Reverse charge mechanism
This query is : Resolved
20 January 2015
Contractor has paid Service tax on work done by Sub contractor,
the same is taken for input credit of service tax.
Now Assessing officer is saying that the sub-contractor has to pay the service tax and contractor has to apply for refund.
Are there any provision (judgements) saying that no need to pay by sub contractor.
the same is taken for input credit of service tax.
Now Assessing officer is saying that the sub-contractor has to pay the service tax and contractor has to apply for refund.
Are there any provision (judgements) saying that no need to pay by sub contractor.
20 January 2015
service tax liability of sub constractor also if his receipts rs. 10 lacs or more in year.
Message likes :
1 times
21 January 2015
thank you sir,
yes, sub contractor receipts are greater than Rs.10 lakhs.
can u please elaborate
yes, sub contractor receipts are greater than Rs.10 lakhs.
can u please elaborate
22 July 2025
In this case, you're dealing with reverse charge mechanism (RCM) and whether the sub-contractor or the main contractor is liable to pay the service tax.
Key Points of the Situation:
Main Contractor has already paid Service Tax on work done by the sub-contractor, and the main contractor has taken input tax credit (ITC) of the service tax paid.
The Assessing Officer (AO) is questioning the situation, stating that the sub-contractor should have paid the service tax and the main contractor should apply for a refund.
The sub-contractor's receipts are over Rs. 10 lakhs, making them liable to pay service tax under the reverse charge mechanism (if the service provided falls under RCM).
Legal Framework Under Reverse Charge Mechanism (RCM)
Under the reverse charge mechanism, certain services provided by sub-contractors are taxable under RCM. According to Notification No. 30/2012-ST dated 20th June 2012, the liability for service tax under reverse charge applies to services provided by certain categories of service providers (including sub-contractors) to the main contractor, if:
The service recipient is a company, partnership firm, or any other similar entity (who is required to pay tax on reverse charge).
The sub-contractor’s receipts exceed Rs. 10 lakhs, making them liable to pay service tax.
However, the application of RCM depends on whether the sub-contractor is providing services that fall under the scope of reverse charge under GST or the service tax regime.
Is the Sub-Contractor Liable to Pay Service Tax?
If the sub-contractor’s services fall under reverse charge mechanism, the main contractor is liable to pay service tax. The key question is whether the sub-contractor has discharged their service tax liability correctly.
Key Points to Remember:
Under RCM: If a sub-contractor is providing a taxable service, and the main contractor is the recipient of that service, the service tax is payable by the main contractor under RCM.
If the main contractor has already paid the service tax, it should be treated as discharged, and the main contractor should be eligible for input tax credit (ITC) based on that payment.
The sub-contractor's liability under RCM doesn’t arise if the main contractor has paid service tax under RCM.
Why Should the Sub-Contractor Not Pay Service Tax?
If the main contractor is liable to pay the service tax under RCM, the sub-contractor is not required to discharge the service tax, as the service tax responsibility shifts to the main contractor.
However, if the main contractor erroneously paid the tax or the tax was paid in excess, the main contractor may apply for a refund, not the sub-contractor. This applies if the main contractor has already paid tax but the sub-contractor should have accounted for it.
Refund and Input Credit (ITC)
If the sub-contractor paid service tax on the subcontractor's service (while RCM should apply), the main contractor can apply for a refund (if applicable), as they were the actual person responsible under the reverse charge mechanism.
Since the main contractor paid the tax on behalf of the sub-contractor, the input credit that was claimed can be adjusted, but the refund process would depend on the proper documentation showing that the service tax was wrongly paid or claimed.
Judicial Precedents and Clarifications
There are no specific judgments explicitly stating that sub-contractors should not pay service tax under the reverse charge mechanism, but the intention behind RCM is clear:
The main contractor is liable to pay service tax on services received from sub-contractors.
If the sub-contractor has paid service tax, but the reverse charge mechanism applies, the main contractor is liable to pay service tax on behalf of the sub-contractor.
The input tax credit (ITC) can be claimed by the main contractor, and if paid in error by the main contractor, they may be entitled to a refund.
In situations like these, where service tax has been wrongly paid, refund procedures should be followed by the main contractor.
