Reverse Charge under Service tax

Section 68(2) of Finance Act, 1994

Read with Notification no. 30/2012 - ST

Reverse Charge Mechanism

Reverse Charge Mechanism

Full reverse
charge
mechanism
The entire service
tax liability is on the
service recipient

Partial reverse
charge
mechanism
Sharing of service
tax liability by
service provider and
service recipient

Services under Full Reverse Charge

Mechanism
1. Insurance Agents Services
2. Goods Transport Agency Services
3. Sponsorship Services
4. Legal Services
5. Support Services by government or local

authority
6. Director Services
7. Import of Services

Services under Partial Reverse Charge

Mechanism
1. Rent - a - Cab Services
2. Manpower supply services
3. Works Contract Services

Full Reverse Charge Mechanism

1. Insurance Agent Services

Full Reverse Charge Mechanism

Insurance Agent Services
Taxable services are provided by
Insurance agent to any person
carrying insurance business
The word used is any person
carrying insurance business (Not
necessarily insurance company, but
IRDA, accepts registration for running
insurance business only for
companies)
Actually, Services are provided by insurance agent to insurance
company but not by insurance agent to insured i.e. client

Full Reverse Charge Mechanism

2. Goods Transport Agency

Full Reverse Charge Mechanism

Goods Transport Agency Services
GTA means any person who provides services in relation to
transportation of goods by road and issues consignment note by
whatever name called.
Service tax is payable by Consignor or Consignee, who is paying
freight or is responsible for paying freight
Generally services in relation to transportation of goods by road
is specified in negative list but it excludes Goods transport agency
services & accordingly GTA Services are taxable

Full Reverse Charge Mechanism

Goods Transport Agency Services

But such consignor or consignee should be

Any Factory registered under Factories Act
Company established under companies Act
Corporation established by or under any law
Any Society or Cooperative society
Any dealer of excisable goods
Any body corporate
Any partnership firm (includes AOP, BOI, LLP)

Therefore for the case of an individual/unregistered firm/HUF/

Governmental agency that are not covered by the above, the GTA would
be liable to discharge the service tax

Full Reverse Charge Mechanism

Goods Transport Agency Services
Whether following are covered?

1) A truck owner transporting goods directly without involvement of goods

transporting agency Not Covered
2) A manufacturer transporting goods to there dealer through their own
transportation. Not Covered
3) Transportation on bullock cart, Tonga, rickshaw, etc Not Covered
4) Farmers transporting goods fellow farmers after harvest from farm to
sugar mill. Not Covered

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
DELTA Ltd. a Company, registered under the Companies
Act is transporting goods to an Individual Y, on To Pay
basis. Who is liable for payment of Service Tax?
Since the consignor is a Company (i.e. falling under the
specified category), the liability is on Consignor or
consignee, paying the freight i.e. Y, notwithstanding
that he is an individual. But Y would request DELTA
Ltd. to pay service tax.

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
DELTA Ltd. a Company, registered under the
Companies Act is transporting goods to an Individual Y,
on payment of freight. Who is liable for payment of
Service Tax?
Since the consignor is a Company (i.e. falling under
specified category), the liability is on Consignor (or)
Consignee, paying the freight i.e. DELTA Ltd.

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
Y an individual is transporting goods to a company,
DELTA Ltd. on payment of freight. Who is liable for
payment of Service Tax?
Since the consignee is a Company (i.e. falling under
specified category), the liability is on Consignor (or)
consignee, paying the freight i.e. Y, notwithstanding that
he is an individual. But Y requests DELTA Ltd. to pay
service tax

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
DELTA Ltd. an individual is transporting goods to a
company, X on To pay basis. Who is liable for
payment of Service Tax?
Since the consignee is a Company (i.e. falling under
specified category), the liability is on the person paying
the freight i.e. X Ltd.

