A Quick Overview of Reverse Charge Mechanism

[VSV & Co VSV & Co]

Service Tax – Reverse Charge Mechanism (‘RCM’)

What is RCM?

Service tax is an Indirect Tax levied by Service provider on Service Receiver on value of services.   

Normally, Service tax is paid to the Government by Service Provider.  However, specific provisions of Service Tax makes persons other than service provider liable to pay service tax. 

Certain Provision makes it mandatory to pay part of tax to be paid by service receiver and part by service provider.

When do RCM becomes applicable?

Applicability of RCM is dependent on the status & location of Service Receiver and Service Provider and taxability of service.  RCM does not apply on non-taxable and exempted services.

The provisions relating to RCM are provided in Notification No 30/2012 – ST dated 20 June 2012 as amended by various notifications.

No threshold exemption of ₹ 10 lakhs is available under RCM service tax liability (Notification No 33/2012 - ST dated 20 June 2012).

Which are the Services on which RCM is applicable?

Following services are covered under RCM/partial RCM under Rule 2(2)(d)(i) of Service Tax Rules, 1994 read with Notification No. 30/2012-ST:

1. Insurance Agent Service

2. (Banking) Recovery Agent Service

3. Goods Transport Agency Service

4. Sponsorship Service

5. Legal Service

6. Arbitral Tribunal Service

7. Services by Directors of the body corporate to the body corporate

8. Support Services provided by Government/Local Authority

9. Rent-a-Cab Service

10. Manpower Supply Service

11. Security Service

12. Service portion in execution of Works Contract

13. Import of Taxable Services

Whether any registration needs to be taken for RCM compliances?

It is mandatory to get registered with Service Tax Department as Service Receiver, in case Service Tax needs to be paid under RCM as per applicable provisions.

Which are the penal consequences for non-compliance under RCM?

The Government has been tightening the penal provisions in service tax in recent times with a view to catch hold of serious offenders.

Any person liable to pay tax Service Tax including Service Receivers under RCM shall be levied penalties and interests as per applicable service tax provisions for non-payment of Service Tax under RCM.  Further, penalties can also be imposed on Service Receivers for failure to take Service Tax Registration or failure to file Service Tax Returns.