Reverse Charge Mechanism under Service Tax
Introduction:
• Generally, liability to pay service tax is of the person providing taxable services, so service provider collects service tax from the service receiver and deposit the same with the Central Govt. in the prescribed manner.
• But in certain cases the liability to pay tax has been shifted on the service receiver, such liability of service receiver is popularly termed as Reverse Charge of Service Tax.
• Reverse charge is not a new concept in service tax, but yes, it has been almost revamped w.e.f. July 1, 2012.
• The purpose of reverse charge provisions has been to prevent the leakage of government revenue by making some other person (generally service receiver) liable for paying service tax. In other words, Govt want to apply the provision of somewhat like TDS in service tax so that the avoidance of service tax could be minimized.
Statutory Provisions:
• As per Sec 68(1) of the Finance Act, 1994 every person providing taxable services shall pay service tax at the rate specified in sec 66B.
• But Sec 68(2) empowers Central Govt. to make any other person liable to pay service tax, meaning thereby that service receiver or any other person may also be made liable to pay tax.
• Further w.e.f July 1, 2012, a new proviso has been added to Sec 68(2) providing that notification issued by Central Govt can also prescribe that a part of service tax to be paid by service receiver and balance by the service provider, popularly known as Joint Charge or Partial Reverse Charge Mechanism. This concept of Joint Charge is important amendment made and somewhat a new mechanism.
• New Provisions relating to Reverse charge are contained in Notification No. 30/2012-ST dated 20.06.2012 read along with Notification No,.45/2012-ST dated 07.08.2012.
Reverse Charge-Position after July1, 2012:
• Till June 30, 2012 six services were covered under reverse charge mechanism i.e. Sponsorship, Goods transport agency services, services by insurance agent and mutual fund agent, certain telecommunication services, import of services.
• But now, w.e.f .July 1, 2012 some of them have been deleted and certain new services have been added. After the changes, by Notification No. 30/2012 dated 30.06.2012 and Notification No. 45/2012 dated 07.08.2012 the picture of Reverse Charge looks like that as shown by the table given below.
Reverse Charge Provisions at a glance
|
S. No. |
Description of Service |
Service provider |
Service receiver |
Person liable to pay ST |
Other points |
|
1. |
Services provided by an insurance agent to any person carrying on insurance business(insurance includes re-insurance) |
Insurance Agent |
Insurance Co. |
100% ST to be paid by insurance co receiving services from agents |
………..NA……. |
|
2. |
Services provided by Goods transport Agency in relation to transport of goods |
Goods transport Agency |
If consignor or consignee who is among the seven persons viz. a factory, registered society, dealer registered under central excise ,body corporate, partnership firm, Association of Person. |
Liability to pay ST is on the person who is liable to pay freight to GTA either himself or through his agent. If both consignor and consignee are not among those seven persons then liabilities to pay ST is on goods transport agency itself and no reverse charge in that case. |
Service receiver if liable to pay ST under reverse charge required to pay ST only on 25% of value of service provided GTA is not availing Cenvat Credit…if GTA availing such credit then service receiver is required to pay ST on 100% value…i.e. no benefit of abatement notification. |
|
3 |
Sponsorship Services |
Any person |
Anybody corporate or partnership firm located in the taxable territory(whole India except J&K) |
100% ST to be paid by the sponsor(service receiver) |
If service receiver is located outside India or in J&K then it is service provided outside taxable territory so not liable to service tax as per Place of Provision f Service Rules, 2012. Eg.-Pepsi IPL, here IPL is being sponsored by Pepsi and in return IPL making Pepsi's publicity , so service receiver is Pepsi and service provider is IPL....therefore under RCM liab to pay ST is of Pepsi... |
|
4 |
Services provided by Arbitral Tribunal |
Arbitral Tribunal |
Business Entity [As per Sec 65B (17), Business entity means any person ordinarily carrying on business/profession.] |
100% ST payable by service receiver under reverse charge scheme. |
Services provided by Arbitral Tribunal is exempt under Mega Exemption notification No. 25/2012-ST dated 20.06.2012 in two cases: 1. If services provided by Arbitral Tribunal is to a non-business entity (like Charitable Trust, Sec 25 company) 2. If services are provided to a business entity having turnover Rs. not exceeding Rs. 10 lacs in previous financial year. |
|
5. |
Legal Services provided by Advocate or Advocate firms |
Individual Advocate or Firm of Advocates |
Business entity having turnover of more than Rs. 10 lacs in the previous financial year, located in taxable territory |
100% ST payable by service receiver under reverse charge scheme. |
Services provided by Advocate or Advocate firms are exempt under Mega Exemption Notification No. 25/2012 in following two cases: 1. If such services provided to Non-Business entity. 2. If such services provided to a Business entity having turnover not exceeding Rs. 10 lacs in previous financial year. |
|
6. |
Services provided by Non-executive Directors (added by Notification No.45/2012) |
Non Executive Director(includes independent directors) |
Company |
100% ST payable by company under reverse charge scheme |
Directors required to obtain registration under Service Tax Law only after the aggregate value of taxable services provided by them exceeds Rs. 10lacs. Further, Directors required to issue invoice like all service providers in the manner prescribed in Rule 4A of Service tax Rules, 1994. |
|
7. |
Support Services by Govt or Local Authority |
Govt .or Local Authority |
Business entity located in taxable territory |
100% ST payable by service receiver under reverse charge scheme. |
Such support services shall exclude services of renting of immovable property and negative list covered services- postal, aircraft &vessel and transport of goods and passengers services provided by Govt. |
|
8. |
Service provided by way of renting/hiring of a motor vehicle meant for carrying passengers |
Individual, HUF, Partnership firm or AOP located in taxable territory |
Business entity registered as Body Corporate located in taxable territory. (For Service tax law purpose, Body Corporate means a company including foreign company and LLP) |
