Dr.

Ram Manohar Lohia National Law University

Lucknow,U.P.

SUBJECT : LAW OF TAXATION - II

TITLE OF PROJECT:

REVERSE CHARGE MECHANISM IN THE LIGHT OF GUJARAT AMBUJA

CEMENTS LTD. v. UNION OF INDIA [AIR 2005 SC 3020]

(Final Draft)

Submitted to: Submitted By:

Mr. Bhanu Pratap Singh Shalini Dwivedi

Assist.Prof.(Law) Roll no. 121 (8th semester)

1
 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my Assistant

Professor Mr. Bhanu Pratap Singh for his exemplary guidance, monitoring and constant

encouragement to give shape to this project. The blessing, help and guidance given by him

time to time shall carry me a long way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to my respected seniors who

share their cordial support, valuable information and guidance, which helped me in

completing this task through various stages.

Lastly, I thank the almighty, my parents, brother, sisters and friends for their constant

encouragement without which this assignment would not have been possible.

Shalini Dwivedi

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3
TABLE OF CONTENTS

1. Introduction
2. Service Tax
A. Meaning of Service
B. Why Service Tax
C. Constitutional Validity of Service Tax
D. Payment of Service Tax
3. Factual Matrix
4. Issues Involved
5. Law on point
6. Decision of the Court
7. Principle of Law laid down
8. Case Analysis
9. Services under Reverse Charge Mechanism
10. Impact of Reverse Charge Mechanism
11. Conclusion
12. Bibliography

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 1. INTRODUCTION:
Conventionally, taxes are divided into two broad heads, namely, direct and indirect,
depending upon the impact and incidence of taxation. Direct taxes are broadly levied
directly on persons and they vary with the statutory definition of each class of
personal tax.1
Every tax which is levied by the Government has the following two effects:
1) Immediate Effect: When a tax is imposed, the immediate effect of the tax is on
the person on whom the tax has been imposed and shall be liable to pay such
tax. The immediate effect is also known as impact of tax.
2) Ultimate Effect: the next issue involved in the imposition of tax is whether the
burden of such tax, which is imposed on a person, can be shifted to another
person i.e. can this tax be recovered from the other person. In other words,
who will be ultimately affected by the imposition of such tax. Ultimate Effect
is also known as the Incidence of tax.
If the impact and incidence of tax is on the same person i.e. the burden of the tax
cannot be shifted or recovered from other person, it is known as direct tax, e.g.,
income tax and wealth tax.
If the impact of tax is on one person and the incidence of the tax is on another person
i.e. the burden of tax can be shifted or the tax so paid can be recovered from another
person, it is known as indirect tax.
Thus, indirect tax is one that can be shifted by the taxpayer to some other person. Its
incidence is borne by the consumer who ultimately consumes the product or the
service.
Further, direct taxes are imposed on persons, whereas indirect taxes are levied on
goods and services e.g. Excise Duty, Customs Duty, Service Tax, etc.

2. SERVICE TAX:
Service tax is a tax levied on services. It is levied on the value addition made by
provision of services. Service Tax is a destination based consumption tax, i.e., service

1
Dr. V Gaurishankar, Principles of Taxation, Wolters Kluwer (India) Pvt Ltd, New Delhi, 2007, 43.

5
 tax is a charge on services provided or agreed to be provided within the territory of
India.2
A. MEANING OF SERVICE:
As per Webster’s Concise Dictionary, ‘service’ means a ‘useful result or
product of labour, which is not a tangible commodity.’ Service is a product
that arises out of labour. It is a form of Value-addition. Such value addition is
intangible and different from sale of goods.
The word ‘service’ has been defined in Section 65B(44) of the Finance Act,
1994. The definition has the following ingredients:
1) There should be an “activity”
2) Such activity must be carried out for a consideration
3) Such activity must be carried out by a person for another person
4) Service includes declared service
5) A few transactions are specifically excluded from the scope of the term
“service”
B. WHY SERVICE TAX?
In the case of Magus Construction Pvt Ltd v Union of India3, it was observed
that: “it may be pointed out, at the very outset, that the tax on services is an
“indirect tax” and is relatively new concept in India. As a matter of fact,
Government of India had introduced the levy of “service tax”, i.e., tax on
services, for the first time, in the year 1994, borrowing the concept from the
developed countries. The basic purpose of this levy has been to increase
revenue, treating the act(s) of rendering service, as an additional source of
revenue. Depending upon its own socio-economic compulsions, each country
evolves its own system of taxation adapting either a “comprehensive
approach” or “selective approach”. Under the concept of “comprehensive
approach”, all services are taxable unless any services are specifically
excluded; whereas under the system of “selective approach” only specified
services are taxable and it is the system of “selective approach”, which India
has adopted. This distinction needs to be kept in mind, when we proceed
further.”

