Reverse charge mechanism
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 September 2012
We are provider of works contract service . We sub contract some of our works ( only labor no material is involved ) whether service tax is applicable to us as per the new Reverse Charge Mechanism ? What is the rule applicable if the sub contractor is un registered ? what is the rate of tax applicable ? please guide us
We are provider of works contract service . We sub contract some of our works ( only labor no material is involved ) whether service tax is applicable to us as per the new Reverse Charge Mechanism ? What is the rule applicable if the sub contractor is un registered ? what is the rate of tax applicable ? please guide us
21 September 2012
First of all what you are sub contracting is not a works contract service. it will be charged to service tax.
If the subcontractor is not liable for service tax because of small service provider then you are not liable under reverse charge.
Service tax will be charged, if applicable to him, @12.36%
If the subcontractor is not liable for service tax because of small service provider then you are not liable under reverse charge.
Service tax will be charged, if applicable to him, @12.36%
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Querist : Anonymous
Querist :
Anonymous
(Querist)
25 February 2013
As an awarder how can I assure that my sub contractor is un registered ?
What proof we have to demand for proving that he is un registered because of small service ?
If the contractor is un registered but he is having required turnover for service tax registration in that situation whether any tax liability is applicable on the awarder ?
What proof we have to demand for proving that he is un registered because of small service ?
If the contractor is un registered but he is having required turnover for service tax registration in that situation whether any tax liability is applicable on the awarder ?
22 July 2025
The questions you’ve raised revolve around the application of Reverse Charge Mechanism (RCM) in a works contract scenario, particularly when the subcontractor is unregistered. Here’s a breakdown to clarify your doubts:
1. Reverse Charge Mechanism for Works Contract and Subcontracting
Under the Reverse Charge Mechanism (RCM), in cases of works contract services, the service recipient (i.e., the awarder of the contract) is liable to pay service tax if the subcontractor is unregistered and providing services.
Situation 1: Subcontractor is unregistered and a small service provider
If the subcontractor is a small service provider (i.e., their turnover is below the exemption limit of ₹10 Lakhs/₹20 Lakhs for GST or ₹10 Lakhs for service tax in some cases), they are exempt from registration.
RCM doesn't apply: Since the subcontractor is not liable for service tax due to their small turnover, you (the awarder) would not be required to pay service tax under the reverse charge mechanism. In this case, no tax liability arises for the awarder.
Situation 2: Subcontractor is unregistered but with turnover above the exemption limit
If the subcontractor’s turnover exceeds the prescribed exemption limit (for GST/Service Tax registration), the subcontractor should be registered for service tax purposes and liable to pay tax.
If the subcontractor is unregistered but liable to be registered (because of exceeding the turnover limit), then RCM is applicable to you (the awarder), as the subcontractor is providing services without registration but is still liable for tax. In this case, you must pay the service tax under RCM and recover it from the subcontractor.
2. How to Verify if the Subcontractor is Unregistered?
To determine whether your subcontractor is unregistered, you can follow these steps:
Step 1: Request Documentation from the Subcontractor
Ask the subcontractor to provide either:
A copy of their GST Registration Certificate or Service Tax Registration Number, if registered.
A declaration letter or a self-certification stating they are not registered under the GST or Service Tax Act because their turnover is below the threshold limit.
Step 2: Cross-check the Turnover
If you suspect the subcontractor might have exceeded the turnover limit and has not registered, you can ask for their financial statements or annual turnover details for the past year to confirm whether they should be registered for service tax/GST.
Step 3: Verify the Status
You can verify the GSTIN or Service Tax Registration Number with the GST portal or check whether they are part of the Taxpayer’s list in the GST Registration Status Check.
3. Tax Rate Under Reverse Charge Mechanism (RCM)
If RCM applies, the service tax rate would be 12% (this was the rate under the earlier service tax regime, and now under GST, it would vary depending on the type of service).
Under GST, a works contract service falls under the 18% GST rate (9% CGST + 9% SGST or 18% IGST for interstate transactions), but the RCM provisions under GST are slightly different than service tax provisions.
The rate for works contract services under GST (under Chapter 99 of the HSN code) is 18%, and the RCM will apply to services received from an unregistered supplier under certain conditions.
1. Reverse Charge Mechanism for Works Contract and Subcontracting
Under the Reverse Charge Mechanism (RCM), in cases of works contract services, the service recipient (i.e., the awarder of the contract) is liable to pay service tax if the subcontractor is unregistered and providing services.
Situation 1: Subcontractor is unregistered and a small service provider
If the subcontractor is a small service provider (i.e., their turnover is below the exemption limit of ₹10 Lakhs/₹20 Lakhs for GST or ₹10 Lakhs for service tax in some cases), they are exempt from registration.
RCM doesn't apply: Since the subcontractor is not liable for service tax due to their small turnover, you (the awarder) would not be required to pay service tax under the reverse charge mechanism. In this case, no tax liability arises for the awarder.
Situation 2: Subcontractor is unregistered but with turnover above the exemption limit
If the subcontractor’s turnover exceeds the prescribed exemption limit (for GST/Service Tax registration), the subcontractor should be registered for service tax purposes and liable to pay tax.
If the subcontractor is unregistered but liable to be registered (because of exceeding the turnover limit), then RCM is applicable to you (the awarder), as the subcontractor is providing services without registration but is still liable for tax. In this case, you must pay the service tax under RCM and recover it from the subcontractor.
2. How to Verify if the Subcontractor is Unregistered?
To determine whether your subcontractor is unregistered, you can follow these steps:
Step 1: Request Documentation from the Subcontractor
Ask the subcontractor to provide either:
A copy of their GST Registration Certificate or Service Tax Registration Number, if registered.
A declaration letter or a self-certification stating they are not registered under the GST or Service Tax Act because their turnover is below the threshold limit.
Step 2: Cross-check the Turnover
If you suspect the subcontractor might have exceeded the turnover limit and has not registered, you can ask for their financial statements or annual turnover details for the past year to confirm whether they should be registered for service tax/GST.
Step 3: Verify the Status
You can verify the GSTIN or Service Tax Registration Number with the GST portal or check whether they are part of the Taxpayer’s list in the GST Registration Status Check.
3. Tax Rate Under Reverse Charge Mechanism (RCM)
If RCM applies, the service tax rate would be 12% (this was the rate under the earlier service tax regime, and now under GST, it would vary depending on the type of service).
Under GST, a works contract service falls under the 18% GST rate (9% CGST + 9% SGST or 18% IGST for interstate transactions), but the RCM provisions under GST are slightly different than service tax provisions.
The rate for works contract services under GST (under Chapter 99 of the HSN code) is 18%, and the RCM will apply to services received from an unregistered supplier under certain conditions.
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