Payment under Reverse Charge Mechanism

The provisions of Section 68(2) of the
Finance Act, 1994 read with rule 2(i)(iv)(d) of Service Tax Rules, 1994 and
Notification No. 30/2012-ST dated 20.06.2012 provide for service receiver to be
one of the persons liable to pay Service Tax. The liability of payment of
Service Tax could, therefore be discharged by any one of the following –

providers in ordinary course

receivers under reverse charge
by service providers and service receivers (proportional reverse charge)
Thus, for specified services as per
Notification No. 30/2012-ST dated 20.06.2012 and conditions stipulated therein,
payment of Service Tax shall be under reverse charge basis or mechanism.
Under new reverse charge mechanism w.e.f.
1-7-2012, the service receiver is liable to pay tax, without any benefit of
threshold exemption along-with service provider also liable for certain
percentage on case to case basis (w.e.f. 1.7.2012 as per Notification No.
30/2012-ST, dated 20.6.2012 as amended by Notifications No. 45/2012-ST, dated
7.8.2012 and 10/2014-ST, dated 11.7.2014).
 The rationale behind the reverse charge
mechanism was explained by CBEC in the Letter.
D.O.F. No. 334/1/2012-TRU, dated 16-3-2012
in its Para 12 as follows:
“12 it has been noticed that a number
of registrants collect the tax but do not pay the same to the Department. This
is a serious loss of the revenue even though the compliant section at the
recipient end is often not benefited. To ensure proper collection, while not
inconveniencing small business, a new scheme is proposed to be
Under the reverse charge mechanism, there
is no option to service provider to pay Service Tax on his own as under normal
course. Also, under partial reverse charge, the law does not provide the option
of discharging Service Tax liability either by service provider or by service
receiver. Both are under statutory obligation to comply with the requirements
of reverse charge mechanism as notified.
Under Partial Reverse Charge
Under full reverse charge (100%)
·  Renting of motor vehicles to carry passengers
· Manpower supply and security services
·      Works contracts
insurance business services by agents
Services by recovery agents
goods transportation by road
arbitral tribunals
legal services
company body corporate director’s services
services provided by Government/ local authority
excluding specified services
services provided by persons located in non-taxable
territory to persons located in taxable in territory.
·     Governed
by Notification No. 30/2012-ST dated 20.06.2012 w.e.f. 1.7.2012 as amended by
Notification Nos. 45/2012-ST, dated 7.8.2012 and 10/2014-ST, dated 11.7.2014.
·     Liabilities
of both the service provider and service receiver are independent of each
of the two persons is for respective amounts (under proportional reverse
charge) and is not influenced by compliance or the lack of it by the other
·    Reverse
charge will not apply where the service receiver is located in non-taxable
recipient shall obtain registration under service tax as recipient of service.
·  For
three specified services provided by business entities being company, society,
cooperative society, trust etc, reverse charge will not apply.
charge will also not apply where the service recipient is any person or
business entity not being a body corporate in case of three specified services.
·    Small
scale benefit is available only to service provider (not to service receiver),
if entitled.
receiver under reverse charge is not eligible to avail exemption of ₹ 10
o. 33/2012-ST DATED 20.06.2012.
of taxation shall be the time when payment is made by the service recipient.
·   Valuation
of services by services provider and service receiver can be on different
principles, if permitted by law (e.g. works contract – + Refer Notification No.
30/2012-ST, explanation II).
to pay Service Tax for ongoing contracts as on 1-7-2012 will be as per Point of
Taxation Rules, 2011.
charge shall not be applicable if provider of service was liable before
·        Service
Tax will not be payable by service receiver under reverse charge, if service
was provided prior to 1.7.2012, even if payment is made after 30.06.2012
·    In
case of proportional reverse charge (manpower supply, works contract and motor
vehicle hire to carry passengers), service provider should charge Service Tax
only on his portion of Service Tax in the invoice and mention that Service Tax
on balance amount is payable by service receiver.
is the statutory obligation on the service recipient to pay Service Tax,
whether under full or proportional reverse charge
Tax under reverse charge has to be paid by cash vide GAR Challan No. 7 and it
cannot be paid by way of utilization of Cenvat Credit. Once it is paid, CENVAT
Credit can be claimed if it is an input sources.
·       Service
provider can claim refund of excess CENVAT Credit arising due to discharge of
service tax liability under reverse charge by the service receiver (Rule 5B of
CENVAT Credit Rules, 2004).
·   In
case of renting of motor vehicles to carry passengers where abatement is also
available, reverse charge basis is proportional depending upon the abatement on
the condition that no Cenvat Credit has been availed. The service provider
should provide a certificate, either in the invoice itself or separately. The ratio
is 60:40 upto 30.9.2014 and 50:50 w.e.f. 1.10.2014 where abatement is taken by
service provider.
case of renting of motor vehicle to carry passengers, reverse charge applies
only where the motor vehicle is provided with driver and the service recover is
not engaged in similar line of business.
case of director’s services, the service provider should not be employed (whole
time) director. Employees are not covered under the scope of Service Tax.
respect of (i) manpower supply and security services, (ii) works contract
services and, (iii) renting of motor vehicles to carry passenger, reverse
charge shall be applicable only when following two conditions are satisfied –
service receiver is a business entity registered as a body corporate, and
ii).        service
provider is any one of the following entities –
undivided family (HUF)
(including limited liability partnerships)
of persons
If both the above conditions are not satisfied in
respect of these three services, Service Tax shall be payable by the service
provider in ordinary course.
·   Services
provided by directors to companies are under reverse charge w.e.f. 07.08.2012.
·  Services
provided by specified security agencies to specified recipients are under
partial reverse charge w.e.f. 07.08.2012.
·  Services
of directors of body corporate shall also be covered under reverse charge
w.e.f. 11.07.2014.
· Services
provided by recovery agents to banks, financial institutions and NBFC’s have
been brought under reverse charge w.e.f. 11.07.2014.
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