Logic behind introduction of “Reverse charge mechanism in Service tax”

The basic logic behind introducing “Reverse Charge Mechanism” is that either the service providers of a particular sector are un-organised or they are situated in non-taxable territories or they are illiterate thereby not well versed with the service tax laws or they are in very large numbers. Therefore, the government finds it administratively more convenient and easy to collect service tax either fully or partially from the service recipient.

Further, in order to explain this with more clarity i would like to quote a very recent example, these days in cities like delhi, mumbai, etc there are a few service providers like Ola & Uber who are providing services of booking cabs through mobile application. These service providers do not own cabs rather they have just provided with a mobile application where a taxi driver who wants to get customers logs in to the application and on the other hand the customer who needs a cab logs in to the application and both the taxi driver and customer gets connected through the mobile application and service is provided. In this transaction the cab services are being rendered by the taxi driver but they are large in number therefore the administration was difficult and on the other hand if government had made the service receiver liable to pay service tax then also the same difficulty of administering large number of people would have been there, thereby government made a smart move and for the first time in service tax laws neither the service provider nor the service receiver rather a third party [i.e. the aggregator(Ola & Uber)] was made liable to pay tax through the latest budget i.e. it made an addition to the list and made the aggregator (i.e. Ola & Uber) liable to pay tax.

Therefore, the basic aim behind introducing reverse charge is to ensure better administration and for the same as per section 68(2) of the Finance act, 1994, government reserves a right make not only the service receiver liable to pay service tax rather any other person which the government may notify can be made liable to pay service tax but it has to be within the constitutional boundaries.

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