Reverse Charge Mechanism under Service Tax

The reverse charge mechanism (RCM) was first introduced effectively from 01-01-2005 vide Notification No. 36/2004-ST dt. 31-12-2004 read with Rule 2(1)(d) of Service Tax Rules, 1994.

With effect from 01-07-1012 a new mechanism of reverse charge (RCM) and partial reverse charge or joint charge (PRCM / JCM) was introduced with the introduction of negative list regime of service tax.

Some fundamental concepts of reverse/partial charge mechanism are;

  1. Applicability of RCM/PRCM is dependent on the status & location of Service Receiver (SR) and Service Provider (SP) and taxability of service. RCM does not apply on non-taxable and exempted services but applies on abated services and where value is determined by valuation rules.
  2. No threshold exemption of Rs. 10 lacs is available to Service Receiver (SR) as this exemption is available to Service Providers only. (refer NN 33/2012-St dt. 20-06-2012)
  3. Service Receiver is liable to pay service tax under this mechanism from very first invoice received under this category. It means SR is liable to pay ST even when SP is within the ambit exemption limit under NN 33/2012-ST.
  4. This service tax liability generally has to be met in cash.

Following services are covered under reverse charge/partial reverse charge mechanism under Rule 2(2)(d)(i) read with Notification No. 30/2012-ST as updated by NN 45/2012-ST, NN 46/2012-ST & NN 10/2014-ST:

  1. Insurance Agent Service

1A. (Banking) Recovery Agent Service (w.e.f. 11-07-2014)

  1. Goods Transport Agency Service
  2. Sponsorship Service
  3. Legal Service
  4. Arbitral Tribunal Service
  5. Services by Directors of the body corporate to the  body corporate (w.e.f. 11-07-2014)
  6. Support Services provided by Government/Local Authority
  7. Rent-a-Cab Service
  8. Manpower Supply Service
  9.  Security Service (w.e.f 07-08-2012)
  10. Service portion in execution of Works Contract
  11. Import of Taxable Services

Detailed analysis of Services provided by Goods Transport Agency (GTA) is provided as below:     

Sr. No. Description of service Provided Percentage of  ST payable by the person providing service Percentage of ST payable by the person receiving the  service
By to
1. Goods Transport Agency (Applicable to transport by road- One who issues consignment note) Goods Transport Agents located in the taxable territory Consignor Or Consignee who is – (a) factory, society, registered dealer of excisable goods, body corporate, partnership firm, AOP & (b) who is liable to pay freight either himself or through his agent NIL 100%

W.E.F. 01.04.15, payable on 30% (earlier 25%) if Cenvat Credit has not been availed by service provider. Exemption of Gross Freight Upto Rs. 1,500/- for single full consignment & Rs. 750/- for part consignment continues.

 

Reverse Charge: if the person liable to pay freight falls within the category of persons specified under Rule 2(1)(d)(i)(B), reverse charge apply.

Under Rule 2(1)(d)(i)(B) if the person liable to pay freight is;

(I) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);

(II) any ‘society’ registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;

(III) any ‘co-operative society’ established by or under any law;

(IV) any ‘dealer of excisable goods’ who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder;

(V) any ‘body-corporate’ established, by or under any law; or

(VI) any ‘partnership firm’ whether registered or not under any law including association of persons;

Any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage is liable to pay service tax.

Provided that when such person is located in a non-taxable territory (i.e. in J&K or abroad), the provider of such service (i.e. GTA) shall be liable to pay service tax.

Non-applicability of reverse charge i.e. GTA is liable to pay service tax:

  1. If consigner or consignee, who pays or is liable to pay freight either himself or through his agent, does not falls in above mentioned categories of specified,
  2. If consigner or consignee, who pays or is liable to pay freight either himself or through his agent, is located in a non-taxable territory (i.e. in J&K or abroad), [refer Rule 2(1)(d)(B) of Service Tax Rules, 1994]

The Mega Exemption Notification No. 25/2012 – S.T. Dated 20.06.12 allows the following exemptions (as relevant to the industry) –

“21. – Services provided by a goods transport agency by way of transportation of –

(a) agricultural produce;

(b) goods where gross amount charged for the transportation of goods on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or

(c) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty;

 

P Chhajed & Co LLP, a renowned and Top Chartered Accountant Firm in Ahmedabad, is a Limited Liability Partnership Form of organization, a highest form of organization a Chartered Accountancy Firm is permitted to form.

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