2
CA Vinnet Sodhani and CA Deepshika Sodhani, Master Guide to Service Tax, Taxmann, 3rd Edition, New
Delhi, 2015, 295.
3
2008 (11) STR 225 (Gau.)

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 C. CONSTITUTIONAL VALIDITY:
Service Tax is levied by the Parliament/Centre vide Entry 97 of List I (Union
List) of Schedule VII of the Constitution of India. The Constitution of India is
the supreme law and all other laws of the Central or State Government have to
be consistent with the Constitution.
Article 265 provides that no tax shall be levied or collected except by
authority of law. Therefore, there cannot be arbitrary levy or collection of
taxes.4
In the case of R.K. Garg v Union of India & Ors., it has been held that there is
a presumption in favour of the constitutional validity of a law and the burden
is upon the person who attacks it to show that there is violation of
constitutional provisions. Any law passed by the Legislature for levying tax,
must fulfil the following conditions:
i. It must be within the legislative competence
ii. It must be made by appropriate legislative body
iii. It must not be in conflict with the fundamental rights enshrined in the
Constitution of India.5
D. PAYMENT OF SERVICE TAX:
The following persons are liable to pay service tax under the service tax law:
a) Provider of Service
b) Service recipient or a specified person liable to pay service tax
(Reverse Charge Mechanism)
c) Both service provider as well as service recipient liable to pay service
tax in certain cases (Partial Reverse Charge Mechanism).6

3. FACTUAL MATRIX:
The writ petitions have been filed challenging the constitutional validity of Sections
116 and 117 of the Finance Act 2000 and Section 158 of the Finance Act, 2003 by
which the decision of this Court in Laghu Udyog Bharati & Anr.v Union of India &

4
Chhotabhai Jethabhai Patel and Co. v Union of India [(1999) 110 ELT 118 (SC)]
5
(1981) 4 SCC 675
6
Dr. Girish Gupta and Dr. Ravi Gupta, Practical Approach to Direct and Indirect Taxes: Problems and
Solutions, Bharat Law House Pvt. Ltd., New Delhi, 29th Edition, 2014, 880.

7
Ors. [(1999) 6 SCC 418], striking down Rules 2(1) (d), (xii) and (xvii) of the Service
Tax Rules, 1994 (as amended in 1997) was sought to be overcome.
The writ petitioners are the customers or clients of goods transport operators and
forwarding and clearing agents.
The goods transport operators as well as the clearing and forwarding agents went on
an all India strike protesting against the imposition of service tax on them. Perhaps
this might have precipitated an amendment to the Service Tax Rules 1994. Rules
2(1)(d),(xii) and (xvii) of the Service Tax Rules, 1994 were amended by imposing the
tax in effect on the customers of clearing and forwarding agents and goods transport
operators. As far as clearing and forwarding agents were concerned the relevant
amendments to the Rules were carried out and brought into effect by two notifications
both dated 16th July 1997. As far as the levy of service tax on customers of goods and
transport operators were concerned, the amendments were made and brought into
effect with effect from 16th November, 1997.
The imposition of service tax on customers was challenged by many of the present
petitioners in Laghu Udyog Bharati. During the pendency of writ petitions, on 2nd
June 1998 notification No.49/98 was issued exempting services provided by goods
transport operators from the levy of service tax altogether and by the Finance Act,
1998 all provisions in the Finance Act, 1994 including Section 65 (41) sub-clause (m)
relating to the levy of service tax on services provided by goods transport operators
were omitted with effect from 16th October, 1998. By the Finance Act, 1998, Section
69 was also amended. The various sub-sections including sub sections (2) and (5)
were omitted. The body of the sections now require every person liable to pay service
tax to make an application for registration without indicating who was so liable. The
Service Tax Rules, 1994 were consequently also amended by the Service Tax
(Amendment) Rules, 1998 to delete the provisions relating to service by goods
transport operators.
In upholding the challenge to Rule 2(1)(d), (xii) and (xvii), this Court noted:
"It is clear from the reading of these provisions that according to the Finance Act the
charge of tax is on the person who is responsible for collecting the service tax. It is
he, who by virtue of the provisions of Section 65(5) is regarded as an assessee. He is
the person who provides the service."

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 It was held that in the circumstances, “the definitions contained in Rule 2(d) (xii) and
(xvii), which seek to make the customers or the clients as the assessee, are clearly in
conflict with Section 65 and 66 of the Act." 7
At this stage on 12th May 2000, the Finance Act 2000 sought to amend Finance
Act of 1994 in the manner indicated in Section 116 and 117.
While the writ petitions challenging the validity of the amendments made by
the Finance Act2000 to Chapter V of the Finance Act, 1994 were pending,
the Finance Act, 2003 was assented to by the President on 14th May 2003. By Section
158 of that Act, Sections 68(1), 71 and Section 94 of the 1994 Act were further
amended.