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
DELTA Ltd. a Company based in Chennai, has its
consignment Agent at Delhi. The Company transports
goods to him, on To Pay basis. The Transport Agency
raises the bill in the name of DELTA Ltd., but the freight
is paid by the consignment agent, directly to the GTA.
Who is liable for payment of Service Tax?

In as much as the bills are raised against DELTA Ltd, the

consignment agent is paying the freight, only on behalf of
DELTA Ltd. In other words, company is paying the
freight, through the consignment agent. As such, the
liability for payment of Service Tax is on DELTA Ltd.

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
DELTA Ltd., a Company sells the goods to Y. The
freight for the movement of the goods has been paid
by company. It collects this freight from Y, by
showing it in the invoice, which is paid by Y, to
company. Who is liable for payment of Service Tax?

Since this is a case of pure sale, DELTA Ltd. cannot be said

to be paying the freight on behalf of Y. DELTA Ltd. is
only getting reimbursement of the freight paid by him,
initially. As such, the liability for payment of Service Tax
will only be on DELTA Ltd.

Full Reverse Charge Mechanism Goods

Transport Agency Services - Illustration
X, an individual is transporting goods to another
Individual, Y. Who is liable for payment of
Service Tax?
Since, both the consignor and the consignee are not
falling under the specified categories, the liability is
on the Goods Transport Agency.

Full Reverse Charge Mechanism Goods

Transport Agency Services - Exemptions
Transportation of the following goods by a goods transport
agency have been exempted from service tax:
1. The following essential goods
Agriculture produce
Foodstuff including flours, tea, coffee, jaggery,
sugar, milk products, salt and edible oil, excluding
alcoholic beverages.
Chemical fertilizer and oil cakes
Newspapers or magazines registered with the
registrar of newspapers
Relief materials meant for victims of natural or
man-made disasters, calamities, accidents or mishap
Defence or military equipments

Full Reverse Charge Mechanism Goods

Transport Agency Services - Exemptions
Transportation of the following goods by a goods
transport agency have been exempted from service
tax:
2. Goods where gross amount charged for the
transportation of goods on a consignment transported
in a single goods carriage does not exceed `1,500
(i.e. total freight charged does not exceed 1,500)
3. Goods, where gross amount charged for
transportation of all such goods for a single consignee
does not exceed ` 750 (i.e. there will be goods of
other consignees)

Full Reverse Charge Mechanism Goods Transport Agency

Services Exemptions (Illustration)
Raj transports his goods in a goods carriage. No
other goods are loaded in the goods carriage. Raj
pays a freight of Rs.1300.

Raj transports his goods in a goods carriage. He

pays a freight of Rs.1300. Some other goods are also
being transported in the same goods carriage,
involving a freight of Rs.500.

Full Reverse Charge Mechanism Goods Transport Agency

Services Exemptions (Illustration)
Consignor

Consignee

Freight

Eligibility for Exemption

Full Reverse Charge Mechanism Goods

Transport Agency Services - Abatement
Transportation of the following goods by a goods transport
agency have been exempted from service tax:
1. The following essential goods
Agriculture produce
Foodstuff including flours, tea, coffee, jaggery,
sugar, milk products, salt and edible oil, excluding
alcoholic beverages.
Chemical fertilizer and oil cakes
Newspapers or magazines registered with the
registrar of newspapers
Relief materials meant for victims of natural or
man-made disasters, calamities, accidents or mishap
Defence or military equipments

Full Reverse Charge Mechanism

3. Sponsorship Services

Full Reverse Charge Mechanism

Sponsorship Service
In case of sponsorship service
provided or agreed to be
provided by way of
sponsorship to any body
corporate or partnership firm
located in taxable territory
receiving the service is liable
Notification no. 30/2012

Full Reverse Charge Mechanism

Sponsorship Service - Illustration

Full Reverse Charge Mechanism

Sponsorship Service - Illustration

Full Reverse Charge Mechanism

Sponsorship Service Exemption

Full Reverse Charge Mechanism

Sponsorship Service Exemption
The following Services by way of sponsorship of tournaments or
championships organised are exempted:
(a) By a national sports federation, or its affiliated federations, where
the participating teams or individuals represent any district, state or
zone
(b)By association of Indian universities, Inter university sports board,
school games federation of India, All India sports council for the
deaf, paralympic committee of India or special Olympics bharat
(c) By central civil services cultural and sports board
(d)As part of national games, by Indian Olympic Association
(e)Under panchayat yuva kreeda aur khel abhiyaan (PYKKA) Scheme.

