3. Reverse Charge
• First sought to be introduced in 1997 for GTA and clearing Agents
• Finance Act, 1994 was not amended to provide for liability of payment service recipient and
amendment was primarily sought by amending Rules
• Held as ultravires the Act by Apex Court in Laghu Udyog Bharati (2006) (2) STR 276 (SC)
• Reintroduced by amendments in charging section vide amendments in 2000 and 2003
• This time upheld by Apex Court in Gujarat Ambuja Cement Ltd. 2006 (3) STR 608 (SC).
• Validity of the collection of service tax from service receiver was upheld in the case of All
India Tax Payers Welfare vs Union Of India [(2006) 205 CTR Mad 360, 2006 4 STR 14]
Reverse Charge & Latest issues CA Gaurav Gupta 3
4. Reverse Charge
• Section 68 provides for mechanism for collection of Service Tax
• Section 68(2) of the Finance Act, 1994 provides for the person other than service provider
for payment of service tax.
• Section 68(2) of the Finance Act, 1994 provides that Government may notify any service
with respect to which the liability of to pay service tax may lay upon the service recipient as
a person liable to pay service tax.
• Rule 2(1)(d) of Service Tax Rules, 2004 also amended suitably as it defines “person liable
to pay Service Tax”
Reverse Charge & Latest issues CA Gaurav Gupta 4
5. Reverse Charge
Prior to July 1, 2012
Reverse charge liability was existing on following four category of services
• GTA
• Sponsorship Services
• Insurance Services
• Import of Services
Post July 1, 2012
• Reverse charge liability effected on 11 cases vide Notification No. 30/2012-ST, dated June
20, 2012
• Enlarged Scope
Reverse Charge & Latest issues CA Gaurav Gupta 5
6. Reverse Charge
Description of
Service
Service Provider Service Recipient Liability of provider Liability of recipient
Insurance Insurance Agent Person carrying on insurance business NIL 100%
Sponsorship Any person Body Corporate or partnership firm
located in taxable territory
Nil 100%
GTA Goods Transport
Agency
Six Specified persons Nil 100%
Arbitral Tribunal Arbitral Tribunal To any business entity located in
taxable territory
Nil 100%
Legal Services Individual
Advocate or a firm
of advocates
Business entity located in taxable
territory
Nil 100%
Rent a Cab
(claiming
Abatement )
Specified persons To any business entity registered as
body corporate located in the taxable
territory
Nil 100%
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7. Reverse Charge
Description of
Service
Service Provider Service Recipient Liability of provider Liability of recipient
Rent a Cab (not
claiming
Abatement )
Specified persons To any business entity registered as
body corporate located in the taxable
territory
50% 50%
Manpower
supply including
Security
Specified persons To any business entity registered as
body corporate located in the taxable
territory
Nil 100%
Works Contract Specified persons To any business entity registered as
body corporate located in the taxable
territory
50% 50%
Directors Individuals / body
corporate
To any business entity registered as
body corporate located in the taxable
territory
Nil 100%
Services by non
resident
By any person
who is located in
non-taxable
territory
Any person located in taxable
territory
Nil 100%
Any Service Govt.
or Local Authority
Business Entity Nil 100%
Reverse Charge & Latest issues CA Gaurav Gupta 7
8. • Invoice:
- Service tax relating to provider’s share shall be charged on invoice
- Service tax relating to service receiver’s share may be mentioned on invoice
with the mention that he is required to pay the balance amount.
• Cenvat of joint charge mechanism input services:
- Cenvat Credit of Provider’s share of Service tax can be availed on the basis
of invoice
- Cenvat Credit of Recipient's share of services can be availed on the basis of
challan both for partial and full reverse charge cases
- If payment is not made to vendor within three months in partial reverse
charge, then such Cenvat credit shall be required to be reversed
Reverse Charge
Reverse Charge & Latest issues CA Gaurav Gupta 8
9. Reverse Charge
Certain points of specific Mention
• Service Tax payable under reverse charge even on advance for services
• Service recipient is required to get himself registered and file returns
• Interest and penal provisions in case of delay applicable even under reverse charge
Circular No. 162/13 /2012 –ST Dt. 6-7-2012
It is clarified that the provisions of partial reverse charge would also be applicable in respect
of such services where point of taxation is on or after 01.07.2012 under the applicable rule in
respect of the service provider.