4. ISSUE INVOLVED:
There are three main grounds on which petitioners have based their challenge:
a) The basis of the decision rendered in Laghu Udyog Bharati had not been
removed or displaced by the impugned sections and could not therefore
overrule, replace or override this Court's decision.
b) Parliament was legislatively incompetent to enact the law. It is stated that the
imposition of the impugned levy encroaches upon the State Government's
power as defined in Entry 56 of List II of the Seventh Schedule to the
Constitution which pertains to 'Taxes on goods and passengers covered by
road or on inland waterways'. Parliament could not by resorting to the
residuary Entry 97 of List 1 of the Seventh Schedule circumvent Entry 56 of
List II and in the guise of levying service tax in fact levy a tax on the transport
of goods.
c) The constitutional validity of the imposition has also been challenged on the
ground that it operated in discriminatory manner by singling out only the
customers of goods transport operators and clearing and forwarding agents to
pay tax whereas the recipients of other kinds of similar services were not
subjected to such imposition.

7
As held in Laghu Udyog Bharti v Union of India [AIR 1999 SC 2596]

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5. LAW ON POINT:
Service tax was introduced for the first time under Chapter V of the Finance Act,
1994.
 Section 66 - of the Act is the charging section and provided for the levy of
service tax at the rate of five per cent of the value of the taxable services
provided to any person by the person responsible for collecting the service
tax.
 Section 65 - "Taxable service" was defined to include only three services
namely any service provided to an investor by a stock broker, to a subscriber
by the telegraph authority and to a policy holder by an insurer carrying on
general insurance business.
By the Finance Act, 1997 the first amendments to Section 65, of the Finance
Act 1994 were made inter alia, by extending the meaning of 'taxable service'
from three services to 18 different services categorized in Section 65(41),
clauses (a) to (r). We are only concerned with clauses (j) and (m) of sub-
section (41) to Section 65.
Clause (j) made service to a client by clearing and forwarding agents in
relation to clearing and forwarding operations, a taxable service.
Service to a customer of a goods transport operator in relation to carriage of
goods by road in a goods carriage was, by clause (m), also included within the
umbrella of taxable service.
The phrases "clearing and forwarding agent" and "goods transport operator"
were defined as follows:
(j) "clearing and forwarding agent" means any person who is engaged in
providing any service, either directly or indirectly, connected with clearing
and forwarding operations in any manner to any other person and includes a
consignment agent"
(m) "goods transport operator" means any commercial concern engaged in
the transportation of goods but does not include a courier agency"
The charge of service tax in respect of the services rendered by clearing and
forwarding agents and goods transport operates remained on the person
responsible for collecting the service tax under Section 66 (3).

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 "66(3) With effect from the date notified under Section 84 of the Finance Act,
1997, there shall be charged a service tax at the rate of five per cent of the
value of the taxable services referred to in sub-clauses (g), (h), (i), (j), (k), (l),
(m), (n), (o), (p), (q),and (r ) of clause (41) of Section 65 which are provided
to any person by the person responsible for collecting the service tax.
The 'person responsible for collecting the service tax' under this Section
was therefore the person providing the service. The phrase itself was also
defined under sub-section (28) of Section 65 to mean "a person who is
required to collect service tax under this chapter or is required to pay any
other sum of money under this Chapter and includes every person in respect of
whom any proceedings under this Chapter have been taken" and 'assessee'
was defined in sub-section (5) of Section 65 as meaning "a person
responsible for collecting the service tax and includes his agent". By the 1997
amendment under Section 68-1A the service tax in respect of taxable
services from items (g) to (r) of Section 65 (41) was directed to be collected
from "such person and in such manner as may be prescribed" and it was said
that all provisions of Chapter V "shall" apply to such person as if he is the
person responsible for collecting the service tax in relation to such services.
However, Sub-sections (2) and (5) of Section 69 continued to refer to the
persons responsible for collecting the service as the provider of the taxable
service.
 Section 68 - required every person providing taxable service to collect the
service tax at specified rates.
 Section 69 - of the Finance Act, 1994 provided for the registration of the
persons responsible for collecting service tax. Sub-sections (2) and (5)
indicated that it was the provider of the service who was responsible for
collecting the tax and obliged to get registered.
 Section 94 - empowers the Central Government to make rules for carrying out
the provisions of Chapter V of the Act. Pursuant to such power, the Service
Tax Rules, 1994 were framed.

