Reverse charge mechanism :
To understand what is a reverse charge mechanism in service tax first we need to be aware of normal service tax.
As per section 68(1) of the Finance Act, 1994, every person providing taxable services to any other person shall pay service tax at the rate specified in section 66. Normally, the liability to pay service tax lies with the service provider. He shall collect the service tax from the service recipients and thus pay it to the authorities.
Reverse charge mechanism was introduced in service tax with effect from 1/7/2012. With this, service receiver is also liable to file return and pay service tax in respect of service tax they have to collect and pay to the authority.
Applicability :
All service receivers are not liable to pay service tax under reverse charge. Only on receiving specific services , reverse charge mechanism will come into picture. Here I’m discussing some instances where Reverse charge mechanism will come into practice.
1.Services of goods transport agency :
Goods transport agency renders the service of transportation of goods by road by issuing a consignment note. Here the party paying the freight shall be the service recipient who shall be liable to pay service tax on such service.
2.Services of insurance agent:
Where an insurance agent provides services to an entity carrying on insurance business , that entity being a receiver of service is liable to pay service tax.
3.Works contract :
work contract is joint contract in which service is provided along with transfer of some material. Here the recipient of service should charge the service tax on the service provided by the other party at the rate applicable.
4.Services by government or local authority :
excluding postal services, insurance and other public utility services ,any life support services provided by government or local authority are also taxable as per this reverse charge mechanism and the full liability lies with service receivers.
5.Services by directors of company :
Under reverse charge mechanism services provided by directors are also attract service tax. Any payments made to non executive directors such as sitting fees etc. are taxable. And the company being a recipient of service should pay service tax on the service.
6. Renting motor vehicle :
Services by way of renting of cabs, cars and buses are included under this service. But it doesn’t include metered cab, public transport etc.
7.Supply of manpower :
Services by way of supplying manpower like supply of security manpower is covered under reverse charge mechanism.
Small service provider exemption :
Small service provider exemption is not available under reverse charge mechanism and service receiver has to register himself under reverse charge mechanism without considering liability of payment.
When to pay ? Point of taxation :
Under reverse charge Point of taxation shall be the date of payment to service provider. In case the payment is not made within 6 months of the issue of invoice, date of invoice shall be considered as the point of taxation.
Center credit availability. :
Service tax paid under reverse charge mechanism is available for cenvat credit if the service received is included in definition of input service.
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