Reverse charge mechanism on job woker

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

31 December 2012 Dear CCI Memebers

ONE PVT LTD COMPANY SENDS RAW MATERIAL TO JOB WORKER FOR PROCESSING.
THE COMPANY DEDUCT TDS U/S194C WHILE MAKING PAYMENT
IN THE BILL JOB WORKER MENTION "LABOUR CHARGES ONLY PROCESS AGAINST PARTY SUPPLIED MATERIAL"
MY QUESTION IS WHETHE THE PVT LTD COMPANY HAVE TO DEDUCT S TAX UNDER REVERSE CHARGE,IF SO WHAT PERCENTAGE & IS CENVAT CREDIT AVAILABLE FOR THAT.

Querist : Anonymous

Querist : Anonymous (Querist)

02 January 2013 Dear CCI Memebers ONE PVT LTD COMPANY SENDS RAW MATERIAL TO JOB WORKER FOR PROCESSING. THE COMPANY DEDUCT TDS U/S194C WHILE MAKING PAYMENT IN THE BILL JOB WORKER MENTION "LABOUR CHARGES ONLY PROCESS AGAINST PARTY SUPPLIED MATERIAL" MY QUESTION IS WHETHE THE PVT LTD COMPANY HAVE TO DEDUCT S TAX UNDER REVERSE CHARGE,IF SO WHAT PERCENTAGE & IS CENVAT CREDIT AVAILABLE FOR THAT.

Read more at: https://www.caclubindia.com/experts/modify_message.asp?entry_id=579619

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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22 July 2025 Scenario:
One Pvt Ltd sends raw materials to a job worker for processing.

The job worker bills for labour charges only (i.e., processing charges, no material cost).

Pvt Ltd deducts TDS under section 194C (for contract labour/service).

Your question:

Does Pvt Ltd have to pay Service Tax under Reverse Charge on the job work charges?

If yes, what is the applicable percentage?

Is CENVAT Credit available on that?

Answer:
1. Applicability of Reverse Charge on Job Work Charges
Job Work under Service Tax:
Under Service Tax (before GST era), job work services are covered under the category "Works Contract Services" or "Processing and Manufacturing Services" depending on the nature.

Reverse Charge Mechanism (RCM):
Service Tax reverse charge was applicable on specified categories of services where the recipient of service (Pvt Ltd here) is liable to pay tax instead of the service provider (job worker).

For job work services, the reverse charge was not generally applicable unless notified specifically.

However, there is a special case in Service Tax laws:
If the job worker is an unregistered person, then the principal (recipient) was liable to pay Service Tax under reverse charge on the job work service.

If the job worker is registered and paying Service Tax normally, then reverse charge generally does not apply.

The fact that the bill states "labour charges only process against party supplied material" indicates this is purely a service (job work) with no supply of goods by the job worker.

2. Applicable Rate of Service Tax
Before GST, Service Tax on processing and job work services was levied at the standard rate of 12% (later increased to 14% and then 15%).

The percentage under reverse charge, if applicable, would be the same rate as the regular service tax rate.

3. CENVAT Credit Availability
If Pvt Ltd pays Service Tax under reverse charge, they are entitled to take CENVAT credit on the amount of service tax paid, subject to the normal CENVAT credit rules.

This is an advantage because the recipient is paying the tax but can claim credit if the input service is used for taxable output.

Summary:
Question Answer
Does Pvt Ltd pay Service Tax under reverse charge? Yes, if the job worker is unregistered. Otherwise, No.
What percentage? The standard service tax rate (e.g., 12% or prevailing rate).
Is CENVAT credit available? Yes, if Service Tax is paid under reverse charge.

Additional Notes:
Since you mentioned TDS under 194C is deducted, that is unrelated to Service Tax. TDS is income tax deduction on payments for contract services.

Ensure to check whether the job worker is registered under Service Tax. If registered, Pvt Ltd pays Service Tax normally as part of the job worker’s invoice.

If job worker is unregistered, Pvt Ltd has to pay Service Tax on reverse charge and take credit accordingly.

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