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10. Rule 7 of Point of Taxation Rules, 2011.
As per Rule 7 of POT rules the point of taxation in case of reverse charge mechanism shall
be the date on which payment is made by the service receiver to the service provider.
Therefore liability to pay service charge is the month in which payment to service provider is
made.
However if payment to the service provider is not made within Three months from the date of
invoice than point of taxation shall be determined as first day after three months.
Exception is that when service provider is outside India is Associated Enterprise, the service
receiver is liable to pay service tax as soon as the account of service provider is credited in
books of account of service receiver.
Reverse Charge
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11. Reverse Charge
Certain important questions
Ques 1: What does a service provider need to indicate on the invoice when he is liable to pay
only a part of the liability under the partial reverse charge mechanism?
Ques 2: If the service provider is exempted being a SSI (turnover less than
Rs. 10 lakhs), will service recipient still be liable to deposit under reverse charge?
Ques 3: Does an SSI unit (having turnover less than 10 Lakhs) liable to deposit Service tax
under reverse charge?
Ques 4: How will service recipient avail Cenvat Credit?
Reverse Charge & Latest issues CA Gaurav Gupta 11
12. Reverse Charge
Certain important questions
Ques 5: Do I need separate registration to discharge my liability under reverse charge?
Ques 6: Do I need to pay interest on late payment of liability under reverse charge?
Ques 7: Can I pay reverse charge liability by Cenvat Credit?
Ques 8: X Ltd. engages a contractor Mr C to construct his factory. Both parties agreed that
Contractor C would charge the entire service tax and discharge the liability. Whether X is
liable to pay liability under reverse charge?
Reverse Charge & Latest issues CA Gaurav Gupta 12
13. Reverse Charge
Certain points of specific Mention - GTA
• Specified Persons:
o Any factory registered under or governed by the Factories Act, 1948 (63 of 1948)
o 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
o Any co-operative society established by or under any law
o Any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or
the rules made there under
o Any body corporate established, by or under any law
o Any partnership firm whether registered or not under any law including association of persons
• Exemption as available for transportation through GTA for specified goods available to
recipient also
• Exemption for INR 750/1500 charge available to recipient also
Reverse Charge & Latest issues CA Gaurav Gupta 13
GTA
14. Reverse Charge
Certain points of specific Mention – Rent a cab / Manpower supply / Works contract
Specified Persons (Provider):
• Any individual
• Hindu Undivided Family
• partnership firm (includes LLP), whether registered or not, including
• association of persons
located in the taxable territory
Points to note:
• Proprietorship firm included
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15. Reverse Charge
Recipient:
• To any business entity registered as body corporate located in the taxable territory
Business Entity – 65B(17) - "business entity" means any person ordinarily carrying out any
activity relating to industry, commerce or any other business or profession
Body Corporate – Section 2(7) of Companies Act – includes company incorporated in India
but does not include –
(a) Corporation Sole,
(b) Registered Cooperative Society
(c) Any other body corporate as notified by Central Government
Reverse Charge & Latest issues CA Gaurav Gupta 15
Rent a Cab / Manpower
Supply / Works Contract
16. Reverse Charge
Body Corporate:
Characteristics:
- Incorporated under some law
- Perpetual succession
- Ability to hold property in own name
Examples:
- Companies (whether incorporated in India / outside India),
- Corporations under laws
Not body Corporate:
- Proprietorship Concern
- HUF
- Society under Societies Act
- Partnership firms
Reverse Charge & Latest issues CA Gaurav Gupta 16
Rent a Cab / Manpower
Supply / Works Contract
17. Whether recipient
PSUs
Yes
Charitable Trusts No, not business entity
Partnership firm No, not body corporate
HUF No, not a body corporate
