Reverse charge mechanism

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kulbir saini (Querist)
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29 June 2016 Dear Experts, Could you please guide me on below issue please?
Our top level managerial people have spent few expenses during official visit at abroad in foreign currency. The expenses are in the nature of hotel bills, motor car expenses, other miscellaneous purchases in foreign currency incurred in abroad through Credit Card. As per Rules of Service tax, if any expenses are incurred specifically by employee for their own use, Service tax thereon will not be allowed as Cenvat Credit. Now my issue is that, As we are making Credit Card payment in INR towards these expense incurred in foreign currency , do we need to pay service tax on these expenses under reverse charge?

Rupesh Jain

Rupesh Jain (Expert)
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29 June 2016 credit card issue the PVT ltd or LTD company then its liability to pay all service tax on the company, and you are not liable under RCM.

My answer is usefull for you, pls send like.

kulbir saini

kulbir saini (Querist)
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29 June 2016 SIR my question is that : A private limited company foreign expenses by traveling in foreign for business purpose and payment through credit cards. so 2 issues involved
1. Whether Credit card payment by director is allowed as expenses without supporting bills.
2. Whether RCM apply on company for foreign expenses , because of these expenses paid by indian and service by foreigner .

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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22 July 2025 In this scenario, you're dealing with two separate issues related to the Reverse Charge Mechanism (RCM) and service tax implications on foreign expenses paid by your company.

Let's break down the situation and address both concerns:

1. Whether Credit Card Payment by Director is Allowed as Expenses Without Supporting Bills?
Generally, supporting bills are required for claiming business-related expenses. The bills or invoices act as proof of the actual expenditure incurred. Without these, it can be difficult to justify the expense for Cenvat Credit purposes or tax returns. Specifically:

Credit Card Payments: Even though the payments are made via credit card, if they are for business-related expenses (e.g., hotel bills, motor car expenses, etc.), they should be supported by valid invoices or bills. The invoice is required to substantiate that the expenses were incurred for business purposes.

Reimbursement: If a director incurs an expense personally, and the company reimburses it, proper documentation (bills, receipts) is necessary for the reimbursement to be accounted for correctly.

So, in the absence of supporting bills, these expenses cannot be claimed as part of the company’s Cenvat Credit or tax returns.

2. Whether Reverse Charge Mechanism (RCM) Applies on Foreign Expenses Paid by the Company?
This is a key point of concern, so let's break it down:

Foreign Expenses: The payments in foreign currency for foreign services (e.g., hotel bills, car rentals) are not directly subject to GST/Service Tax in India, as they are services provided by a foreign supplier. However, if these services are provided by a foreign supplier to an Indian recipient, RCM may apply.

Service Tax Liability under RCM: The RCM is applicable on services imported into India. Specifically, foreign services such as hotel services or car hire services provided by foreign vendors (where payment is made in foreign currency) may attract service tax under RCM. Under the previous Service Tax regime, this was applicable for services like legal, consulting, or business-related foreign services.

Who Pays the Tax? The recipient of the foreign service, i.e., your company, would be liable to pay the service tax under RCM, even though the services are provided by a foreign entity. The tax would need to be paid at the rate applicable in India, and you can also claim Cenvat Credit on the same, if the expenses are related to business activities.

Foreign Credit Card Payments: When you make payments through a foreign credit card, the foreign entity (issuer of the card) will provide you with an invoice in foreign currency, and you would have to convert that invoice to INR. You will then have to pay the applicable service tax under RCM.

Summary of Key Points:
Credit Card Payments: For expenses paid via credit cards, the company must have valid invoices to support these expenses for claiming Cenvat Credit. Without supporting invoices, the expenses cannot be treated as business expenses for tax purposes.

RCM on Foreign Expenses: Yes, Reverse Charge Mechanism (RCM) may apply for services incurred abroad, even though payments are made in foreign currency. If you are receiving services from foreign suppliers (e.g., hotel, car rental, etc.), service tax under RCM would need to be paid by your company in India.

You would need to pay tax on the value of services received, even if payment is made via foreign currency. The tax liability arises due to the fact that services are imported from a foreign entity.

This tax can be claimed as input tax credit (ITC) if the expenses are for business purposes.

What Should You Do?
Ensure You Have Proper Documentation: Obtain valid invoices or receipts for all expenses incurred during the official trip, especially for services received from foreign suppliers.

Pay Service Tax under RCM: If these services are subject to RCM, the company must account for and pay the service tax under RCM in India. The tax rate would depend on the specific service, but typically, it would be the standard 18% GST on the taxable value.

Claim ITC: If the expenses are for business purposes, the company can claim input tax credit (ITC) for the RCM-paid service tax.

Consult a Tax Professional: Given the complexity of international payments and GST implications on foreign services, it's advisable to consult a tax professional to ensure compliance with all requirements and optimize your company's tax position.

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