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Reverse Charge Mechanism under Service Tax from 01-07-2012

by on December 6, 2012

Service Tax regime has undergone a massive change over from 01-07-2012 and in connection to that new notifications are issued for taxable and exempt services.

Under this new regime, “Reverse Charge Mechanism” is also included and scope of which is expanded through Notification No. 30/2012 dated 20/06/2012. Therefore, it is important for all of us to understand what is reverse charge mechanism and how does it work?

Q: What is Reverse Charge Mechanism under Service Tax?
A: Generally, Service tax is payable by Service Provider. However, under certain specified services, government has shifted the burden of paying service tax to service receivers e.g. goods transport agency services, advocate services etc. Therefore, it is called reverse charge mechanism under service tax.

Q: What are such specified services covered?
A:

Sr.

No.

Description of a service % of service tax payable by the service provider % of service tax payable by the service Receiver Remark

1

Insurance service by insurance agent

Nil

100%

Full reverse charge

2

Transportation of goods by road (GTA) Service

Nil

100%

Full reverse charge

3

Sponsorship Service

Nil

100%

Full reverse charge

4

Arbitral Tribunal Service

Nil

100%

Full reverse charge

5

Advocate Services by Individuals

Nil

100%

Full reverse charge

6

Support Service by Government or Local Authority

Nil

100%

Full reverse charge

7

(a)     Renting or hiring any motor vehicle designed to carry passenger on abated value.(b)    Renting or hiring any motor vehicle designed to carry passenger on non abated value.

Nil

 

60%

100%

 

40%

Partial reverse charge

8.

Supply of Manpower Service or Security Agency Service (from 07-08-2012)

25%

75 %

Partial reverse charge

9.

Works Contract Service

50%

50%

Partial reverse charge

10

Import of Services

Nil

100%

Full reverse charge

11

Directors  (from 07-08-2012)**

Nil

100%

Full reverse charge

**Please refer our detail article of “Tax Implications on Directors” at – http://aviratshiksha.wordpress.com/2012/08/17/tax-implications-on-directors/)

Q: Who is covered under this mechanism?
A:
The status of service receiver is very important. The liability fixed under reverse charge mechanism is different for different class of service receivers e.g. individuals, firms, corporates etc. However, all corporate entities are covered under reverse charge mechanism.

Q: How much service tax is to be paid under this mechanism?
A: Service tax under reverse charge is to be paid either fully or partially depending on the nature of services received and percentage defined against it as per table above. If full service tax is to be paid by service receiver then it is called fully reverse charge concept and if partial service tax is payable by service receiver and service provider then it is called partial reverse charge concept.

Q: Who is covered under Partial Reverse Charge Mechanism Concept?
A: Partial reverse charge is applicable to only four services i.e. Security, Manpower Supply, Works Contract and Rent-a-cab services. Partial reverse charge is applicable only if service providers are either Individuals, HUFs or Partnership Firms and the service receiver is a corporate or body corporate i.e. in case of specified service providers and specified service receivers only.

Examples of applicability of Partial Reverse Charge -

e.g. Individual (SP) to Company (SR)
HUF (SP) to Company (SR)
Partnership Firm (SP) to Company (SR)
Individual (SP) to Non-profit making company (SR)Partnership Firm (SP) to Non-profit making company (SR)

Examples of non-applicability of Partial Reverse Charge -

e.g. Company (SP) to Company (SR)
Company (SP) to Individual (SR)
Company (SP) to Firm (SR)
Firm (SP) to Firm (SR)
Local Authority (SP) to Firm (SR)
Company (SP) to Local Authority (SR)

Q: What is the rationale behind partial reverse charge mechanism?
A: Budget 2012-13 has announced partial reverse charge mechanism applicable from 01-07-2012, to minimize the compliance on the part of small service providers like Individuals, HUFs and Partnership firms who are also found inconsistent in complying service tax payments and returns in time. Therefore, the burden of such compliance and payment of service tax is shifted to bigger players like corporates.