AMENDMENT IN FINANCE ACT, 1994 in 2000:

 Section 116- During the period commencing on and from the 16th day of
July, 1997 and ending with the 16th day of October, 1998, the provisions of

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Chapter V of the Finance Act, 1994 shall be deemed to have had effect
subject to the following modifications, namely:-
(a) In section 65.—
(1) for clause (6), the following clause had been substituted namely:-
(6) "assessee" means a person liable for collecting the service tax and include-
(i) his agent; or
(ii) in relation to services provided by a clearing and forwarding agent, every
person who engages a clearing and forwarding agent and by whom
remuneration or commission (by whatever name called) is paid for such
services to the said agent; or
(iii) in relation to services provided by a goods transport operator, every
person who pays or is liable to pay the freight either himself or through his
agent for the transportation of goods by road in a goods carriage;
(ii) after clause (18), the following clauses had been substituted, namely:-
'(18A) "goods carriage" has the meaning assigned to it in clause (14)
of section 2 of the Motor Vehicles Act, 1988;
(18B) "goods transport operator" means any commercial concern engage in
the transportation of goods but does not include a courier agency;
(iii) in clause (48), after sub-clause (m), the following sub-clause had been
inserted namely:-
"(ma) to a customer, by a goods transport operator in relation to carriage of
goods by road in a goods carriage;
(b) In section 66, for sub-section (3), the following sub-section had been
substituted namely:-
"(3) On and from the 16th day of July, 1997, there shall be levied a tax at the
rate of five per cent, of the value of taxable services referred to in sub-clauses
(g), (h), (i),(j),(k) (l), (m), (ma), (n) and (o) of clause (48) of section 65 and
collected in such manner as may be prescribed,";
(c) In section 67, after clause (k), the following clause had been inserted,
namely:-
"(ka) in relation to service provided by goods transport operator to a
customer, shall be the gross amount charged by such operator for services in

12
 relation to carrying goods by road in goods carriage and includes the freight
charges but does not include any insurance charges;"
 Section 117- of the Finance Act, 2000- seeks to retrospectively validate the
taxes earlier collected under the Service Tax Rules which this court had
directed to be refunded. It reads:-
117. Validation of certain action taken under Service Tax Rules.--
Notwithstanding anything contained in any judgment, decree or order of any
court, tribunal or other authority, sub-clauses (xii) and (xvii) of clause (d) of
sub-rule (1) of rule 2 of the Service Tax Rules, 1994 as they stood
immediately before the commencement of the Service Tax
(Amendment)Rules, 1998 shall be deemed to be valid and to have always
been valid as if the said sub-clauses had been in force at all material times and
accordingly,-
(i) any action taken or anything done or purported to have been taken or done
a any time during the period commencing on and from the 16th day of July,
1997 and ending with the day, the Finance Act, 2000 receives the assent of
the President shall be deemed to be valid and always to have been valid for all
purposes, as validly and effectively taken or done;
(ii) any service tax refunded in pursuance of any judgment, decree or order of
any court striking down sub-clauses (xii) and (xvii) of clause (d) of sub-rule
(1) of rule 2 of the Service Tax Rules, 1994 before the date on which
the Finance Act, 2000 receives the assent of the President shall be recoverable
within a period of thirty days from the date on which the Finance Act 2000
receives the assent of the President, and in the event of non payment of such
service tax refunded within this period, in addition to the amount of service
tax recoverable, interest at the rate of twenty-four per cent, per annum shall be
payable, from the date immediately after the expiry of the said period of thirty
days, till the date of payment.
Explanation- For the removal of doubts, it is hereby declared that no act or
omission on the part of any person shall be punishable as an offence which
would not have been so punishable if this section had not come into force."

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 AMENDMENT IN FINANCE ACT, 1994 in 2003:
 Section 158- "During the period commencing on and from 16th day of July,
1997 and ending with the 16th day of October 1998, the provisions of Chapter
V of Finance Act, 1994, as modified by Section 116 of the Finance Act, 2000,
shall have effect subject to the following further modifications, namely: -
(a) in section 68, in sub-section (I), the following proviso shall be inserted at
the end and shall be deemed to have been inserted on and from the 16th
day of July, 1997, namely:-
Provided that-
(i) in relation to services provided by a clearing and forwarding
agent, every person who engages a clearing and forwarding agent
and by whom remuneration or commission (by whatever name
called) is paid for such services to the said agent for the period
commencing on and from the 16th day of July, 1997 and ending
with the 16th day of October, 1998; or
(ii) in relation to services provided by goods transport operator every
person who pays or is liable to pay the freight, either himself or
through his agent for the transportation of goods by road in good
carriage for the period commencing on and from the 16th day of
November, 1997 and ending with the 2nd day of June, 1998
shall be deemed always to have been a person liable to pay service tax,
for such services provided to him, to the credit of the Central
Government.”