Full Reverse Charge Mechanism

Sponsorship Service Exemption

Full Reverse Charge Mechanism

Sponsorship Service
What if receiver of service is not body corporate or
partnership firm

What if receiver of service is a body corporate or firm

and is not located in taxable terriotry

Advertising Services It is not covered

in reverse charge, but discussed here
Negative list Entry (g) of Sec. 66D
Selling of space or time slots for advertisements other than

advertisements broadcast by radio or television.

Advertisement MENAS any form of presentation for
promotion of, or bringing awareness about, any event, idea,
immovable property, person, service, goods or actionable
claim through newspaper, television, radio or any other
means but does not include any presentation made in person
Advertisement is not specified in negative list but sale of
space or time for advertisement is specified and hence, it is
not taxable

Advertising Services What is sale of

space or time for advertisement?

Sale of time for advertisement in

television

Sale of time for advertisement in

Cinema
Sale of Space for
advertisement
Publicity in internet

Sale of Space for advertisement Hoardings

Advertising Services Question Hour?

Activity
Sale of space for advertisement in print media.
Sale of space or time for advertisement to be broadcast
on radio or television.
Sale of time slot by a broadcasting organization.
Sale of space for advertisement in bill boards public
places, buildings, conveyances, cell phones,
automated teller machines, and internet.
Aerial advertising.
Making or preparing advertisements (i.e. Designing)
Commissions received by advertisement agencies from
the broadcasting or publishing companies for
facilitating business.
Canvassing advertisement for publishing on a commission
basis.

Taxable / Not taxable

Full Reverse Charge Mechanism

Sponsorship Service
What if Sponsorship
Service is converted into
advertisement service.
In that case there is no reverse
charge and the person receiving
the amount (Service provider)
can claim the amount as for
sale of space for advertisement.
There will be no service tax on
service provider also.

Full Reverse Charge Mechanism

4. Legal Services

Full Reverse Charge Mechanism

Legal Services - Illustration

Harish salve, leading advocate

Full Reverse Charge Mechanism

Legal Services
Legal Services provided by Advocate or Advocate firms to

business entity having turnover exceeding 10 lakhs per

annum, located in taxable territory is covered under reverse
charge mechanism and the business entity is liable to pay
entire service tax.

Business entity means ANY PERSON ordinarily carrying out

any activity relating to industry, commerce or any other

business or profession.

Full Reverse Charge Mechanism

Legal Services - Exemptions
The following services are exempted.
Services provided by an individual as an advocate or a
partnership firm of advocates by way of legal services to
(i) An advocate or partnership firm of advocates providing
legal services (or)
(ii) A person other than business entity
(iii) Business entity with a turnover upto 10 lakhs in the
preceding financial year

Full Reverse Charge Mechanism Legal

Services - Illustration
Service Provider
Individual Advocate
Individual Advocate
Individual Advocate

Service Recipient
Individual
Individual Advocate
Business Entity
(Turnover during PY 10
lakhs)
Individual advocate Business Entity
(Turnover during PY > 10
lakhs)
Individual Advocate Firm of advocates

Taxability
Exempted
Exempted
Exempted

Taxable (SR
liable to pay)
Exempted

Full Reverse Charge Mechanism Legal

Services - Illustration
Service Provider
Firm of advocates
Firm of advocates
Firm of advocates

