Reverse Charge Mechanism In Nutshell with FAQ

What is Reverse Charge?

Normally, service tax is payable by person providing the service.   Section 68(2) makes provision for reverse charge i.e. making person receiving the service liable to pay tax.  Provision can be made that part of tax will be paid by service receiver and part by service provider. Provisions relating to reverse charge are contained in Notification No. 30/2012-ST dated 20-6-2012.

From which date it is applicable?

No reverse charge, if service provided prior to 1-7-2012. In case of some services, reverse charge mechanism is applicable w.e.f. 1-7-2012 i.e. service tax is payable (partly or wholly) by service receiver.

In view of section 67A (which is effective from 28-5-2012), service tax will not be payable by service receiver under reverse charge mechanism, if service was provided prior to 1-7-2012, even if payment is received later.

This will be so even if invoice was issued after 1st July 2012. However, to avoid controversy, it is advisable to date invoice prior to 30-6-2012 [Note that Point of Taxation Rules cannot override provisions of section 67A].

Does partial reverse charge applicable for all service providers and recipients?

No. Only specified Services falling under partial reverse charge mechanism viz., Manpower Supply,Security Services, Works contract service and Renting of motor vehicle services.

Further, the service provider shall be either any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory.

Furthermore, the service recipient shall be business entity registered as body corporate located in the taxable territory.

Who are Business Entity and Body Corporate

In some cases, reverse charge is applicable only when service receiver is business entity registered as ‘body corporate’.

“Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, Government, charitable organisation is not ‘business entity’.

Body Corporate – Company, LLP, Cooperative Society is Body Corporate – Firm, HUF, Trust is not ‘Body Corporate’ [Society registered under Societies Act is legally not ‘body corporate’].

What does a Service Provider need to indicate on the invoice when he is liable to pay service tax under the partial Reverse Charge Mechanism?

The Service Provider shall issue an invoice complying with Rule 4A of the Service Tax Rules,1994.The invoice shall indicate the name, address and the registration number of the service provider; Name and Address of Service Recipient receiving taxable service; the descripttttion and value of taxable service provided or agreed to be provided; and the service tax payable thereon. As per clause (iv) of sub-rule (i) of the said rule 4A “the service tax payable thereon” has to be indicated.

If the Service Provider is exempted being a SSI (Turnover less than Rs. 10 Lakhs), how will the Reverse Charge Mechanism operate?

In case the service provider is availing exemption owing to turnover being less than Rs. 10 lakhs then he shall not be obliged to pay any tax. However, Service Recipient shall have to pay service tax to the extent of his service tax liability under the partial Reverse Charge Mechanism.

Whether Service receiver can avail SSI exemption limit?

No, the service recipient cannot avail SSI exemption while discharging servcie tax liability under reverse charge in terms of Notification No. 33/2012- ST dated 20-06-2012. A statutory liability cannot be shifted by mutual agreement. If statutory liability is of service receiver, he alone is liable.

How is the Service Recipient required to calculate his tax liability under Partial Reverse Charge Mechanism? How will the Service Recipient know which abatement or valuation option has been exercised by the service provider?

It is being provided by way of Explanation in the Notification referred above that Service tax liability of the Service Provider and Service Recipient are different and independent of each other. The Service Recipient can independently avail or forgo abatement or choose a valuation option, which is independent of Service Provider.
 

What is the Point of Taxation for service tax liability under Reverse Charge Mechanism?

Usually, Point of Taxation (POT) for service provider would be earliest of following i.e. Date of Invoice or Date of receipt of payment. In case invoice is not issued within stipulated 30 days from the date of receipt of payment or date of completion of service, whichever is earlier then Point of Taxation would be earliest of following i.e . Date of receipt of payment or Date of completion of service.

However for the service recipient, in terms of Rule 7 of the POT Rules, point of taxation is date of payment i.e. the invoice is issued, say in July 2012 and the service recipient pays for the same in August 2012 then point of taxation for the service provider will be the date of issue of invoice in July 2012 and the point of taxation for the service recipient shall be the date of payment in August 2012.

Further, Rule 7 of POT Rules states that POT under reverse charge would be date of Payment provided payment is made within 6 months from the date of invoice otherwise POT would be date of invoice.

Exception is that when service provider is outside India is Associated Enterprise (group company with at least 25% common interest), the service receiver is liable to pay service tax as soon as the account of service provider is credited in books of account of service receiver.

Is Cenvat Credit allowed to be taken of the service tax partially billed by the Servic e Provider and partially paid by a Service Recipient under the Partial Reverse Charge Mechanism?

Yes, CENVAT Credit can be availed of the service tax amount paid to the Service Provider as well as paid by the Service Recipient in cash, directly into the Government Treasury under the Partial Reverse Charge Mechanism provided the same is Input Service for the Service Recipient

The credit of service tax paid to the service provider would be available on the basis of the invoice issued provided the payment of the value of input service and the service tax made within three months from date of invoice otherwise service recipient shall pay/reverse equal to the CENVAT cerdit availed on such input service and take credit whenever subsequent payment made of value of input service and the service tax by the Servi ce Recipient.

The credit of service tax paid by service receiver under partial reverse charge would be available on the basis of tax payment challan as per Rule 9(1)(e) of Cenvat Credit Rules, 2004 on or after the day on which payment is made of the value of input service and the service tax as indicated in invoice, bill or, as the case may be, challan referred to in Rule 9 of Cenvat Credit Rules, 2004.

Whether Service Receiver can pay Service Tax by utilising CENVAT Credit?

No. Explanation to Rule 3(4) of Cenvat Credit Rules, 2004 specifically provide that “Cenvat Credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient.” Therefore, Service Receiver has no option but to make payment of Service tax in cash.

Whether Service Recipient paying Service tax under reverse charge needs to get registered under Service Tax?

Yes, Service Recipient will have to get registered under Service tax, even if he is not providing any service. He will have to file the return as well even if it is a nil return.

As per Section 69 of Finance Act, 1994, “every person liable to pay the service tax under this Chapter or the rules made there under shall within such time and in such manner and in such form as may be prescribed , make an application for registration to the Superintendent of Central Excise”

Reverse charge provisions at a glance

The provisions are summarised below.

Source: Web & Self.