Reverse Charge Mechanism under Service Tax Laws

Here is a complete overview of the service tax reverse charge mechanism.

Let us explain it in detail. Know when and where it is applicable. The post gives you full details on the service tax reverse charge.

As per service tax rules, every service provider collects the service tax. The service provider ultimately pays the tax to the authorities.

The reverse mechanism was introduced at a later stage in 2012. With this alteration, the receiver of the service is also responsible for filing a return and paying this tax. However, not all service receivers are liable to pay service tax. Here is a list of the services that come under the purview of the reverse charge mechanism.

Applicability of Reverse Service Charges

Here is a list of the services where the service receiver is liable to pay the charges under the reverse mechanism.

1. An Insurance Company – When an insurance company is receiving services from the insurance agent, it is liable to pay services tax as a receiver.

2. Transport services – When a company or a firm receives the services of transportation of goods by road, it is liable to pay service tax.

3. Leaving apart the utility services like railway and postal, any other life support services provided by the local governmental authority is taxable. The receiver pays the charges with full liability on his part.

4. In the case of work contracts where services as well goods are transferred, the recipient is responsible for charging the service tax at the applicable rate.

5. In a company, the executive director pays fees to the non-executive directors. In such a case, the company has to pay service tax as a recipient of the services.

6. Services providing manpower like vigilant or security also come under the reverse charge mechanism. The receiver of the services has to pay and not the provider.

7. Service providers providing rented cabs and buses are also covered under this mechanism. The receiver of the service pays. However, in the case of public transport and metered cabs, this does not apply.

When the reverse service tax mechanism is working, the small service provider exemption is not applicable. The receiver of the service has to get registration under the reverse charge mechanism regardless of the liability of the payment.

Services with Partial Reverse Charge

However, there are few services that are only partially covered under the reverse charge system. It is mandatory to pay the service charge by the receiver within 6 months from the date of payment.

1. Cab hiring services are one of such services. If the service provider is not taking benefit of abatement, then he is liable to pay 50$ of service tax. The balance of 50% is a liability of the receiver of the service. If the provider is getting a benefit of abated value, then the receiver is liable to pay 100%.
2. The same goes with the service of the work contracts. The service provider and the receiver are liable to pay a 50% portion of the full amount.

The main purpose of the service tax reverse charge mechanism was to increase tax compliance and revenues. It was difficult for the government to collect service tax from certain unorganized sectors. The reverse service charge mechanism eliminated those restrictions.

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