Guide to Reverse Charge Mechanism

Generally, the service provider is liable for payment of service tax to the Government. However in some cases, the recipient of service is liable for payment of service tax. In some cases, a part of tax is payable to the Government by the recipient of service and balance is to be paid by the service provider. This mechanism is popularly known as Reverse Charge Mechanism.

Services Covered under Reverse Charge Mechanism

The following are covered by Reverse Charge Mechanism. In these cases, service tax is payable (in some cases partially payable) by the service receiver:

Insurance Agents
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Goods Transport Agency
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
- The person who pays or liable to pay freight for the transportation of goods by road in carriage, located in the taxable territory, shall be treated as the person who receives the service and is liable for service tax under Reverse Charge Mechanism.
Sponsorship
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Arbitral Tribunal
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Support Services by Government or Local Authorities
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Hiring of Motor Vehicles to Carry Passengers on Abated Value
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Individual Advocate
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Supply of Manpower or Security Services
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Works Contracts
- Percentage Payable by Service Provider: 50%
- Percentage Payable by Service Receiver: 50%
- In works contract services, both service provider and the service recipient are the persons liable to pay tax. The service recipient has the option of choosing the valuation method as per his/her choice independently. It may be different from valuation method adopted by the service provider of service.
Import of Services
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Services by Director to Company
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Recovery Agent
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Mutual Fund
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Lottery Service
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%
Aggregator Services
- Percentage Payable by Service Provider: 0%
- Percentage Payable by Service Receiver: 100%

For those transactions which are not covered by the above table, the service provider is responsible for payment of service tax.

Invoice Issued by Service Provider with Reverse Charge

If Reverse Charge Mechanism is applicable, the invoice issued by service provider should include only that portion of service tax which is to be paid by service provider.

Reverse Charge Mechanism Small Scale Service Provider

Small service providers with a turnover of less than Rs.10 lakhs are not liable to pay service tax. Hence, i

f the service provider is availing exemption owing to turnover being less than Rs 10 lakh, he shall not obliged to pay any tax. However, the service recipient shall have to pay service tax which he is required to pay under partial reverse mechanism.

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Frequently Asked Questions

Common questions about Reverse Charge Mechanism in Financial Services Taxation.

The reverse charge mechanism is a provision where the service recipient, instead of the service provider, is liable to pay the applicable service tax to the government. In certain services, the service tax is partially payable by the service provider and the remaining by the service recipient.

Some of the key services covered under the reverse charge mechanism include insurance agents, goods transport agencies, sponsorship services, arbitral tribunals, support services by government or local authorities, hiring of motor vehicles to carry passengers, services by individual advocates, supply of manpower or security services, works contracts, import of services, services by directors to companies, recovery agents, mutual funds, lottery services, and aggregator services.

In works contract services, both the service provider and the service recipient are liable to pay service tax. The service provider is liable to pay 50% of the tax, while the service recipient is liable for the remaining 50%.

If the reverse charge mechanism is applicable, the invoice issued by the service provider should include only the portion of service tax that the service provider is liable to pay. The portion payable by the service recipient should not be included in the invoice.

Yes, small service providers with a turnover of less than Rs. 10 lakhs are exempt from paying service tax. However, the service recipient is still liable to pay the service tax they are required to pay under the partial reverse charge mechanism.

Yes, in the case of import of services, the service recipient in India is liable to pay the entire service tax under the reverse charge mechanism.

In the case of services provided by an individual advocate, the service recipient is liable to pay the entire service tax under the reverse charge mechanism.

For sponsorship services, the service recipient is liable to pay the entire service tax under the reverse charge mechanism.

No, insurance agents are not liable to pay service tax. The entire service tax for services provided by insurance agents is payable by the service recipient under the reverse charge mechanism.

For aggregator services, the service recipient is liable to pay the entire service tax under the reverse charge mechanism, and the service provider is not liable to pay any portion of the tax.