What is Time of Supply for Services on Reverse Charge

In our previous blog, we discussed Time of Supply for Services under the Forward Charge Mechanism. Under the reverse charge mechanism, the recipient or buyer of services has to pay tax to the credit of the government unlike forward charge, where the supplier has to pay tax to the government.
 

What is reverse charge mechanism?
Under the reverse charge mechanism, the recipient or buyer of services has to pay tax to the credit of the government unlike forward charge, where the supplier has to pay the tax. For example, on availing a transportation service, the recipient of the service has to pay service tax to the government.

Why reverse charge mechanism?
In order to ensure that the tax is collected on the sale of goods or services from various unorganised sectors, the government introduced the Reverse Charge Mechanism. Under this, the liability to pay tax rests with the service recipient. This has helped the government to track and tax those taxable services which were so far not traceable.

Impact of reverse charge mechanism
While this motive of government has contributed to increase in the tax revenue, it has also caused manifold impact on small service providers. A person providing taxable service should be registered under Service Tax if the taxable value of the services rendered exceed Rs 10 lakhs. However, a person liable to pay Service Tax under the reverse charge mechanism should be mandatorily registered. Due to this, he will be not be entitled to the exemption which is available to small service providers.
Secondly, the payment of Service Tax liability under the reverse charge mechanism is to be discharged in cash/bank. This implies that even if the business has input service tax credit or CENVAT credit, they cannot be used to discharge the tax liabilities of reverse charge mechanism, there by impacting the cash flow of the business.

Under Current Regime
Under the current indirect tax regime, on certain notified category of services, service tax needs to be paid on reverse charge basis. The burden of tax liability under reverse charge, depending on nature of service the liability is completely on the recipient of service or partially on the service provider and recipient of service.
Let us understand this with an example:
1. Complete Reverse Charge Mechanism
The entire liability to pay tax on taxable services is on the services recipient. The service recipient has to pay 100% of the tax liability to the central government. 
For example, Max Advertising Agency availed transportation services from S.L.V Transports for Rs 50,000. In Service Tax, ‘Transportation of Goods by Road‘ is covered under reverse charge and the service recipient is liable to pay the complete tax on the transportation service. Accordingly, on availing transportation services, Max Advertising agency has to pay Service Tax of Rs.7,500 (15% of Rs 50,000) to the central government.
2. Partial Reverse Charge Mechanism
The responsibility to pay tax is partly on the service provider and partly on the service recipient. The Service Tax is distributed between the service provider and service recipient, and both will be liable to pay service tax to the central government. 
For example, Max Advertising agency availed security services from 24/7 Security Agency. For the period of April, 24/7 Security Agency billed Max Advertising agency for Rs 1,00,000. Under Service Tax, ‘Supply of manpower for any purpose or security services’ is part of list of service under reverse charge, and both, the service provider and service recipient, are liable to pay tax in the ratio of 25:75%(25% on service provider and 75% by the recipient of services).
Accordingly, 24/7 Security Agency charged a service tax of Rs. 3,750 on 25% of the taxable service value i.e. Service Tax @ 15% on Rs. 25,000(1,00,000*25/100). And the remaining service tax of Rs. 11,250 on 75% of the taxable service value i.e. Service Tax @ 15% on 75,000 ( 1,00,000*75%/100) is to be paid by Max Advertising agency.
Let us understand the Point of Taxation (POT) on Reverse Charge

Earliest of the following

Date of payment

Earliest of date of payment entered in books of accounts or the date on which payment is credited to the bank accounts

3 months from the date of invoice

In case payment is not made by recipient to service providers within 3 months, the point of taxation will be the date immediately following the expiry of 3 months.

Let us understand with examples.

Date of Invoice

Date of Payment

Point of Taxation

Explanation

20th July, 2016

10th August, 2016

10th August, 2017

Date of payment is earlier than 3 months from the date of invoice

1st July, 2016

10th December, 2016

1st October, 2017

Since the payment is not made within 3 months, POT will be the date following the expiry of 3 months from the date of invoice i.e., 1st October, 2017

Under GST
In GST, determining the point of taxation is referred under ‘Time of Supply’ provisions. The determination of the time of supply for services under reverse charge in GST is much similar to the provisions of point of taxation under Service Tax, except that the payment window is reduced to 60 days from 3 months from the date of invoice.
A person liable to pay taxes under reverse charge mechanism requires mandatory registration. The impact of reverse charge on these business is expected to continue as well.
The liability of GST (CGST and SGST or IGST as applicable) will arise as shown below:

Earliest of the following

Date of payment

Earliest of date of payment entered in books of accounts or the date on which payment is credited to the bank accounts

60 days from the date of invoice

In case payment is not made by recipient to service provider within 60 days, the time of supply will the date immediately following the expiry of 60 days.

If for any reason, the above dates cannot be determined, then the time of supply will be the date of recording the supply in the books of the recipient.
Let us understand this with examples.

Date of Invoice

Date of Payment

Time of Supply of services

Explanation

20th July, 2017

10th August, 2017

10th August, 2017

The date of payment is earlier than 60 days from date of invoice. Hence time of supply will be 10th August, 2017.

1st July, 2017

10th September, 2017

30th August, 2017

In this case, 60 days from date of invoice is earlier than the date of payment. Hence time of supply will be 30th August, 2017.

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