Reverse Charge
Reverse Charge & Latest issues CA Gaurav Gupta 17
Rent a Cab / Manpower
Supply / Works Contract
18. Reverse Charge
Certain points of specific Mention – Rent a cab
• Persons in same line of business, no liability under reverse charge mechanism
• Radio taxi not included
Certain points of specific Mention – Manpower Supply
• Recruitment agencies not covered
• To include all amounts including ESI/ PF etc. while determining liability under reverse
charge as well
Reverse Charge & Latest issues CA Gaurav Gupta 18
Rent a Cab / Manpower
Supply
19. Effective rate
Abatement Taken
by Rent a Cab
operator
Valuation – 40%
Reverse Charge Liability
– 100% of above
No Abatement Taken by
Rent a Cab operator
Valuation –100%
Reverse Charge Liability –
50% of above
Reverse Charge
Works ContractNotification No. 26/2012
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20. Reverse Charge
Case 1:
Mr. X engages a contractor Mr C to construct his factory. As per contract all material to be
provided by Mr A. Mr. C shall provide 10 labour for the execution of the contract @Rs 600
per man day. Overtime shall be charged extra @ Rs 100 per hour. The persons employed at
construction work are working under the superintendence and control of the Contractor Mr. C.
Whether this transaction is covered under manpower supply service or works contract?
Answer:
None,
a. Its not manpower supply because both superintendence and control over the labour lies
with Mr. C
b. Its not a works contract because no property in goods is transferred from Mr C to Mr A.
Reverse Charge & Latest issues CA Gaurav Gupta 20
Works Contract
21. Reverse Charge
Certain points of specific Mention – Non resident
• Exemption to Government, charitable trusts (Specific), Individuals for non business purpose
and RBI for forex management.
• Payment to service provider in J&K covered under reverse charge liability
Certain points of specific Mention – Manpower Supply
• Recruitment agencies not covered
• To include all amounts including ESI/ PF etc. while determining liability under reverse
charge as well
Reverse Charge & Latest issues CA Gaurav Gupta 21
22. Reverse Charge
Failure to pay Service Tax under
All Implications as is in case of Service provider being person liable to pay.
Hindustan Coca Cola Beverages P. Ltd. v. CIT, 293 ITR 226 (SC) :
“The Tribunal, upon rehearing the appeal, held that though the appellant-assessee was rightly
held to be an ‘assessee in default’, there could be no recovery of the tax alleged to be in
default once again from the appellant, considering that Pradeep Oil Corporation had already
paid taxes on the amount received from the appellant. It is required to note that the
Department conceded before the Tribunal that the recovery could not once again be made
from the tax deductor, where the payee included the income on which tax was alleged to
have been short deducted in its taxable income and paid taxes thereon. There is no dispute
whatsoever that Pradeep Oil Corporation had already paid the taxes due on its income
received from the appellant and had received refund from the Tax Department. The Tribunal
came to the right conclusion that the tax once again could not be recovered from the
appellant (deductor-assessee), since the tax has already been paid by the recipient of
income.” CA Gaurav Gupta 22
23. Disclaimer
This presentation has been prepared for internal use of
ICAI and its members. The contents of this document are
solely for informational purpose. It does not constitute
professional advice or a formal recommendation. The
presentation is made with utmost professional caution but
in no manner guarantees the content for use by any
person. It is suggested to go through original statute /
notification / circular / pronouncements before relying on
the matter given. The presentation is meant for general
guidance and no responsibility for loss arising to any
person acting or refraining from acting as a result of any
material contained in this presentation will be accepted by
us. Professional advice recommended to be sought
before any action or refrainment.
CA Gaurav Gupta
Partner
MGS & Co.
507 B, D-Mall, Netaji Subhash Palace,
Delhi - 110034
+91 11 32962487
+91 11 2735 2487
+91 98110 13940
cagauravmgs@gmail.com
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