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Reverse charge mechanism

aishwarya s raghavan (student) (224 Points)

20 December 2012

Dear All!

Please help me with this query..

My client (A Ltd) pays security charges to another B (Firm). With effect from 8th August, 2012 reverse charge applies and therefore while paying B, A Ltd should pay only 25% of the service tax amount and pay the balance 75% directly to the government. Also, A Ltd is eligible to take credit on this 75% of service tax amount only on payment basis. However, my client contends that his supplier B (Firm) raises 100% of service tax amount in the invoice. And A Ltd makes payment of the 100% of service tax to B who is now responsible to remit the same to government. My Query:

a) Is A Ltd eligible to take credit on the entire 100% of service tax which the Supplier (B) has raised in the invoice?

b) If Yes, does it hold good even when A Ltd has not made payment to B?

Thanks in Advance!

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5 Replies

CA Pintu Mishra (Chartered Accountant- Industry) (514 Points)
Replied 20 December 2012

The invoice raised by B ltd isnt in law however for the bills raised by B with 100% ST and if you have already paid the amount you can take ST credit in full which you had paid and B ltd shall pay entire St to the govt.

But as per new rules you should advice them to charge only 25% of ST and you pay 75% ST to the government and you are eligible for cenvat of 25% of ST which was charged by B ltd and 75% of ST which is directly paid by you to the govt when you make payment of this.

Advice is to go as per rules.

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Nirav Worah (CHARTERED ACCOUNTANT) (396 Points)
Replied 20 December 2012

Even if the service provider has paid entire service tax it cannot absolve the service reciever from payment of service tax. He has to discharge its service tax liability. It is advisable to go according the rules and the service provider and service recipient should discharge its share of service tax.

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Manoj Agarwal (Service Tax Consultant Rourkela ServiceTaxExpert@yahoo.com) (3456 Points)
Replied 30 December 2012

Agree with Neerav.

Since reverse charge has created a statutory liability on service receiver the same cannot be escaped by mutual agreement. Even if service provider B raises invoice with 100% service tax, A Ltd is still liable to pay tax on 75% of invoice value. Reverse Charge is not optional and 25/75 ratio must be followed. However, answering your querry:-

a) Yes, cevnat credit can be claimed on 100% of service tax as per invoice.

b) Yes, but if payment is not made within 3 months, the cenvat credit needs to be reversed.

Note: Please check with other Experts.

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Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 31 December 2012

The availment of credit on 100% paid to sec firm maybe disputes but available as per me.

Co needs topay 75% under reverse charge anyway and avail the credit on the same.

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vittakaushik (articles) (71 Points)
Replied 31 December 2012

The company can take cenvat credit of 100% of the service tax amount paid to the firm.

However the company has to pay 75% of the service tax amount to the department as the liability of the service provider and service receiver is independent in reverse charge mechanism.The company can avail cenvat credit of 75 % service tax paid also.

In nutshell the company can avail cenvat credit of both 100% and 75% service tax as the company has paid for it and security service is an eligible service(inclusive list).

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