Reverse Charge Mechanism under Service Tax

Introduction: In the Finance Act, 2012, several amendments were made to the provisions governing Service Tax. One of such amendment was introduction of Reverse Charge Mechanism in Service Tax.

Understanding the Concept of Reverse Charge Mechanism: Under normal circumstances, a service provider is liable to pay Service Tax. However, after Finance Bill 2012, in certain cases, the liability is shifted to service recipient and thus service tax is to be paid by service recipient. This is commonly known as ‘Reverse charge mechanism’ or ‘Joint charge mechanism’ as in certain cases, both service provider and service receiver are liable to pay Service Tax.

Notification No. 30/2012 specifies the nature of service, persons providing service, service receiver and the percentage of Service Tax payable by service provider and service receiver.

But any Service Recipient, so liable to pay service tax in the above scheme, can claim Cenvat Credit of such tax paid by him and utilize the credit against 

* Central Excise duty payable on manufacture of final goods OR

* Service Tax payable by him on any output service 

on the basis of copy of GAR 7 challan.

Service Recipient, so liable to pay service tax in the above scheme, shall get himself registered under Service Tax. He will have to file service tax return even if it is a NIL return.

If Service Provider claims exemption on account of SSI i.e. his turnover/gross receipts are less than 10 lacs p.a., he will not be liable to pay any service tax under Reverse Charge Mechanism. However Service Recipient will still be liable to pay service tax at the rate applicable to him under the Reverse Charge Mechanism. The Service Recipient cannot claim exemption of SSI. By shifting liability on Service Recipient irrespective of the fact that turnover of the service provider has not exceeded the exemption limit would defeat the very purpose of exemption granted under the statute.

To add to the burden on Service Recipient, the payment for such reverse charge liability has to be made in cash and no credit can be utilized for the same. Also, payment of entire tax liability by the Service Provider does not absolve the receiver from its own obligation to pay to government authority.

The point of taxation varies in the following ways:

1. For Service Provider: It is the date of invoice or date of receipt of payment, whichever is earlier, provided invoice is issued within 30 days from date of receipt of payment/ completion of service. Else it is date of receipt of payment or date of completion of service, whichever is earlier.

2. For Service Recipient: It is the date of payment of invoice, provided payment is made within 6 months of invoice being issued. Else it will be date of invoice.

If Service Provider is unable to utilize the Cenvat credit of service tax paid under Reverse Charge Mechanism in respect of Input services, he can claim refund of such unutilized amount, subject to certain terms and conditions. Such refund is not available to Service Recipients as only net amount after deducting Service Recipient’s service tax liability and TDS is to be paid to Service Provider.