6. DECISION OF THE COURT:

A. FIRST ISSUE-
As is apparent from Section 116 of the Finance Act, 2000, all the material portions
of the two Sections which were found to be incompatible with the Service Tax
Rules were themselves amended so that now in the body of the Act by virtue of
the amendment to the word "assessee" in Section 65(5) and the amendment
to Section 66(3), the liability to pay the tax is not on the person providing the
taxable service but, as far as the service provided by clearing and forwarding
agents and goods transport operators are concerned, on the person who pays for

14
 the services. As far as Section 68(1A) is concerned by virtue of the proviso added
in 2003, the persons availing of the services of goods transport operators or
clearing and forwarding agents have explicitly been made liable to pay the service
tax.
As we have said, Rule 2(1)(d) (xii) and (xvii) had been held to be illegal in Laghu
Udhyog Bharati only because the charging provisions of the Act provided
otherwise. Now that the charging section itself has been amended so as to make
the provisions of the Act and the Rules compatible, the criticism of the earlier law
upheld by this Court can no longer be availed of. There is thus no question of
the Finance Act, 2000 overruling the decision of this Court in Laghu Udhyog
Bharati as the law itself has been changed.
The statutory foundation for the decision in Laghu Udhyog Bharati has been
replaced and the decision has thereby ceased to be relevant for the purposes of
construing the present provisions (vide Ujagar Prints vs. Union of India 8 ).
Therefore subject to our decision on the question of the legislative competence of
Parliament to enact the law, and assuming the amendments in 2003 to be legal for
the time being, we reject the submission of the writ petitioners that by the
amendments brought about by Sections 116 and 117 of the Finance Act 2000, the
decision in Laghu Udhyog Bharati has been legislatively overruled.
B. SECOND ISSUE-
“Entry 56 of the Second List refers to taxes on goods and passengers carried by
road or on inland waterways. It is clear that the State Legislatures are authorized
to levy taxes on goods and passengers by this entry. It is not on all goods and
passengers that taxes can be imposed under this entry; it is on goods and
passengers carried by road or on inland waterways that taxes can be imposed. The
expression "carried by road or on inland waterways" is an adjectival clause
qualifying goods and passengers, that is to say, it is goods and passengers of the
said description that have to be taxed under this entry. Nevertheless, it is obvious
that the goods as such cannot pay taxes, and so taxes levied on goods have to be
recovered from some persons, and these persons must have an intimate or direct
connection or nexus with the goods before they can be called upon to pay the
taxes in respect of the carried goods. Similarly, passengers who are carried are

8
(1989)3 SCC 488,517.

15
 taxed under the entry. But, usually, it would be inexpedient, if not impossible, to
recover the tax directly from the passengers and so, it would be expedient and
convenient to provide for the recovery of the said tax from the owners of the
vehicles themselves.”9
Since service Tax is not a levy on passengers and goods but on the event of
service in connection with the carriage of goods, it is not therefore possible to
hold that the Act in pith and substance is within the States exclusive power under
Entry 56 of List II. What the Act ostensibly seeks to tax is what it, in substance,
taxes. In the circumstances, the Act could not be termed to be a colourable piece
of legislation. It is not the case of the petitioners that the Act is referable to any
other entry apart from Entry 56 of List II. Therefore the negation of the
petitioners’ submission perforce leads to the conclusion that the Act falls within
the residuary power of Parliament under Entry 97 of List I.
C. THIRD ISSUE-
The final challenge to the 2000 amendment to the Service Tax Act, 1994 is that it
operated in a discriminatory manner in that it chose the recipient of the services to
be the assessee only in the case of services rendered by goods transport operators
and clearing and forwarding agents. We are unable to accept the submission.
Because of the inherent complexity of fiscal adjustments of diverse elements in
the field of tax, the legislature is permitted a large discretion in the matter of
classification to determine not only what should be taxed but also the manner in
which the tax may be imposed.

