Reverse charge mechanism

Introduction of Reverse Charge Mechanism
(RCM)

What do you mean by RCM?

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Legal Framework – Reverse Charge

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Section 68(2) –Charging Section
Rule 2(1)(d) of STR – Person Liable to Pay
Rule 9(1)(e ) of CCR-Challan
Rule 4A of STR – Invoice
Rule 7 of POTR – Due Date



Person Liable to Pay Tax
Description of
Service

Service
Provider

Service Receiver

Person Liable

Rate of
Tax

Insurance Business

Insurance
Agent

Insurance
Company

Insurance
Company

12.36%

Goods Transport

GTA

Specified persons

Specified persons

12.36%

Sponsorship

Any person

Body corporate or
Firm

Body corporate or
Firm

12.36%

Legal Services

Arbitral
Tribunal or
Advocate

Business Entity

Business Entity

12.36%

Support Services

Government or
Local Authority

Business Entity

Business Entity

12.36%


6

Description of
Service

Service
Provider

Service Receiver

Person Liable

Rate of
Tax

Hiring of Motor
Vehicle On abated Value

Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP

Business Entity
registered as Body
Corporate

Business Entity
registered as Body
Corporate

12.36%

Hiring of Motor
Vehicle On non abated Value

Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP

Business Entity
registered as Body
Corporate

Business Entity
registered as Body
Corporate

40% of
12.36%

Provider
Supply of Manpower
& Security Services
for any purpose

Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP

Business Entity
registered as Body
Corporate

Business Entity
registered as Body
Corporate
Provider


60% of
12,36%
75% of
12.36%
25% of
12.36%

7

Description of
Service

Service
Provider

Service Receiver

Person Liable

Rate of
Tax

Director Services

Non Executive
Director

Company

Company

12.36%

Works Contract

Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP

Business Entity
registered as Body
Corporate

Business Entity
registered as Body
Corporate

50% of
12.36%

Provider

50% of
12.36%

Any person
located in Taxable
Territory

12.36%

Any Taxable Service

Located in Non
Taxable
Territory


Any person located
in Taxable Territory

8

Notice by DGCEI
Legal Services ……
 Legal Services: It means any services provided in
relation to advise, consultancy or assistance in any
branch of law, in any manner and includes
representational services before any court, tribunal or
authority.
 Business Entity: It means any person ordinarily
carrying out any activity relating to industry, commerce
or any other business or profession.

9

Goods Transport Agency Services
Provided or agreed to be provided by a goods transport agency in
respect of transportation of goods by road, where the person liable to
pay freight is,—
Any factory registered under or governed by the Factories Act, 1948
(63 of 1948);
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;
Any co-operative society established by or under any law;
Any dealer of excisable goods, who is registered under the Central
Excise Act, 1944 (1 of 1944)
Any body corporate established, by or under any law; or
Any partnership firm whether registered or not under any law
including association of persons;


Rent a Cab Services
Renting of Motor
Vehicle

If abatement
Of 60% claimed

S.R. is Liable to
pay @ 4.944%


S.P. is not Liable
Pay any tax

If abatement
is not claimed

S.R. is Liable to
pay @ 4.944%

S.P. is Liable to
pay @ 7.416 %


WORKS CONTRACT
ST to be discharge by the Recipient under
Reverse Charge will be 50% of the Taxable
Liability
Original
Works
i.e.
New
Construction, all types of
addition & alteration and
erection, commissioning or
installation of PM/Equipment
etc
Taxable Amount = 40% of
the Total Amount Charged

ST = (40*12.36%)*50% =
2.472

Maintenance or repairs
or
reconditioning
or
restoration or servicing of
goods eg. Amc

Maintenance,
repairs,
completion
&
finishing
service such as glazing,
plastering, floor and wall
tiling etc.
eg. Interior
Decoration

Taxable Amount =
70% of the Total
Amount Charged

ST = (70*12.36%)*50%
= 4.326

Taxable Amount =
60% of the Total
Amount Charged

ST = (60*12.36%)*50% =
3.708

In Works Contract Services, the service
recipient has the option of choosing the
valuation method independent of
valuation method adopted by provider of
service.



Controversy
Legal Services [Rule 2(1)(cca) of Service Tax
Rules, 1994] – means any service provided
in relation to advice, consultancy or
assistance in any branch of law, in any
manner and includes representational
services before any court, tribunal or
authority.


Details in Invoice under RCM
• Governing Rule: Rule 4A of the Service Tax Rules 1994.
• Invoice shall indicate the name, address and the registration
number of the service provider and person receiving taxable service;
the description and value of taxable service provided or agreed to
be provided; and the service tax payable thereon.
• As per clause (iv) of sub-rule (1) of the said rule 4A "the service tax
payable” thereon' has to be indicated. The service tax payable
would include service tax payable by the service provider.



• Lets now see the journal entry part



Case 1
Where Service Tax has been charged fully in Invoice
Expense A/c
Dr
Service Tax Input Credit A/c
Dr
Service Tax Deferred Input A/c
Dr
To Vendor A/c
To TDS Payable A/c
To Service Tax Payable A/c - Reverse Charge
Case 2
Where Service Tax has not been charged in Invoice
Expense A/c
Dr
Service Tax Deferred Input A/c
Dr
To Vendor A/c
To TDS Payable A/c

Debit
100.00
7.42
4.94
112.36

100.00
12.36
112.36

Credit
105.42
2.00
4.94
112.36

97.75
2.25
12.36
112.36


Case 3
In case of Abatement ( e.g. 40%)
Expense A/c
Dr
Service Tax Input Credit A/c
Dr
To Vendor A/c
To TDS Payable A/c


Debit
100.00
4.94
104.94

Credit
98.00
2.00
4.94
104.94


Rule 7 of POT
• Date of Payment
• Where payment for service is not made
within period of 6 months of date of
invoice, POT shall be determined as per
General Rule (Rule 3)



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Reverse charge mechanism

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