(i) Service receiver liable to pay only on 40% value (ii)Service provider- NIL if he is not availing Cenvat credit, but if availed Cenvat credit then liable to pay ST on 60% value. |
(i) If services provided to Non-Business entity then liability to pay 100% ST is of service provider. (ii) Similarly, if services provided by Company, LLP then the liability to pay ST is of these service providers. |
|
9. |
Services provided by way of Supply of Manpower |
Individual, HUF, Partnership firm or AOP located in taxable territory |
Business entity registered as Body Corporate located in taxable territory. |
ST on 25% of value to be paid by service provider and on balance 75% value by service receiver. |
………..NA……. |
|
10. |
Services provided by way of security services (actually added by Notification No.45/2012 to point No.9 itself) |
Individual, HUF, Partnership firm or AOP located in taxable territory |
Business entity registered as Body Corporate located in taxable territory. |
ST on 25% of value to be paid by service provider and on balance 75% value by service receiver. |
………..NA……. |
|
11. |
Services provided (service portion) in execution of works Contract |
Individual, HUF, Partnership firm or AOP located in taxable territory |
Business entity registered as Body Corporate located in taxable territory. |
Tax on 50% value to be paid by service provider and 50% by service receiver. |
………..NA……. |
|
12. |
Services provided by any person which is located in a non –taxable territory i.e. J&K or outside India(import of service) |
Any person located in non-taxable territory |
Any Person located in taxable territory |
100% ST to be paid by service receiver receiving (importing) services. |
If services provided by any person which is located in a non –taxable territory to any person who is also located in non-taxable territory,….then there is no question of service tax in India. |
Some frequently asked questions on Reverse Charge Mechanism:
Q- 1 Is service receiver liable to get registered under Service tax Law?
Ans-Yes, service receiver liable to obtain registration because as per Sec 69 of Finance Act, 1994, every person liable to pay service tax is liable to get registered.
Therefore, service receiver need to make an application for registration in Form ST-1 within 30 days of becoming liable to pay tax under reverse charge mechanism.
Q-2 Service receiver wants to take benefit of small scale service provider exemption Notification No, 33/2012, can he do so while discharging his service tax liability under reverse charge mechanism?
Ans- No, the service receiver cannot take the benefit of SSP exemption while discharging service tax liability under reverse charge because Notification No. 33/2012-ST dated 20-06-2012, specifically deny the same. Therefore, service receiver liable to pay tax from Re. 1 itself.
Q-3 Whether service receiver can pay Service Tax by utilizing Cenvat Credit?
Ans- No, Explanation to Rule 3(4) of Cenvat Credit Rules,2004 provide that service receiver cannot utilise the cenvat credit for paying service tax under reverse charge scheme, so tax to be paid by cash only. However, under Rule 9(1)(e) of Cenvat Credit Rules,2004 , service receiver can claim the credit of service tax paid under reverse charge if the services so received can be termed as input services as per Rule 2(i) of Cenvat Credit Rules.
Q-4 Does partial reverse charge applicable to all service providers and receiver?
Ans- No, partial reverse charge only applicable in case of specified services like Manpower Supply, Security services, Works Contract etc.
Further for partial reverse charge to be operational three conditions need to be existing:
(i) service provider to be individual, HUF, firm, AOP etc
(ii) service receiver to be business entity registered as body corporate ,
(iii) Both service provider and service receiver should be located in taxable territory.
If anything of the above three conditions is missing, then liability to pay tax is of that of service provider and no partial reverse charge will apply.
Q- 5 How is the service receiver required to calculate his tax liability under partial reverse charge mechanism? Will he required to follow the service provider to see what valuation and abatement options has been exercised by the service provider?
Ans- Explanation to reverse charge notification provides that tax liability of both service receiver and provider are different and independent of each other. So, service receiver can independently avail or forego abatement or may choose a valuation option different from service provider.
Q-6 What is Point of taxation for service tax liability under reverse charge mechanism?
Ans – As per Rule 7 of Point of Taxation Rule 2011, point of taxation under reverse charge would be the date of payment provided payment is made within 6 months from the date of completion of service otherwise point of taxation will be date of completion of service.
But in case of partial reverse charge mechanism, the point of taxation for service receiver is as per Rule 7 of POT, 2011(as above) but the liability of service provider is as per Rule 3 of POT, 2011…where Rule 3 provides the point of taxation to be the earliest of date of invoice or date of payment if the invoice issued within 30/45 days of date of completion of service, otherwise the point of taxation would be date of completion of service.
Q- 7. Under what code service tax on the services under reverse charge are to be deposited by services receiver?
Ans- From July1 2012, one Accounting code head for every service has been notified. So these accounting codes are to be used to deposit service tax for respective services whether deposited by service provider or under reverse charge by service recipient.
Conclusion-
The new reverse charge mechanism seems to reversing the hope of small assessees (particularly small companies and LLPs), making small assessees liable for somewhat a big compliance. So, some practical complexities will naturally arise in accounting, record maintenance and filing proper returns. But, insertion of new provisions, making amendments and then amending those amendments is the inherent in any typical law and service tax is not the exception. Every time a new amendment is brought therein, a new era of disputes begins. This time also there is no difference.
Thanks for reading.
Your queries, comments and suggestions are most welcomed.
The author can also be reached at saurabhchokhra92@gmail.com
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