7. PRINCIPLE OF LAW LAID DOWN-RATIO:

A. IN RELATION TO FIRST ISSUE-
A legislature is competent to remove infirmities retrospectively and make any
imposition of tax declared invalid, valid. This has been the uniform approach of
this Court. Such exercise in validation must of course also be legislatively
competent and legally sustainable. Those issues are considered separately.
B. IN RELATION TO SECOND ISSUE-
There is a distinction between the object of tax, the incidence of tax and the
machinery for the collection of the tax. The distinction is important but is apt to be

9
Rai Ramakrishna & Ors. v State of Bihar [1963(1) SCR 897]

16
 confused. Legislative competence is to be determined with reference to the object
of the levy and not with reference to its incidence or machinery. There is a further
distinction between the objects of taxation in our constitutional scheme. The
object of tax may be an article or substance such as a tax on land and buildings
under Entry 49 of List II, or a tax on animals and boats under Entry 58 List II or
on a taxable event such as manufacture of goods under Entry 84 of List-I, import
or export of goods under Entry 83 of List-I, entry of goods under Entry 52 of List
II or sale of goods under Entry 54 List II to name a few.
C. IN RELATION TO THIRD ISSUE-
Though taxing laws are not outside Article 14, however, having regard to the wide
variety of diverse economic criteria that go into the formulation of a fiscal policy
legislature enjoys wide latitude in the matter of selection of persons, subject
matter, events etc., for taxation. The tests of the vice of discrimination in a taxing
law are, accordingly, less rigorous. In examining the allegations of a hostile,
discriminatory treatment what is looked into is not its phraseology, but the real
effect of its provisions. A legislature does not, as an old saying goes, have to tax
everything in order to be able to tax something. If there is equality and uniformity
within each group, the law would not be discriminatory.

8. CASE ANALYSIS- Reverse Charge Mechanism:

Normally service tax is payable by the service provider of taxable service. However,
very often Government finds it administratively more convenient and easy to collect
service tax either fully or partially from the service recipient. The basic reason for
making the service recipient liable to pay service tax is that either the service
providers are situated in non-taxable territories, or are illiterate or unorganised or in
large numbers. 10
A. HISTORY:
First time reverse charge mechanism was introduced in service tax in the year
1997 by shifting the burden of payment of service tax from the service
provider to the service recipient in case of clearing and forwarding agent
service and goods transport operators service.

10
S.S. Gupta, Service Tax: How to meet your obligations, Volume 1, Taxmann, New Delhi, 2015, 229.

17
 However, such provisions were quashed by Hon’ble Supreme Court in the
case of Laghu Udyog Bharti v Union of India & Ors., as illegal and
unsustainable in law because of being ultra vires to the Finance Act, 1994.11
Thereafter, the Government amended the Section 68 of the Act to empower
the Central Government to notify the services on which service tax shall be
payable by the person other the service provider.12
In case of Gujarat Ambuja Cements Ltd. v Union of India, the Supreme Court
held that now the charging section itself has been amended so as to make the
provisions of the Act and the Rules compatible, the criticism of the earlier law
upheld by this Court can no longer be availed of. A legislature is competent to
remove infirmities retrospectively and make any imposition of tax declared
invalid, valid. Therefore, now, the Central Government is empowered to shift
the burden of payments of service tax from service provider to service
recipient.13
In year 2012, reverse charge was not new phenomenon to deal with. However,
what was new is the manner of levying the reverse charge wherein partial
service tax is payable by service recipient and rest of service tax is payable by
the service provider, i.e., joint reverse charge mechanism.
The Finance Act, 2015 enhanced the list of services involving reverse charge
and has brought yet another aspect of this charge to a person other than the
service provider, where in case of services involving ‘aggregator’, neither the
service provider nor the service recipient would be liable to pay tax, the
liability will be that of the aggregator.
B. STATUTORY PROVISION:
Section 68 of the Act is the principal section which fixes the responsibility to
pay service tax. Sub-section (1) of Section 68 provides that service provider
would be the person liable to pay service tax. Sub-section (2) of Section 68
provides over-riding powers to the Central Government to prescribe any
person who may be liable to pay service tax.

11
AIR 1999 SC 2596
12
Notification No. 36/2004-ST read with Rule 2(1)(d) of Service Tax Rules, 2004, introduced from 01-01-2005
13
AIR 2005 SC 3020

18
 Accordingly, whenever the Central Government prescribes any person other
than the service provider as person liable to pay service tax, a reverse charge
situation is created.14
C. CONDITIONS TO BE FULFILLED FOR APPLICATION OF
REVERSE CHARGE:
 If Service Receiver- Business Entity registered as Body Corporate and
Service Provider – Individual, HUF, proprietary or partnership firm, AOP
then only Reverse charge mechanism applies in following services:
i. Rent-a-cab
ii. Works Contract
iii. Supply of manpower for any purpose or security services
 If Service Receiver is Business Entity:
i. Services of Arbitral tribunal
ii. Legal Services of Advocate or Advocate Firms
iii. Support Services by government15
D. POINT OF TAXATION:
Point of taxation in case of Reverse Charge Mechanism is governed by Rule 7
of Point of Taxation Rules, 2011, Rule 7 states as under:
“Notwithstanding anything [contained in rules 3, 4, or 8], the point of taxation
in respect of the persons required to pay tax as recipients of service under the
rules made in this regard in respect of services notified under sub-section (2)
of section 68 of the Act, shall be the date on which payment is made.
Provided that where the payment is not made within a period of three months
of the date of invoice, the point of taxation shall be the date immediately
following the said period of three months.”16

