15 services such as insurance, services of a director to a company, non-resident service providers, etc.

Service tax is payable on gross amount including TDS. Also, the small service provider exemption of Rs.10 lakh is not available when tax is payable under reverse charge.

Service Tax liability arises on the earliest of-

  • The date of payment, OR
  • The date immediately after 60 days from the date of issue of invoice.

Exceptions-

  • If service provider is an Associated Enterprise outside India, the service receiver is liable to pay service tax as soon as the account of service provider is credited in the books of service receiver.
  • In some cases, reverse charge is applicable only when service receiver is business entity registered as body corporate- Company, LLP, Cooperative Society and not to Firm, HUF, and Trust.

Import of service-

  • Service tax is payable only if Place of Provision of service is in taxable territory (i.e. India plus 200 nautical miles inside the sea, except J&K.
  • Service provider should be outside taxable territory and service reciever should be located in taxable territory.

Cenvatcredit

  • Service tax paid on reverse charge will be available as input tax credit if otherwise it is his eligible input service. But, Cenvat credit cannot be used to pay tax by service receiver i.e. service tax as to be paid by cash only- GAR 7 Challan.
  • In some services (e.g. Goods Transport Agency, renting or hire of motor vehicle designed to carry passengers), the abatement is subject to non availment of Cenvat Credit by service provider (not by service receiver). Theservice reciever does not have to prove that service provider has not availed any Cenvat credit.

GST scenario-

Currently there is no reverse charge mechanism in supply of goods. But, in GST regime, reverse charge may be applicable for both services as well as goods. The time of supply for goods under reverse charge shall be earliest of-

  • The date of payment, OR
  • The date of receipt of goods, OR
  • The date immediately after 30 days from the date of issue of invoice by the supplier.

If not possible, to determine any of above, the time of supply shall be date of entry in the books of account of recipient.

Service Tax Reverse Charge WEF 01.06.2016

S.No Service Provided SP (Tax) SR (Tax) Ser Provider

Ser Receiver

1 Insurance Agent Nil 100(15) Any Person Insurance Co.
2 Recovery Agent Nil 100(15) Any Person Bank/FI/NBFC
3 MFund Agent/Distrib Nil Nil MF Agent MFund/AMC
4 Lottery Sell/Makt.Agt. Nil 100(15) Sell/Market Agent Dist/SellAgt.
5 GTA (Except Household) Nil 100(15) Any Person Co.,P.firm,Factory,

Society, excise registered assessee

6 Sponsorship Service Nil 100(15) Any Person Body Corp/Firm
7 Arbitral Tribunal Nil 100(15) Arbitral Trib. Business Entity
8 Legal (excel Sr. Advocate) Nil 100(15) Individual or  Firm Business Entity
9 Director Service Nil 100(15) Individual Co./Body Corp.
10 Any Services by Govt. Nil 100(15) Govt / Loc Auth. Business Entity
11 Rent. Pasnger Vehicle After 60% Abatement Nil 100(6)  

 

 

Individual/ HUF/Partnership/Firm AOP/LLP

 

 

Business Entity registered as body corporate

Without Abatement 50(7.5) 50(7.5)
12 Manpower/Security Nil 100(15)
13 Works Contract
Excl.Mat. (100%) 50(7.5) 50(7.5)
Original Work (40%) 50(3.00) 50(3.00)
Other work (70%) 50(5.25) 50(5.25)
14 Important of Service Nil 100(15) Any Person Any Person
15 Aggregator Services Nil 100(15) Any Person Any Person

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