Firm of advocates

Firm of advocates

Service Recipient
Individual
Individual Advocate
Business Entity
(Turnover during PY 10
lakhs)
Business Entity
(Turnover during PY > 10
lakhs)
Firm of advocates

Taxability
Exempted
Exempted
Exempted

Taxable (SR
liable to pay)
Exempted

Full Reverse Charge Mechanism Legal

Services - Illustration
Service Provider
Advocates practicing
as company
Advocates practicing
as company
Advocates practicing
as company
Advocates practicing
as company
Advocates practicing
as company

Service Recipient
Individual

Taxability
Taxable (SP
liable to pay)
Individual Advocate
Taxable (SP
liable to pay)
Business Entity
Taxable (SP
(Turnover during PY 10 lakhs) liable to pay)
Business Entity
Taxable (SP
(Turnover during PY > 10 lakhs) liable to pay)
Firm of advocates
Taxable (SP
liable to pay)

Full Reverse Charge Mechanism

Support Services
In case of support services provided by government or local

authority to business entity in taxable territory, the business entity

is liable to discharge the service tax liability on full taxable value.
In respect of the following services, government or local authority
is liable to pay service tax but not the business entity
1. Renting of immovable property
2. Speed post, express parcel post, life insurance and agency
services provided by department of post
3. Service in relation to aircraft or a vessel, inside or outside
the precincts of a port or airport by government
4. Transport of goods or passengers by government

Full Reverse Charge Mechanism

Support Services - Illustrations
Infrastructural services
Logistics and marketing
Advertisement and promotion
Construction or works contract
Renting of immovable property
Security
Testing and analysis

Full Reverse Charge Mechanism

Directors Services to company
Services of director to company is covered under the provisions of

reverse charge by amending noti. 30/2012 w.e.f 7/8/2012 and

remuneration to directors is as follows:
Service Provider - Director (Service Tax liability= 0%)
Service Recipient - Company (Service Tax liability = 100%)
Director INCLUDES Non-executive, Nominee, Public interest
and Independent directors
Director DOES NOT INCLUDE Managing Director, Whole time
director and Executive director, who are in full time employment
of the company (Therefore no service tax as it is contract of
service).

Full Reverse Charge Mechanism

Directors Services to company
Remuneration INCLUDES sitting fees, travelling expenses and

incidental expenses for attending the meetings of Board and their

committees and commission or other remuneration paid.
Remuneration DOES NOT INCLUDE travelling expenses other
than for board meetings and committee meetings.
Service tax should be paid @12.36% on gross value of services
and not by back calculations.
Service tax should be computed on the amount of remuneration
and TDS should be calculated on the same amount but not after
including service tax.

Details in Invoice under RCM

Governing Rule: Rule 4A of the Service Tax Rules 1994.
Invoice shall indicate the name, address and the registration number of the

service provider and person receiving taxable service; the description and value
of taxable service provided or agreed to be provided; and the service tax
payable thereon.
As per clause (iv) of sub-rule (1) of the said rule 4A "the service tax payable
thereon' has to be indicated. The service tax payable would include service tax
payable by the service provider.

Service tax Vs. TDS

CBDT vide Cir. 1/2014 clarified that no TDS is required to be made on

service tax component, if service tax is shown separately in invoice.

TVS Motor Co. Ltd. V CCE (2012) (CESTAT) - Service tax is payable
on amount inclusive of income tax TDS
Example:
Professional services by Mr. A to Mr. B is 1,00,000.
Service tax payable @ 12.36% is 12,360
Invoice by Mr. A to Mr. B = 1,12,360
TDS @ 10% should be calculated on 1,00,000 but not 1,12,360
Payment made by Mr. B to Mr. A = 1,02,360
Service tax payable to Govt. is 12,360 but not on 1,02,360
(Reverse working should not be done)