Q: How to pay?
A: The payment of service tax under this mechanism is to be paid by bank/challan only. Therefore, initially, the burden of payment of service tax is to be lifted through bank payment only. However, it is certainly not an additional costs as CENVAT Credit can be availed of such payment of service tax on the basis of challan paid against the liability arising out of other output services.

Q: When to pay?
A: The liability of service tax arises when payment is being made to service providers and not when bill is issued and payment of service tax is to be made within 5th/6th of the next month in which payment to service providers are made.

Q: Is service tax payable on advance payment to service providers?
A: Yes, service tax is payable on advance paid to service providers after July 12 on the total advance payment made.

Q: How to receive bills from such service providers?
A: In case of full reverse charge services, the service receivers should request to service providers to invoice only the gross value and no service tax should be shown. In case of partial reverse charge services, the service receivers should request to service providers to invoice the gross value plus the service tax payable to the extent of his liability only.

Q: What if service provider is SSI having turnover less than 10 lakh?
A: Generally, service tax is exempt to all till the turnover is 10 lakh. However, the said exemption is available to service providers only and not to service receivers. Reverse charge mechanism being the liability of service receivers, even if the service providers are having less than 10 lakh turnover, service tax is to be paid by service receiver to the extent payable by him from the very first rupee paid to service providers against the services provided by him.

Q: Is reverse charge applicable on services provided and completed before 01.07.2012 though payments were made after 01.07.2012?
A: Merely because payment has been made after 01.07.2012 will not add any additional liability on the service receiver in respect of reverse charge mechanism. If payments are made of services received before 01.07.2012 and completed before it and payment is made any time after July 12, the liability of service tax will remain that of service providers only.

In other words, the invoices received by service receiver before or up to June 12 whose payment has been made even in or after July 12 are not taxable under reverse charge. One can conclude that the invoices raised in or after July 12 for services provided in or after July 12 are taxable to service receivers when the payment of such invoices have been made in or after July 12.

CA GAUTAM JOSHI

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From → Service Tax

39 Comments
  1. sandeep joshi permalink

    can any one tell me that Is our company NSDC(National skill development corporation ) is liable to take the service tax registration after this reverse charges machnism,our company is a company formed by MOF for skilling the youth and all the income is expempt u/s 10 (46). plz help…

    • Hi Sandeep,

      Thanks for choosing our platform.

      Reverse charge mechanism is applicable to all corporate (as a service receiver). Therefore, there is no exception to a company formed by MOF for skilling the youth and even if all the income is expempt u/s 10 (46).

      However, the reverse charge is applicable to specified services only as discussed in the article. Hence, if the company is not receiving such services, the same is not liable to pay service tax under reverse charge.

      Best Wishes.

  2. Arvind Bansal permalink

    Please provide me filled form st 3 for transporter service receiver

    • Dear Sureshji,

      We have sent a sample file of ST-3 for Goods Transport Agency service as required by you on your email id.

      Please note that I have entered dummy registration number, entity and payment details so please change accordingly. Figures you can enter as per your accounts.

      Please note that this return is only for educational purpose and shall not be submitted online.

      Best Wishes.

  3. Sithal Jain permalink

    Please provide me filled form st 3 for manpower service provider

    • Dear Sithal,

      We have sent a sample file of ST-3 for Manpower Supply Service as required by you on your email id.

      Please note that I have entered dummy registration number, entity and payment details so please change accordingly. Figures you can enter as per your accounts.

      Please note that this return is only for educational purpose and shall not be submitted online.

      Best Wishes.

  4. HIREN Patel permalink

    Dear Sir, I want to know that…Company ABC Ltd. has taken security services from Y (Firm) and hence the Y (Firm) Will CHarge 25% ST and Service receiver will pay 75%. Now, my question is that,
    1.whether can we get the CENVAT credit on 100% ya 75%
    2.We have to book 25% as expnses…?
    3.Like TDS, how to pay 75% ST as the Service Provider is not registered bcoz claiming SSI exemption.
    4.How to file ST3 , can you send me the copy for the same.,?
    5.Can you explain me with examply the accounting treatment…?

    Thank you very much.

