Service Tax Reverse Charge Mechanism – Chart, Accounting Entries & issues

Posted Date : 29-May-2013 , 04:04:08 pm | Posted By CASANSAAR print

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Section 68 of Finance Act, 1994

• Sec 68 (2) provides legal backing for the levying of Service Tax under reverse charge mechanism. Sec 68 (2) is worded as follows:-

- “In respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

Brief History of Reverse Charge

The Reverse Charge was introduced in Service Tax vide Budget of the year 2005-2006. At that point of time there was only one service which was covered under Reverse Charge. However, with the passage of time this list has been expanded and at present this list contains 11 services into it which covers both Reverse Charge and Partial Reverse Charge.

Notification No. 30/2012-ST, dated 20th June, 2012

In order to charge service tax under reverse charge mechanism the Central Government is required to provide the list of taxable service by the way of notification. The notification no. 30/2012-ST provides for the list of service that will be taxable under reverse charge mechanism.

List of Services under RCM

S. No.	Description of Services	Provided By	Provided To	% of ST payable by Provider	% of ST payable by Receiver
1	Insurance Auxiliary Service	Insurance Agent	Person carrying on Insurance business	NIL	100%
2	Sponsorship Service	By any service provider	Body Corporate or Partnership firm	NIL	100%
3	Transport of goods by Road	Good Transport Agency	Consignor or consignee in organized sector	NIL	100%
4	Legal Service	Arbitral Tribunal	Business Entity	NIL	100%
5	Legal Service	Individual advocate or firm of advocates	Business Entity	NIL	100%
6	Support Service by Government or local authority	Government or Local Authority	Business Entity	NIL	100%
7	Any Service	Person in Non Taxable territory	Person in Taxable Territory	NIL	100%
8	Any Taxable Service	Director of the company	Company	NIL	100%
9	Renting or hiring of motor vehicle to carry passenger on abated value. (60% abatement)	Individual, HUF, Firm, AOP, BOI	Business Entity registered as body corporate	NIL	100% (i.e. 40% of liability)
10	Renting or hiring of motor vehicle to carry passenger on non abated value	Individual, HUF, Firm, AOP, BOI	Business Entity registered as body corporate	60%	40%
11	Supply of Manpower	Individual, HUF, Firm, AOP, BOI	Business Entity registered as body corporate	25%	75%
12	Security Service	Individual, HUF, Firm, AOP, BOI	Business Entity registered as body corporate	25%	75%
13	Work Contract Service	Individual, HUF, Firm, AOP, BOI	Business Entity registered as body corporate	50%	50%

Other Relevant Aspects

1. Business Entity and Body Corporate

-Business Entity– means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. [Government, charitable organization is not a “business entity”].

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

2. Partial RC on Renting or Hire of Motor Vehicle designed to carry passengers

- Reverse charge when renting to a person who is not engaged in similar line of business

- Service Provider should be HUF, Individual, firm.

- Service Receiver – Business entity registered as body corporate

- If motor vehicle is taken on hire without driver it is ‘transfer of right in goods’. It is deemed sale of goods VAT will apply – Service Tax will not be charged.

3. Partial RC on Manpower Supply Service

- “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. [Rule 2(g) of Service Tax Rules, inserted w.e.f 01.07.20 12].

- 75% of ST shall be paid by service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 25% of ST shall be paid by service provider.

- Security Service, cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.

- Service tax in such cases shall be payable on – SALARY + PF + ESI + Commission of labour contractor.

4. Partial RC in Work Contract Service

- 50% of ST shall be paid by the service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 50% shall be paid by service provider.

- Service Receiver is a business entity incorporated as body corporate.

Utilization of CENVAT credit by Service Receiver

Accounting Entries

o In the following example, the service recipient should pay 25% to the service provider and should pay remaining 75% to the service tax authorities directly.

o Accounting entry in the books of Service Provider:-