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Service Tax - Reverse Charge Mechanism

Written By Admin on Wednesday, 24 October 2012 | Wednesday, October 24, 2012


Reverse charge mechanism is which has been comes under lime light is nothing new for Service tax provide and service tax receiver. Under the reverse charge mechanism, the service receiver is liable to pay service tax instead of service tax provider. The service receiver will register himself with service tax authorities and file the required returns. The general exemption of Rs. 10 lacs is not available for that.

It is clear that the Negative list regime would bring additional revenue to the Government. From a business perspective, the service tax is more or less a pass through liability; however, the compliance requirements do have an impact on the business. Further, where there is tax, there are disputes, which add to the cost. Therefore, the point for discussion would be to examine whether this increased revenue comes at a cost of significantly greater compliance by industry.

In the new scheme effective from 1 July, 2012 this list has been further extended to 10 services and the newly introduced categories are services provided by:
  • arbitral tribunal or by individual or firm of advocates or specific services by government or local authorities to any business entity;
  • renting of passenger vehicles or manpower supply services by individual, Hindu undivided family or partnership firm to a body corporate;
There is yet another addition of two services to this list effective from 7 August, 2012
  • directors of companies;
  • security agencies, under certain circumstances.
The Government has issued Notification no 30-2012 dated 20/06/2012 where it has given complete list of services that are covered under reverse charge mechanism. There are certain services on which 100% service tax needs to be paid by Service Recipient and  in some instances wherein both service provider and service recipient needs to pay service tax as per percentage mentioned in the table below:-

Sr. No.
Description of service
Percentage payable by service provider
Percentage payable by service receiver
1
Insurance Agent
Nil
100%


Any service provided by insurance agents to insurance companies who is involved in the business of insurance will be liable for service tax without any exemption or amount limit.

2
Goods transport agency (Applicable to transport by road)
Nil
100%


The reverse charge is applicable only when consignor or consignee is a factory registered under factory act, registered society, co-operative society, any dealer registered for under central excise act, any body corporate or any partnership firm.

In case of goods transport agency, a person who is liable to pay freight shall be treated as person who receives the service.

3
Sponsorship
Nil
100%


Where service receiver is a body corporate or a partnership firm and service provider can be anyone..

4
Arbitral Tribunal
Nil
100%


Where service provider is arbitral tribunal and service receiver is a business entity having turnover more than Rs. 10 lacs in preceding financial year.

5
Support services by government or local authorities
Nil
100%
6

Hiring of motor vehicle to carry passenger on abated value
Nil
100%


Hiring of motor vehicle to carry passenger on Non-abated value
60%
40%


Where service provider is Individual/ proprietorship/ partnership/ HUF and service receiver is company registered under companies act 1956 or business entity registered as body corporate in taxable region.

The provisions are applicable to companies whether Indian companies or foreign companies. If they receive any kind of service by hiring of any vehicle they have to deduct service tax and register themselves with service tax authorities.

7
Individual Advocate
Nil
100%


Where service provider is individual advocate or firm of advocate and service receiver is a business entity having turnover more than Rs. 10 lacs in preceding financial year.

In case of advocate, they have to indentify which of their clients has turnover of more than Rs. 10 lacs and ask them to deduct and pay service tax and for others they have to pay service tax. It is also not clear what happen when the service receiver will not follow the provisions. In that case whether the service provider is liable for payment of taxes.

8

Supply of man power or security services (wide notification no 45-46 wef 7-8-12)
25%
75%


Where service provider is Individual/ proprietorship/ partnership/ HUF and service receiver is company registered under companies act 1956 or business entity registered as body corporate in taxable region.

9
Works Contracts
50%
50%


Where service provider is Individual/ proprietorship/ partnership/ HUF and service receiver is company registered under companies act 1956 or business entity registered as body corporate in taxable region.

In case of work contract services, if both service provider and service receiver is liable to pay tax then service recipient has option to choose the valuation method independent of service provider.

In works contract service there are two schemes one is composite scheme and other is paying on actual labour and services. 

The question is in a single works contract if the contractee and contractor choose different schemes for payment of service tax then how the ratio of 50% will be determined, will the contract be divided in two parts or any other criteria will be adopted? Some more clarifications are required in this regard from CBEC

10
Import of Services
Nil
100%

Any servicers provided by any service provider to any service receiver.

11
Services by director to company (wide notification no 45-46 wef 7-8-12)
Nil
100%

Whole time directors and Managing Directors of the companies are considered as employees of the company in which they are directors. The definition of service itself excludes services provided by the employees to employers. Hence, there is no service tax in respect of whole time directors and managing time directors  such employee directors. Service tax will apply only in case of non employee directors.

Director have to take service tax registration number from the government authorities in the case where reverse charge mechanism applicable.


However the government has issued the notification and made the reverse charge liable on some entities where turnover exceeds Rs. 10 lacs. In such cases that entities has to register itself with service tax authorities even the amount of service received from such persons is in hundred of Rupees. Once the person has registered under service tax, he has to file the return half yearly even if the taxable turnover is Nil.

The logic behind such a move on the part of the policy maker would be to curb tax evasion, which is prevalent in these sectors due to the reason that these are unorganised sectors as most of the service providers are individuals and small service firms. On the other hand, this a punitive provision for body corporate in keeping with the amount of administrative and accounting hassles involved in the process.

Followings are some of the questions which may come to our mind

Who is labile?

It is well clarified that only specified services falling under partial reverse charge mechanism Service provider shall be either any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory. Service recipient shall be business entity registered as body corporate located in the taxable territory. In the case where recipient is Partnership firm, the reverse charge mechanism will not be applicable in certain circumstances.

Does service tax applicable for all directors of a Company?
Whole time directors and Managing Directors of the companies are considered as employees of the company in which they are directors. The definition of service itself excludes services provided by the employees to employers. Hence, there is no service tax in respect of whole time directors and managing time directors such employee directors. Service tax will apply only in case of non employee directors.
 
Whether the Directors have to obtain registration ?
Yes. However the service provided by them was not a taxable service for the service rendered till 01 July 2012.

Whether the directors have to issue an invoice?
Every service provider must raise an invoice within 30 days of completion of the service.

What if the service provider is SSI?

Service provider is availing exemption owing to turnover b eing less than Rs. 10 lakhs then he shall not be obliged to pay any tax. In such a case, service recipient shall have to pay service tax to the extent of his service tax liability to the extent of percentage specified in above mentioned mechanism.

Point of taxation?

The service recipient, in terms of Rule 7 of the POT Rules, point of taxation is date of payment i.e. the invoice is issued, say in August 2012 and the service recipient pays for the same in September 2012 then point of taxation for the service provider will be the date of issue of invoice in August 2012 and the point of taxation for the service recipient shall be the date of payment in September 2012.

There may be question arise whether the service providers whose gross turnover is less than Rs. 10 lacs has to registered with service tax ? if they provide services mentioned under reverse mechanism.

According to our view, they are liable for service tax. In the reverse charge mechanism the service receiver has to deduct service tax without any monetary ceiling for service tax deduction.

Whether service provider need to register in all cases?

In case of service provider’s where 100% liabilities are lied on the service receiver, there is no liability on the service provider, in that case there is no need for the service provider to register with service tax authorities because no liability is accrue and arise on service provider.

Whether Service Receiver can pay Service Tax by utilizing CENVAT Credit?

No. It is well clarified in Explanation to Rule 3(4) of Cenvat Credit Rules, 2004 provides 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.” Therefore, Service Receiver has to make payment of Service tax in cash.




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