9. SERVICES UNDER REVERSE CHARGE:

There are total 15 Services on which Reverse charge mechanism is made applicable
out of which on 2 services concept of Partial Reverse charge mechanism applies.
Under Partial Reverse charge mechanism both service provider and service receiver

14
V.S. Datey, Indirect Taxes: Law and Practice, Taxmann, New Delhi, 28th Edition, 2012, 117
15
CA Kamlesh Singh Chauhan, Reverse and Partial Charge Mechanism in Service Tax, available at
http://taxguru.in/service-tax/reverse-charge-partial-reverse-charge-mechanism-service-tax.html accessed on 4th
March 2017
16
Rule 7, Point of Taxation Rules, 2011

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are jointly made liable to pay service tax. The details of Reverse charge in respect of
15 services provided or to be provided are as under:
A. Services on which 100% Reverse charge Mechanism is applicable:
i. Services by an insurance agent to any person carrying on insurance
business
ii. Services by a recovery agent to a banking company or a financial
institution or a non-banking financial company
iii. Services by a mutual fund agent or distributor, to a mutual fund or
asset management company
iv. Services by a selling or marketing agent of lottery tickets to a lottery
distributor or selling agent
v. Services by a goods transport agency in respect of transportation of
goods by road
vi. Services by way of sponsorship
vii. Services by an arbitral tribunal
viii. Services by individual advocate or a firm of advocates by way of legal
services
ix. Services by a director of a company or a body corporate to the said
company or the body corporate
x. Services by Government or local authority by way of support services
excluding,- (1) renting of immovable property, and (2) services
specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of
the Finance Act,1994
xi. Services by way of supply of manpower for any purpose or security
services
xii. Import of services- Services by any person who is located in a non-
taxable territory and received by any person located in the taxable
territory
xiii. Services by a person involving an aggregator in any manner
B. Services on which Partial Reverse Charge Mechanism is applicable:
i. Rent-a-cab service if Service provider is not availing abatement then
Service provider is liable to pay Service tax on 50% and on rest
Service receiver is liable to pay on rest under Reverse charge

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 mechanism. However if Service provider is availing abatement then
Service receiver is liable to pay 100% of service tax payable on abated
value.
ii. On service portion in execution of works contract service provider is
liable to pay service tax on 50% portion and on rest, service receiver is
liable to pay under reverse charge mechanism.17

10. IMPACT OF REVERSE CHARGE MECHANISM:

A direct impact of the reverse charge mechanism is that service recipient has to pay
service tax in place of service provider. Apart from this there are some other impacts
which could be due to reverse charge-
1) Service recipient paying service tax under reverse charge would not be eligible
to avail threshold exemption which is available to service providers up to Rs.
10 lakh of turnover.18 Thus the recipient would have to discharge service tax
even on one rupee of service received.
2) In case of 100% reverse charge scenario, the service provider will not be in a
position to use the input credits against the output liability. However, the
service recipient paying service tax under reverse charge would be eligible to
claim credit thereon.
3) In case of partial reverse charge scenario, a special dispensation has been
provided for the service provider under Rule 5B of the CENVAT Credit
Rules, 2004, which provides for refund of unutilised CENVAT credit.19
4) The provisions of partial reverse charge would also apply in respect of such
services where point of taxation is on or after 01-07-2012 under the applicable
rule, in respect of the service provider.20
5) Compliances on part of the service recipient would increase.

17
CA Jatin Gorver, Introduction to Reverse Charge Mechanism, available at http://taxguru.in/service-tax/all-
about-service-tax-reverse-charge-mechanism.html accessed on 4th March 2017.
18
Notification No. 33/2012-ST
19
Rule 5B of the CENVAT Credit Rules, 2004- “A provider of service providing services notified under sub-
section (2) of Section 68 of the Finance Act and being unable to utilise the CENVAT credit availed on inputs
and input services for payment of service tax on such output services, shall be allowed refund of such unutilised
CENVAT credit subject to procedure, safeguards, conditions and limitations as may be specified by the Board
by notification in the Official Gazette.”
20
CBEC Circular No. 162/13/2012-ST, dated 06-07-2012

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11. CONCLUSION:
The expression ‘reverse charge’ has been coined keeping in view the liability of
service recipient to pay service tax instead of service provider, and thereby reversing
the onus to discharge tax. The statutory provision, however, talks about liability of a
person other than the service provider to pay service tax’. Thus as long as service
recipient is that other person, the charge can be correctly termed as ‘reverse charge’.
Reverse charge mechanism in service tax (RCM) (Section 68 (2)) has been
introduced with effect from 1/7/2012. With its introduction, service receiver is also
liable to file return and pay service tax on the portion of service tax.
Motive of this change is mainly more tax compliance and increase tax revenue but it
is giving hardship to service receiver as if one’s liability for payment of
service tax under reverse charge is small amount like Rs. 1000 or Rs. 100, he has to
get registration under service tax act and pay service tax and file return.

