Reverse Charge Mechanism of Service Tax

Reverse charge mechanism is not a new concept in service tax. Under the reverse charge mechanism, instead of service provider, the service receiver is liable to pay service tax. In that case, the service receiver will register himself with service tax authorities and file the required returns. The general exemption of Rs. 10 lacs is not available for that. The government has imposed the liability on service receivers before that also such person receiving services by goods transport agencies but these requirements are mandatory for companies and government authorities receiving the services in old days.

The Government has issued Notification no 30-2012 dated 20/06/2012 where it has given complete list of services that are covered under reverse charge mechanism. In some cases both service receiver and service provider has to pay service tax in prescribed ratio. The complete list is as under:-

However there are certain conditions and exemption, where satisfaction of those conditions will attract liability of service tax under reverse charge mechanics.

1. Insurance Agents:- Any service provided by insurance agents to insurance companies will be liable for service tax without any exemption or amount limit.

2. Goods transport agency:-  The reverse charge is applicable only when consignor or consignee is a factory registered under factory act, registered society, co-operative society, any dealer registered for under central excise act, any body corporate or any partnership firm.

3. Sponsorship:- where service receiver is a body corporate or a partnership firm.

4. Arbitral tribunal:- where service provider is arbitral tribunal and service receiver is a business entity having turnover more than Rs. 10 lacs in preceding financial year.

5. Advocate:-   where service provider is individual advocate or firm of advocate and service receiver is a business entity having turnover more than Rs. 10 lacs in preceding financial year.

6. Support services to government or local authorities:- Where service receiver is any business entity.

7. Hiring of any motor vehicle:- where service provider is Individual/ proprietorship/ partnership/ HUF and service receiver is company registered under companies act 1956 or business entity registered as body corporate in taxable region.

8. Supply of manpower or security services:- where service provider is Individual/ proprietorship/ partnership/ HUF and service receiver is company registered under companies act 1956 or business entity registered as body corporate in taxable region.

9. Work Contract:- where service provider is Individual/ proprietorship/ partnership/ HUF and service receiver is company registered under companies act 1956 or business entity registered as body corporate in taxable region.

10. Import of services:- Any servicers provided by any service provider to any service receiver.

11. Services of Director to company:- The services provided by any director (Individual) to the said company. However it is clear now that services provided by director in employee employer relationship do not attract service tax.

However some other explanations are also there. In case of goods transport agency, a person who is liable to pay freight shall be treated as person who receives the service. In case of work contract services, if both service provider and service receiver is liable to pay tax then service recipient has option to choose the valuation method independent of service provider.

However the government has issued the notification and made the reverse charge liable on some entities where turnover exceeds Rs. 10 lacs. In such cases that entities has to register itself with service tax authorities even the amount of service received from such persons is in hundred of Rupees. Once the person has registered under service tax, he has to file the return half yearly even if the taxable turnover is Nil.

In case of advocate, they have to indentify which of their clients has turnover of more than Rs. 10 lacs and ask them to deduct and pay service tax and for others they have to pay service tax. It is also not clear what happen when the service receiver will not follow the provisions. In that case whether the service provider is liable for payment of taxes.

In case of hiring of vehicle, the provisions are applicable to companies whether Indian companies or foreign companies. If they receive any kind of service by hiring of any vehicle they have to deduct service tax and register themselves with service tax authorities.

However the intension of government is very clear for this type of arrangement. They want to collect the tax from the person receive the services and apply the concept of tax deduction at source so that the concealment of tax revenue could minimize. The intension and formula applied by the government is no doubt a good one but there are practical difficulties also. The companies or entities which are not providing any kind of service but receiving any of the above mentioned services shall get themselves registered and pay the service tax. Even in case they have stop receiving such services they have to file a nil return with the authorities. 

Thanks & Regards.

CA Prashant Gupta

Email: prgupta.ca@gmail.com