Conclusion
Reverse charge mechanism applies to certain services provided by the sub-contractor to the main contractor.
The main contractor is responsible for paying the service tax under RCM, and if they have already paid it, they can claim input tax credit.
If the sub-contractor has paid tax on their services, refunds can be claimed by the main contractor, not the sub-contractor.
Ensure that the sub-contractor’s services fall under the reverse charge mechanism. If there are discrepancies, the main contractor should apply for a refund as per the procedures provided by the authorities.
Key Points of the Situation:
Main Contractor has already paid Service Tax on work done by the sub-contractor, and the main contractor has taken input tax credit (ITC) of the service tax paid.
The Assessing Officer (AO) is questioning the situation, stating that the sub-contractor should have paid the service tax and the main contractor should apply for a refund.
The sub-contractor's receipts are over Rs. 10 lakhs, making them liable to pay service tax under the reverse charge mechanism (if the service provided falls under RCM).
Legal Framework Under Reverse Charge Mechanism (RCM)
Under the reverse charge mechanism, certain services provided by sub-contractors are taxable under RCM. According to Notification No. 30/2012-ST dated 20th June 2012, the liability for service tax under reverse charge applies to services provided by certain categories of service providers (including sub-contractors) to the main contractor, if:
The service recipient is a company, partnership firm, or any other similar entity (who is required to pay tax on reverse charge).
The sub-contractor’s receipts exceed Rs. 10 lakhs, making them liable to pay service tax.
However, the application of RCM depends on whether the sub-contractor is providing services that fall under the scope of reverse charge under GST or the service tax regime.
Is the Sub-Contractor Liable to Pay Service Tax?
If the sub-contractor’s services fall under reverse charge mechanism, the main contractor is liable to pay service tax. The key question is whether the sub-contractor has discharged their service tax liability correctly.
Key Points to Remember:
Under RCM: If a sub-contractor is providing a taxable service, and the main contractor is the recipient of that service, the service tax is payable by the main contractor under RCM.
If the main contractor has already paid the service tax, it should be treated as discharged, and the main contractor should be eligible for input tax credit (ITC) based on that payment.
The sub-contractor's liability under RCM doesn’t arise if the main contractor has paid service tax under RCM.
Why Should the Sub-Contractor Not Pay Service Tax?
If the main contractor is liable to pay the service tax under RCM, the sub-contractor is not required to discharge the service tax, as the service tax responsibility shifts to the main contractor.
However, if the main contractor erroneously paid the tax or the tax was paid in excess, the main contractor may apply for a refund, not the sub-contractor. This applies if the main contractor has already paid tax but the sub-contractor should have accounted for it.
Refund and Input Credit (ITC)
If the sub-contractor paid service tax on the subcontractor's service (while RCM should apply), the main contractor can apply for a refund (if applicable), as they were the actual person responsible under the reverse charge mechanism.
Since the main contractor paid the tax on behalf of the sub-contractor, the input credit that was claimed can be adjusted, but the refund process would depend on the proper documentation showing that the service tax was wrongly paid or claimed.
Judicial Precedents and Clarifications
There are no specific judgments explicitly stating that sub-contractors should not pay service tax under the reverse charge mechanism, but the intention behind RCM is clear:
The main contractor is liable to pay service tax on services received from sub-contractors.
If the sub-contractor has paid service tax, but the reverse charge mechanism applies, the main contractor is liable to pay service tax on behalf of the sub-contractor.
The input tax credit (ITC) can be claimed by the main contractor, and if paid in error by the main contractor, they may be entitled to a refund.
In situations like these, where service tax has been wrongly paid, refund procedures should be followed by the main contractor.
Conclusion
Reverse charge mechanism applies to certain services provided by the sub-contractor to the main contractor.
The main contractor is responsible for paying the service tax under RCM, and if they have already paid it, they can claim input tax credit.
If the sub-contractor has paid tax on their services, refunds can be claimed by the main contractor, not the sub-contractor.
Ensure that the sub-contractor’s services fall under the reverse charge mechanism. If there are discrepancies, the main contractor should apply for a refund as per the procedures provided by the authorities.
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