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 BIBLIOGRAPHY
1. PRIMARY SOURCES:
1) Chapter V of Finance Act, 1994.
2) Service Tax Rules, 1994.
2. SECONDARY SOURCES:
A. BOOKS:
1) V.S. Datey, Service Tax, Taxmann, Delhi, 25th Edition, 2015.
2) S.S. Gupta, Service Tax: How to meet your Obligations, Volume 1,
Taxmann, Delhi, 2015.
3) Dr. Girish Ahuja and Dr. Ravi Gupta, Systematic Approach to
Taxation, Bharat Law House Pvt. Ltd., New Delhi, 32nd Edition, 2014.
4) Rohini Aggarawal, Service Tax: Law & Practice, Volume 1, ARX
Publishing House, Delhi, 13th Edition, 2015.
5) JK Mittal, Law, Practice and Procedure of Service Tax, Lexis Nexis,
Gurgaon, 32nd Edition, 2016.
6) V.S. Datey, Indirect Taxes: Law and Practice, Taxmann, Delhi, 28th
Edition, 2012.
7) Dr. Vinod K. Singhania and Dr. Monica Singhania, Students’ Guide to
Income Tax, Service Tax, VAT, Excise Duty, Customs Duty, CST,
Taxmann, Delhi, 51st Edition, 2014.
8) V.S. Datey, Service Tax Manual, Taxmann, Delhi, 15th Edition, 2010.
9) JK Mittal, Handbook of Service Tax Law, Lexis Nexis, Gurgaon, 5th
Edition, 2016.
10) CA Vineet Sodhani and CA Deepshika Sodhani, Master Guide to
Service Tax, Taxmann, Delhi, 3rd Edition, 2015.
11) Dr. V. Gaurishankar, Principles of Taxation, Wolters Kluwer (India)
Pvt Ltd., New Delhi, 2007.
12) Dr. Justice AR. Laksmanan, Taxation Laws, Universal Law Publishing
Co., New Delhi, 2015.
13) Dr. Girish Ahuja and Dr. Ravi Gupta, Practical Approach to Direct
nad Indirect Taxes: Problems & Solutions, Bharat Law House Pvt.
Ltd., New Delhi, 29th Edition, 2014.

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B. WEB SOURCES:
1) CA Jatin Gorver, Introduction to Reverse Charge Mechanism,
available at http://taxguru.in/service-tax/all-about-service-tax-reverse-
charge-mechanism.html
2) CA Kamlesh Singh Chauhan, Reverse and Partial Charge Mechanism
in Service Tax, available at http://taxguru.in/service-tax/reverse-
charge-partial-reverse-charge-mechanism-service-tax.html
3) Raja Babu, Service Tax Reverse Chart WEF 01.06.2016, available at
http://www.simpletaxindia.net/2016/05/service-tax-reverse-charge-
chart-wef-01.06.2016.html#axzz4aOK53CgH accessed on 3rd March
2017.
4) http://www.cbec.gov.in/htdocs-servicetax/ecs-st/reverse-ch-
mechanism/reverse-ch-mech-ecs-cases-idx
5) Reverse Charge in Service Tax, available at
http://www.cbec.gov.in/htdocs-servicetax/ecs-st/reverse-ch-
mechanism/reverse-ch-mech-ecs-cases-idx accessed on 3rd March
2017.
6) Jigar Shah, Service Tax: Reverse Charge Mechanism, available at,
https://icaiahmedabad.com/Jigar-Shah-19-10-2013-Final.pdf, accessed
on 28th February 2017.
7) Applicability and Procedure of Service Tax under Reverse Charge,
available at http://www.caclubindia.com/articles/applicability-
procedure-of-service-tax-under-reverse-charge-21184.asp accessed on
1st March 2017.
8) Gandhi & Gandhi, Reverse Charge Mechanism under Service Tax,
available at http://www.gandhis.com/wp-
content/downloads/2015/05/ReverseChargeMechanism.pdf accessed
on 2nd March 2017.
9) Reverse Charge Mechanism in Service tax, available at
http://taxmasala.in/reverse-charge-mechanism/, accessed on 2nd March
2017.

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