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Reverse Charge Mechanism - Service Tax

Guide to Reverse Charge Mechanism

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┬áby 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, if 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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