Reverse Charge Mechanism

Section 68 (1) of Chapter V of Finance Act, 1994 (‘Act’ for short) provides that every person providing taxable service to any person shall pay service tax at the rate specified in section 66B (at present 14% - SBC – 5%)  in such manner and within such period as may be prescribed.

Section 68(2) introduced the reverse charge mechanism concept.  The said section provides that Notwithstanding anything contained in sub-section (1), 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.

The proviso to the said section provides 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.

Notification

The Central Government, by virtue of powers given under Section 68(2) to it, notified some services under which the Government fixed the percentage payable by the service provider as well as the service recipient vide Notification No. 30/2012-Service Tax, dated 20.06.2012.  This notification has been amended vide Notifications No. 45/2012-Service Tax, dated 07.08.2012; No. 10/2014-Service Tax, dated 11.07.2014, No. 7/2015-Service Tax, dated 01.03.2015 and No. 18/2016-Service Tax, dated 01.03.2016.

Taxable services

The said notification notified the following services (as on date, incorporating the amendments) subject to this notification as detailed below:

• Services provided or agreed to be provided  by an insurance agent to any person carrying on the insurance business;
• Services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company;
• Services provided or agreed to be provided by a selling or marketing agent of lottery tickets in relation to a lottery in any manner to a lottery distributor or selling agent of the State Government under the provisions of the Lottery (Regulations) Act, 1998;
• 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;
• any society registered under the Societies Registration Act, 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 theCentral Excise Act, 1944  or the rules made there under;
• any body corporate established, by or under any law; or
• any partnership firm whether registered or not under any law including association of persons;

• Services provided or agreed to be provided by,-

• an arbitral tribunal, or
• a firm of advocates or an individual advocate other than senior advocate, by way of legal services, or
• Government or local authorityexcluding,-

• renting of  immovable property, and
• services specified insub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994,

  to any business entity located in the taxable territory;

• Services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate;
• Services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers to any person who is not in the similar line of business or supply of manpower for any purposeor security servicesor service portion in execution of works contract by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory;
• Services provided or agreed to be provided by a person involving an aggregator in any manner
• Services provided or agreed to be provided by any person which  is located in a non-taxable territory and received by any person located in the taxable territory;

Extent of liability

The Government further fixed the liability of service tax payable by the service provider and the service recipient in respect of the services mentioned above as detailed in the following table:

Two explanations are given in the Notification.  Explanation 1 provides that the person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.  Explanation 2 provides that in works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.