Joint Charge Mechanism

Introduction:

The new service tax law based on negative list taxation was effective from 1^st of July 2012. Though there are a number of aspects and issues under the same, one of the main issues of concern is about the joint charge mechanism. 

The object of introducing this mechanism was to ensure that there was a proper collection of tax while at same time not inconveniencing small business people. Both these aspects in the view of the paper writer have not been met and has introduced avoidable confusion and large scale non compliance. Of course it would pave the way for some unscrupulous consultants outside and inside the revenue department to make merry. It is a fact that the revenue department is riddled with corruption and this would provide an additional handle to harass and extort/ extract the uneducated small service providers. This mechanism had shifted the liability of payment of service tax from service provider to recipient in case of smaller service providers while not absolving the small SP. It is a considered as a revenue augmentation as now the small service provider who is below Rs. 10 lakhs would not charge on his portion but the receiver would have to pay irrespective of that fact. 

What is Joint Charge Mechanism

Under the concept of joint charge, for one service the service provider as well as service receiver are made liable for payment of service tax to the extent notified. This liability is independent of the other person’s liability. In other words the failure to comply with the provisions by one person on his part would not impact the compliance requirement of other person and vice versa.

Effective 01st July 2012 who are all covered under Joint Charge Mechanism

Similar to the reverse charge the same Notification No. 30/2012-ST dated 20.06.2012 as amended by Notification No.45/2012-ST dated 7.08.2012 deals with even joint charge as well. As per the said notification, the cases in which the joint charge would be applicable and to what extent is provided below :

It may be noted that LLP is considered as Body corporate as well as partnership technically.

As a consequence of the joint charge mechanism, the specified service recipients who are not at all providing any taxable service would also be liable to register under service tax and pay service tax for the services received. This would add additional compliance to such companies/corporate bodies. Traders who get works contract services would now require to register, pay the joint charge, file returns and be subjected to audit.

Other relevant aspects

While following the reverse charge or joint charge mechanism the following aspects are relevant.

a. The quantum of service tax to be displayed in Invoice/Bill/Challan: The relevant service provider has to comply with Rule 4A of Service Tax Rules, 1994. According to Rule 4A(1)(iv) the Service Tax is payable on the description and value of taxable service provided or agreed to be provided and displayed in invoice.

b. The service recipient is liable to pay service tax irrespective of the fact whether the service provider was exempted or not by virtue of small service provider exemption under Notification No. 33/2012-ST dated 20.06.2012. In other words even if the total value of service provider is less than 10 lakhs the service recipient wherever liable to pay service tax has to pay tax.

c. The exemption if any available to service provider (other than small scale service provider exemption) can also be availed by the service recipient. For eg. if the works contract is for construction of public road, then service recipient need not pay service tax.

d. The service recipient is given freedom to choose the methodology of computation of tax in case of works contract irrespective of the service provider’s option to pay tax.

e. The service recipient is eligible to claim CENVAT Credit of service tax paid by both the service provider if any and also recipient by himself, subject to eligibility under CCR, 2004.

f. The service tax has to be paid by the service recipient on making payment to service provider if the payment is made within six months from the date of invoice. If it is not so paid the liability would be considered to have been arisen when the invoice for the service is raised or if it is delayed beyond the period of 30 days from completion of service the date of completion of service would be considered. In such cases the recipient would be liable to pay interest for the delay.

FAQ’s:

1. Which are the services for which the joint charge mechanism is applicable?

The mechanism is applicable to services provided or agreed to be provided by way of:

a. Renting of a motor vehicle designed to carry passengers on a non-abated value to any person who is not engaged in similar line of business.

b. Supply of manpower for any purpose or security services.

c. Service portion in execution of works contract.

2. What is status of service provider and service recipient when services are covered in joint charge mechanism?

Service provider located in taxable territory should fall under any one of the following categories-

a. Individual.

b. HUF.

c. Partnership firm, whether registered or not.

d. Association of persons. And service recipient should be a business entity body corporate located in taxable territory.

Thus nature of service and the status of both service provider and service receiver are important to determine applicability of joint charge mechanism.

3. Whether the service tax liability of service receiver -company in respect of manpower supply services can be paid by the service provider?

No, the liability to specified extent of service tax liability of business entity company(of 75%) of total service tax payable) has to be borne by company itself. The service provider individual, firm etc cannot collect service tax from the recipient and pay to Government.

4. Whether the service receiver body corporate business entity having a service tax registration needs to take a fresh registration for paying service tax under joint charge mechanism?

No. The company can pay service tax in its existing registration. Not needed to take a fresh registration under service tax as a recipient of service under joint charge mechanism.

5. What does a service provider need to indicate on invoice when he is liable to pay only a part of liability under joint charge mechanism?

The service provider has to issue an invoice complying with Rule 4A of Service Tax Rules , 1994. Thus the invoice shall indicate name, address and registration number of service provider, name and address of person receiving taxable service, the description and value of taxable service provided or agreed to be provided and the service tax payable thereon. The invoice could indicate as a precaution by way of a note in invoice that service recipient is also under an obligation to deposit the specified percentage of service tax payable by him directly to Government.