Service tax Vs. TDS In case of reverse Charge

In case of reverse charge the service recipient has to pay service tax and

at the same time has to deduct TDS on the payment made by him to
service provider.
There was confusion till 2014 as to whether TDS should be calculated
on the amount including service tax as service tax is paid by the service
recipient.
But CBDT vide its circular no. 1/2014 dated 6.1.2014 has clarified
that while computing TDS, service tax element should be excluded as
service tax is not the income part but is a statutory liability.
Service provider under reverse charge will raise invoice only on the
service portion excluding service tax and service recipient has to
calculate service tax as well as TDS on the same amount and pay to the
respective authorities accordingly.
Even if service provider charges in his invoice only his part of service
tax (in case of partial reverse charge), TDS should be computed only
that service value excluding the part amount of service tax.

Case 1
Where Service Tax has been charged fully in Invoice
Expense A/c
Dr
Service Tax Input Credit A/c
Dr
Service Tax Deferred Input A/c
Dr
To Vendor A/c
To TDS Payable A/c
To Service Tax Payable A/c - Reverse Charge

Case 2
Where Service Tax has not been charged in Invoice
Expense A/c
Dr
Service Tax Deferred Input A/c
Dr
To Vendor A/c
To TDS Payable A/c
To Service Tax Payable A/c - Reverse Charge

Debit
100.00
7.42
4.94
112.36

100.00
12.36
112.36

Credit
105.42
2.00
4.94
112.36

97.75
2.25
12.36
112.36

Case 3
In case of Abatement ( e.g. 40%)
Expense A/c
Dr
Service Tax Input Credit A/c
Dr
To Vendor A/c
To TDS Payable A/c
To Service Tax Payable A/c - Reverse Charge

Debit
100.00
4.94
104.94

Credit
98.00
2.00
4.94
104.94

Important Points relating to RCM

Cenvat can not be availed for discharging the ST Liabilities on RCM
ST Paid under RCM can be utilize towards the discharge ST on output

services
Threshold exemption of upto Rs.10 Lac is not applicable here in RCM
except Legal services
Allowed Refund of unutilized cenvat credit availed from input services
as per Rule 5B of Central Exice Rules,2004

Partial - Reverse Charge Mechanism

PARTIAL REVERSE CHARGE MECHANISM

Concept
Joint charge mechanism means a mechanism where the 'Service recipient

is also made liable to pay service tax on a specified percentage of the

service along with the Service provider instead of the 'Service provider
being liable for the entire liability payment.

The Notification 30/2012-ST Dated 20 June 2012, specifies the services

on which joint charge mechanism is applicable and the proportion in

which the 'Service recipient of services is liable to pay the service tax.

Joint charge mechanism is applicable when service provided by a non-

corporate service provider to a corporate business entity.

Basic Condition in Partial RCM

Service Provider

Individual

HUF

Partnership Firm

AOP

BOI

LLP

Service Receiver
Business entity registered as
body corporate
He should be located in taxable
territory

PARTIAL REVERSE CHARGE MECHANISM

Points to be Remembered
CENVAT Credit:
Cenvat credit of the tax paid can be availed on the part of service tax paid even

by the service recipient. (If other rules are satisfied)

However, liability under Reverse Charge cannot be paid through CENVAT
Valuation:
Service recipient can opt for separate method of valuation than service provider.
Liability:
Service recipient has to pay his liability in all circumstances and the benefit of
small service provider exemption is not available.

PARTIAL - REVERSE CHARGE MECHANISM

List of Services
Sr.
No.

Description of Service

Percentage of service tax payable

by the recipient of services

Remarks

Rent-a-Cab service when not

under abatement scheme and
service receiver is not a Renta-Cab operator.

40%

The said body

corporate is only
liable to the extent of
40% and on balance
60% Rent-a-Cab
operator will collect
and pay the said
liability.

In case of abatement
An abatement is available under
Notification no. 26/2012 for
renting of motor vehicle
designed to carry passengers to
the extent of 60%

100%

However, if the
service receiver and
provider are both in
the business of
providing Rent-a-Cab
service then the
reverse mechanism
wouldnt apply.