    • Dear Hiren,

      Please find your answers here:

      1. Yes. you can avail 100% service tax credit. 25% on the basis of bill and 75% on the basis of copy of challan (GAR-7) that you deposited.
      2. You don’t have to book 25% service tax charged by service provider (Y) as an expenses because it is eligible as credit. Book this service tax as “Service Tax Receivable” under current assets head.
      3. 75% service tax is to be paid when payment is made to service provider (Y). You have to deposit this portion of service tax under appropriate accounting head (Security Service:00440108) in cash or by cheque through your bank before 5th of next month following the month in which payment is made.
      4. We have sent a sample copy of ST-3 for your case on your email id.
      5. Find following accounting entries:

      1. On Receipt of bill -
      Expenses account (bill net of taxes) Dr.
      Service tax receivable account (25%) Dr.
      To Party (Y) account

      2. On payment to service provider (Y) -
      Service Tax payable account (75%) Dr.
      To Bank account

      3. While availing credit of 75% amount -
      Service Tax receivable account (75%) Dr.
      To Service Tax payable account (75%)

      Best Wishes.

  5. RAGHU permalink

    Hi friends,
    I need one clarification,
    We (our company) has to pay Remuneration of Outsourcing charges to foreign company.
    We are the service receiver, whether we liable to pay service tax under RCM ?

    • Hi Raghu,

      Payment made to foreign service provider for outsourcing services can be considered as “Import of services” and taxable under reverse charge. You need to select first the appropriate category of service and registered it with service tax department. You have to convert the foreign currency payment into Indian rupee first and then pay 12.36% service tax on it. Once paid, the same can be taken as CENVAT Credit.

      If you can throw some more light on description of service then exact taxability can be decided.

      Best Wishes.

  6. Alagu permalink

    Dear Sir,
    We are 100% export Service Company. We are receiving security invoice. The invoice is showing ST 25% servicer provider and 75% to be paid by service receiver. My questing is our company to be pay 75% of service tax, because we are 100% export Service Company.

    If we pay the service tax under reverse charge method please send sample ST3 format.

    • Hi

      First of all, even as an exporter you need to pay partial reverse charge service tax @75% on security service received.

      If not already done, you need a service tax registration with security service added in the ST-2.

      Please find the attached sample service tax return sent on your email id.

      Best Wishes.

  7. Mayur Pasad permalink

    Kindly provide me filled st 3 return for Partial Reverse charge provision. Goods transport service by road, Manpower supply service, works contract service

    • Dear Mayur,

      We have sent a file on your email address considering you as service receiver and status of the entity as registered private limited company.

      Best Wishes.

  8. ajay permalink

    our firm is under business support services (immigaration), let me know the rate of tax?

    • Dear Pranav,

      General rate of service tax is 12.36%. If you provide more specific information then we can answer.

      Best Wishes.

  9. please provide me valuation of Works contract as u given for manpower

    • Dear Amit,

      There are following all possible Works contract rates as per Notification No. 24/2012 dated 06/06/2012:

      For service receivers other than corporate
      1. Construction Services – 4.944%
      2. Management or repair service provided -
      - for movable property – 8.652%
      - for immovable property – 7.416%
      3. erection, commissioning or installation of plant, machinery or equipment – 4.944%

      For corporate service receivers
      1. Construction Services – 2.472%
      2. Management or repair service provided -
      - for movable property – 4.326%
      - for immovable property – 3.708%
      3. erection, commissioning or installation of plant, machinery or equipment – 2.472%

      Best Wishes.

  10. Amit permalink

    Dear Sir, I Have a issue.
    Our company takes services of renting a cab service for passangers. Most of the service providers Charge service tax @ 4.94% i.e 40% of 12.36%. now my issue is how much we have to pay service tax on reverse charge mechanism. And some service providers don’t charge any service tax.
    For Ex- Bill amount Rs 31000/-
    service tax @4.944%-1531.40
    Total32532.64
    Kindly Suggest

    • Dear Amit,

      Please find following suggestions:

      1. Those service providers who don’t charge service tax and are individual, HUF or firm :-

      - Pay ST @4.944% as a service receiver.

