Reverse Charge Mechanism In Service Tax- An Overview

REVERSE CHARGE MECHANISM OF SERVICE TAX (RCM)

With effect from 1-7-2012, the central government has notified the new partial reverse charge mechanism for the payment of service tax in respect of certain taxable services. the present write up tries to make an investigative study of this new scheme.

The Liability To pay service Tax:

Service tax is an indirect tax, where the service provider has to collect the tax from the service receiver and had to pay to deposit in to Government account. As per Sec68(1) of Finance act 1994, every person providing taxable service to any person is liable to pay service tax. Hence the liability to pay service tax is on the service provider. However an exception to the above said rule has been provided under sub section (2) of 68 of the Act., in terms of which the central government has the powers to notify services in respect of which even the service receiver shall be liable to pay service tax wholly or partially. This is termed as REVERSE CHARGE MECHANISM. Since in respect of some services both the service provider and service receiver are liable to pay service tax proportionately, it is termed as "partial reverse charge mechanism"

Services covered under partial reverse charge mechanism:

By the virtue of powers conferred under sub section(2) of Sec 68 of the Act, The Central Govt. has issued notification dated 1-7-2012 notifying the following services which shall be covered under the partial reverse charge mechanism. They are:

1. Insurance agent's Services.

2. Services Provided by a goods transport agency in respect of transportation of goods by road, where person liable to pay freight is:

3. Sponsorship services Provided to anybody Corporate or Partnership Firm located in Taxable Territory

4. Services of Arbitral Tribunal provided to any business entity located in India.

Here The term Business Entity has been defined Under Clause 17 of Sec 65B, which means any person carrying out any activity relating to Industry , Commerce or any other business or profession. Hence, even an Individual , a proprietary firm or partnership Firm shall be construed as a business entity if such person carries out any activities relating to Industry , Commerce or Profession.

5. Legal Services provided by Individual advocates or by a firm of Advocates to any business entity located In Indian Territory.

6. Support services Provided by Government or local authority to any business entity located in taxable territory , excluding the following:

1. Renting Of Immovable Property

2. Services of Department of Post, Express Post, Life Insurance and agency Services Provided to person other than Government.

3. Services in relation to an aircraft or a vessel.

7. Renting of a motor vehicles designed to carry passengers, to any person who is not in the similar line of business.

Excluding: Renting of motor vehicles to any person carrying similar line of business.

8. Supply of Man power for any purpose or Security Services.

9. Service Portion In the Execution Of Works Contract:

10. Services Provided By a person who is located In a non taxable Territory To any person located in the Taxable Territory.

Here there is no provision of whether service provided for Business purposes or not, Hence it is applicable to Trusts Registered U/sec  12 A Of Income Tax Act.

11.Services Provided By a Director of a company to the said Company:

Payment Of Tax Under Reverse Charge Mechanism:

Where Service tax is payable under reverse charge mechanism, it is required to be paid in cash only. In other words benefit of Cenvat cannot be availed for discharging the service tax liability on reverse charge mechanism.

Cenvat Credit on Service Tax paid on reverse Charge Mechanism:

Any service recipient paying the service tax under reverse charge mechanism may take the Cenvat credit of Service Tax paid by him and utilize the same towards the discharge of Central Excise Duty payable on Manufacture of Final Products or towards payment of Service Tax on Other Output Services., on the basis of Copy of GAR-7 Challan.

Threshold exemption of Upto Rs.10 Lac is not applicable:

By Virtue Of notification 33/2012 , the aggregate value of taxable services upto Rs. 10lacs has been  exempted from service Tax., However, it has been provided that the benefit of the threshold exemption is not applicable to those cases where the service tax is payable under reverse charge mechanism. As Per the Proviso to the said Notification, the benefit of threshold exemption does not apply to such value of Taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub section (2) of Section 68 of the Act. A plain reading of the above said provision suggests that the benefit of threshold exemption is not applicable in respect of services specified under notification No.33/2012,irrespective of whether the service tax is payable, wholly or partially by the service provider or service receiver .    

Refund of Unutilised Cenvat Credit to Service Recipients:

The Central Government has inserted a new rule 5B under Cenvat Credit Rules, 2004, providing for the refund of the Service tax paid under reverse mechanism. According to this rule, if the Service provider is unable to utilize the Cenvat credit availed of Inputs and Input services, he shall be allowed refund of such un utilized Cenvat credit subject to safeguards, conditions and limitations.

It may be noted that the refund under the above rule is available for the Provider of service who pays service tax on reverse charge mechanism. In other words, the refund shall not be allowed to service recipients who pay service tax under reverse charge wholly or Fully..

Some Instances:

1. It may be noted that in respect of renting of motor vehicles, supply of man power or security services or works contract service provided by an Individual, or HUF, or Proprietary or partnership Firm, the reverse charge mechanism shall apply only if the service recipient is a business entity registered as body corporate. If the Service recipient is not a body corporate, the reverse charge shall not apply.    

2. In case of legal services provided by an individual advocate or a partnership of Advocated, reverse charge provisions shall apply even if the receiver of such service is an Individual , HUF, Proprietary firm or partnership firm. However, such service tax shall be liable only when the gross turnover of Service receiver exceeded Rs.10lac in the preceding Financial Year.

Summing Up:

Liability to pay service tax on the reverse charge mechanism is a unique feature of the service tax regime. The service recipient is liable to pay service tax without availing the Cenvat credit of the Inputs and Input services. However, He can claim the Cenvat credit paid as service receiver towards the payment of service tax on other Output services and Payment of Central Excise duty on manufacture and clearance of excisable goods.