6. What is Point of Taxation for recipient of Service?

The Point of taxation for persons who are required to make a payment as a recipient of service shall be date on which the payment is made. This would be applicable only if invoice payment is made within 6 months of date of invoice. If payment is not made within 6 months of invoice date then point of taxation is date of invoice.

7. What is point of taxation for recipient of service when invoice issued in July 2012 and paid in August, 2012?

When the invoice is issued in say July, 2012 and service recipient pays for same in August, 2012 the point of taxation for service recipient is date of payment in August, 2012.  The service recipient would need to pay tax to extent of liability by 5^th/6^th of September,2012.

8. What is point of taxation for service provider when invoice issued in July, 2012 and paid in August, 2012?

When the invoice is issued in say July, 2012, the point of taxation for service provider is date of invoice in July, 2012. The service provider is required to pay tax by 5^th/6^th of August, 2012 or 5^th/6^th October, 2012 depending whether he is a individual/ or proprietary firm or partnership firm or association.

9. How to compute value of services received by service recipient in case of works contract of original works, where actual value of transfer of property in goods is not determined?

The service recipient has to discharge service tax liability based on payments made to service provider.  The costs of free issue materials supplied by service recipient to service provider is required to be included in value of relevant services, if presumptive method of paying service tax on 40% of total amount charged is followed under Rule 2A of Valuation Rules.

10. Whether service tax liability arises to service recipient body corporate under joint charge in respect of housekeeping service, done by individual contractor?

Yes, liability can arise to extent of 75% of total service tax payable under manpower supply service only if the labourers are working under superintendence or control of the service recipient body corporate.

11. Whether service tax liability arises to service recipient construction company under joint charge when it engages daily wage workers on a piece rate basis?

If the labourers are engaged on daily wages or measurable work basis then they could be considered as providing services in course of employment. These are services which are provided as an employee of company. This is not a manpower supply service. Therefore, excluded from definition of service

12. Whether service tax liability arises to service recipient company under joint charge  when  sole proprietary concern providing security services  deploys its persons at company office to provide security services to client?

Yes, this would be liable to service tax to extent of 75% of service tax liability as the services are not provided by the security guards to the recipient company in course of employment with company. The security services agency is engaged in providing security services and merely 25% liability to be borne by it under joint charge.

13. Whether service tax liability arises to service recipient company  when a pure labour jobs such as excavation, removing underbrush is done by a contractor being a partnership firm?

No, pure labour job done in relation to construction by contractor is not liable in hands of recipient. The liability arises to extent of 50% of tax payable only when the works contract by way of a comprehensive contract of material plus labour works is executed by such a contractor for the recipient company.

14. Whether service tax liability can be paid by recipient under joint charge mechanism by utilizing Cenvat credits?

No, payment has to be done in cash/cheque/e-payment. There is a specific restriction that CENVAT credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient.

15. Whether liability of service provider and service recipient are independent of each other?

Yes, the service tax liability is independent and different from each other.  The service tax liability of the service provider and the service recipient is to the specified extent alone.

16. If the service provider is exempted as it is a small service provider how joint charge would work?

If the service provider is availing exemption due to turnover being less than Rs 10 Lakhs he is not required to pay any tax.

17. Whether there is any impact of the availment of small service provider exemption by service provider on the service recipient?

A particular service provider may avail the small service provider exemption limit of Rs 10 Lakhs by notification no.33/2012-ST dated 20.6.2012. This availment of exemption by the service provider does not give any relief to service recipient. Discharge of service tax liability by service provider is not made a pre-condition for discharge of service tax liability by service recipient. Service recipient has to discharge the service tax liability even when the threshold exemption is availed by service provider.

18. Whether a body corporate business entity engaged solely in manufacture of exempted goods such as manufacture of breads needs to take a service tax registration to pay service tax on rent a cab service where amount paid less than Rs 1 Lakhs pa?

Yes, as there is no monetary limits for specified services received as a renting of motor  vehicles  designed to carry passengers. They have to register and pay.

19. Is there any monetary limit of exemption when service tax liability is discharged on joint charge mechanism on works contract services?

No, there is no monetary limit when the service tax liability is discharged by the recipient of service under joint charge mechanism.

20. Whether joint charge is applicable on services provided and completed before 1.7.2012 though payments made after 1.7.2012?

For any services whose point of taxation was determined and whole liability affixed before 1.7.2012 the new provisions would not apply. Merely due to reason that the payments are made after 1.7.2012 would not add any additional liability on service receiver in respect of such services.

21. Would credit of service tax paid on services of construction of building by individual contractor  be available to a service recipient company engaged in manufacture of excisable goods?

No, as input services credits in relation to setting up of a factory would not be available to manufacturer of final products after amendment in input services definition wef 1.4.2011.

22. Whether refund of Cenvat credits to a service provider providing services taxed on joint reverse charge basis is available?

A provider of service providing services notified under sub-section (2) of section 68 of the Finance Act and being unable to utilise the CENVAT credit availed on inputs and input services for payment of service tax on such output services, shall be allowed refund of such unutilised CENVAT credit subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette. This may be available only to persons who are discharging liability under joint charge mechanism.

Madhukar N Hiregange FCA

Acknowledgements to CA Prateek Marlecha for assisting in this article.