      2. Those service providers who charge service tax @4.944% and are individual, HUF or firm :-

      - Ask them to stop charging ST on bill and as a service receiver your company shall pay ST @4.944%

      3. Those service providers who charge service tax @4.944% and are not individual, HUF or firm :-

      - You don’t need to pay any service tax as a service receiver.

      Best Wishes.

  11. Kamlesh permalink

    Dear Sir,

    My question is, in reverse charge mechanism can we tag Service Tax Input to the Other Current Asset account.Please assist me.

    • Dear Kamlesh,

      Yes you can certainly do if you want to put more control and make reverse charge credit separate to regular credit.

      Best Wishes.

  12. vivek permalink

    hi can you mail me gta return sample for service provider who is individual

  13. Please provide me the rate of service tax on manpower supply

    • Dear Jaspreet,

      ST for manpower supply service is to be paid on 75% of value if you are paying as service receiver.

      If you are paying as service provider it is 25% of service value.

      Best wishes.

  14. Aziz Khan permalink

    we are doing construction work for government educational institution (exempted service). to complete the work we engaged labour contractror and machinery on hire. My question is weather reverse chage is applicable to us against exempted service and if it applicable than how we claim the cenvet credit as our output service is exempted.

    • Hi Aziz,

      Reverse charge mechanism is very conditional. However, just because your output service is exempt, it does not mean reverse charge mechanism can not be applied in your case.

      Good to note here is that the sub-contracted work is of labour and hiring machinery. If this work falls under manpower supply service or works contract service as per service tax regime then yes you are covered in reverse charge mechanism. We also need to see the status of your entity and service provider’s entity i.e. are you guys proprietors, firms or corporate etc. Hence, please answer yourself following questions to come to a right solution:

      1. What is your status?
      2. What is the status of service provider?
      3. What is the nature of service? (Is it manpower supply or works contract in any way?)

      Please provide us the above information to tell you exactly.

      Because you have received these services specifically for an exempted output service, the CENVAT Credit of such tax paid to sub-contractor can not be received. However, if you have other taxable output services then you can receive benefit of Rule 6(3) for partial availability of credit as calculated under that rule.

      Best Wishes.

  15. nithin permalink

    when did reverse charge concept start? is it retrospective? since my firm is receiving transportation services from 2009 should we pay service tax from that year with penalty or is it applicable only after 2012?

    • Hi Nitin,

      Reverse charge in case of Transportation services (called GTA Service in service tax law) is effective even before 2009. Yes, you are liable to pay service tax on freight payment over and above Rs. 750/- for single consignment and @ 3.09%.

      If you have not paid then you still have a chance to comply the law by taking benefits under VCES. Interest @18%, late registration, late payment penalty (which can be 100% of ST defaulted otherwise) – all can be waived under VCES immunity scheme. The last date to apply for VCES is 31st of December 2013.

      Best Wishes.

  16. Umesh permalink

    Could you pl send me ST3 on Man Power, GTA and Rent a Cab.

    • Dear Umesh,

      Please note we have sent an email to your address with a sample return attached.

      Best Wishes.

  17. Abhinav Jain permalink

    My company was incorporated by Advocate (LLP) in India, with all fees paid from outside India.
    Is Service Tax Payable under Reverse Charge.
    At present turnover of my company is NIL.

  18. pratik permalink

    Dear sir,
    An assesses is service receiver of manpower supply so I want to knw dat evry time assessee receives bill of manpower supply from provider, is it compulsory to pay service tax by receiver coz we payz 75% and takes credit of 100%(i.e. paid by assesee and provider) so there wil alwayz be balance in cenvat credit a/c….please help and i want st3 format for d same

    thank you

  19. siju.C.T permalink

    Please provide me filled form st 3 for transporter service provider

Trackbacks & Pingbacks

  1. To-do list for filing ST-3 July to Sept 2012 | aviratshiksha
  2. Effects of Partial Reverse Charge under Service Tax Return July-Sept 2012 | aviratshiksha
  3. Effects of Full Reverse Charge under Service Tax Return July-Sept 2012 | aviratshiksha
  4. Service Tax on Immigration Services | aviratshiksha

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