PARTIAL - REVERSE CHARGE MECHANISM

List of Services
Sr.
No.

Description of Service

Manpower supply service 75%

provided or agreed to be
provided for any purpose

Security Service

Percentage of service tax

payable by the recipient of
services

75%

Service
portion
in
Works 50%
Contract Service which is
provided by (a) Individual (b)
HUF (c) Partnership Firm (d)
AOP located in taxable territory
to a business entity registered
as body corporate located in
taxable category

Remarks

Any person receiving such

manpower or security
service is required to pay
service tax to the extent
of 75% and balance 25%
will be required to be paid
by person providing such
manpower.
Any person receiving such
services being a body
corporate would have to
pay tax @ 50% of the
taxable tax.

RENT-A-CAB SERVICE
In Nutshell
Renting of Motor Vehicle

If abatement of 60%
claimed

S.R. is liable to
pay @ 4.944%

S.P. is not
liable to pay
any tax

If abatement not
claimed

S.R. is liable
to pay @
4.944%

S.P. is not
liable to pay
@ 7.416%

WORKS CONTRACT SERVICE

In Nutshell
Original Works

Works Contract of
Movables

Any other WC for

Immovables

Taxable Amount
40% = 4.944%
effective rate

Taxable Amount
70% = 8.652%
effective rate

Taxable Amount
60% = 7.416%

ST = 40% x 12.36% X
50% = 2.472%

ST = 70% x 12.36% X
50% = 4.326%

ST = 60% x 12.36% X
50% = 3.708%

REVERSE CHARGE MECHANISM

Accounting Treatment
Case 1: Partial Reverse Charge
Debit

Credit

Expense A/c

Dr.

100.00

Service Tax Input Credit A/c

Dr.

7.42

Service Tax Deferred Input A/c

Dr.

4.94

To Vendor A/c

105.42

To TDS Payable A/c

2.00

To Service Tax Payable A/c - Reverse Charge

4.94

112.36

112.36

Case 2: Full Reverse Charge

Expense A/c

Dr.

100.00

Service Tax Deferred Input A/c

Dr.

12.36

To Vendor A/c

97.75

To TDS Payable A/c

2.25

To Service Tax Payable A/c - Reverse Charge

12.36

112.36

112.36

Principle of Mutuality - Meaning,

Exceptions & Exemptions:
Meaning:
As per this principle, there must be two parties for levy of service

tax i.e. service must be provided by one person to another

person.

Exceptions [Explanation 3 to Sec. 65B(44)]:

An establishment of a person located in taxable territory and

another establishment of such person located in non-taxable

territory are treated as establishments of distinct persons.
An unincorporated association or body of persons and members
thereof are also treated as distinct persons.

Principle of Mutuality - Meaning,

Exceptions & Exemptions:
Exemptions [Notification no. 25/2012]:
Service by an registered, unincorporated body or a non- profit

entity, to its own members by way of reimbursement of charges

or share of contribution
1. As a trade union;
2. For the provision of carrying out any activity which is exempt
from the levy of service tax; or
3. Up to an amount of 5,000 per month per member for
sourcing of goods or services from a third person for the common
use of its members in a housing society or a residential complex
[i.e. Resident Welfare Association (RWA)]

Principle of Mutuality - Meaning,

Exceptions & Exemptions:
Circular No. 175/1/2014 (dated: 10/1/14)
If per month, per member contribution exceeds 5,000, the

entire contribution would be ineligible for contribution and

service tax would be leviable.
Small Service Provider exemption under Notification no. 33/2012
is applicable to RWA.
RWA incurring expenses viz. electricity bill, telephone bill on
behalf of members is excluded as per rule 5(1) of valuation Rules,
2006 for determining the value of taxable services of RWA
RWA can avail CENVAT credit in terms of CENVAT credit rules,
2004