Section 68 of Finance Act, 1994

• Sec 68 (2) provides legal backing for the levying of Service Tax under reverse charge mechanism. Sec 68 (2) is worded as follows:-

- “In respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

Brief History of Reverse Charge

The Reverse Charge was introduced in Service Tax vide Budget of the year 2005-2006. At that point of time there was only one service which was covered under Reverse Charge. However, with the passage of time this list has been expanded and at present this list contains 11  services into it which covers both Reverse Charge and Partial Reverse Charge.

Notification No. 30/2012-ST, dated 20th June, 2012

In order to charge service tax under reverse charge mechanism the Central Government is required to provide the list of taxable service by the way of notification. The notification no. 30/2012-ST provides for the list of service that will be taxable under reverse charge mechanism.

List of Services under RCM

Other Relevant Aspects

1. Business Entity and Body Corporate

-Business Entity– means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. [Government, charitable organization is not a “business entity”].

- Body Corporate – Company is a Body Corporate – Firm, HUF, Trust is not a body corporate. [Society registered under Societies Act is legally not ‘a body corporate’].

2.  Partial RC on Renting or Hire of Motor Vehicle designed  to carry passengers

- Reverse charge when renting to a person who is not engaged in  similar line of business

- Service Provider should be HUF, Individual, firm.

- Service Receiver – Business entity registered as body corporate

- If motor vehicle is taken on hire without driver it is ‘transfer of right in goods’. It is deemed sale of goods VAT will apply – Service Tax will not be charged.

3. Partial RC on Manpower Supply Service

- “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. [Rule 2(g) of Service Tax Rules, inserted w.e.f 01.07.20 12].

- 75% of ST shall be paid by service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 25% of ST shall be paid by service provider.

- Security Service, cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.

- Service tax in such cases shall be payable on – SALARY + PF + ESI + Commission of labour contractor.

4. Partial RC in Work Contract Service

- 50% of ST shall be paid by the service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 50% shall be paid by service provider.

- Service Receiver is a business entity incorporated as body corporate.

Utilization of CENVAT credit by Service Receiver

Accounting Entries

o    In the following example, the service recipient should pay 25% to the service provider and should pay remaining 75% to the service tax authorities directly.

o    Accounting entry in the books of Service Provider:-

o     Accounting entry in the books of Service Receiver:-