Service Tax -Reverse Charge Mechanism

What is charging section?

Services are chargeable for service tax as per provision under section 66B but who will pay service tax has been given in section 68 of the Finance Act,1994, sub-section (2) of Section 68 speaks out as to liability to pay by service recipient. 

Sec 68 (2) is worded as follows:-

- “In respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

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How many services are covered Reverse Charge?

At present eleven services are covered under both Reverse charge & Partial/joint reverse charge vide Notification No:- 30/2012-ST, dated 20^th June 2012

è  Which are the services covered under reverse Charge?

Following services are covered:-  

S.No	Description of Services
1	Insurance Auxiliary Service
2	Sponsorship Service
3	Transport of goods by Road
4	(a)  Legal Service by Arbitral Tribunal to Business Entity (b)   Legal Service by Individual Advocate/firm of Advocate to Business Entity
5	Support Service by Government or local authority
6	Any Service provided by a person located in Non-Taxable territory to person in taxable territory
7	Any Taxable Service by Director to company
8	(a)  Renting or hiring of motor vehicle to carry passenger on abated value (b)  Renting or hiring of motor vehicle to carry passenger on non abated value
9	Supply of Manpower
10	Security Service
11	Work Contract Service

Under Full Reverse Charge	Under Partial/Joint Reverse Charge
Service tax on input service can be availed/utilized only after making payment of value of service & service tax to the Government account	(a)  Part of service tax on input service which paid by service recipient can be availed/utilized after making payment of value of service & service tax to the Government account
	(b)  Part of amount of service tax on input service which shall be collected & paid by service provider, as and when the invoice is received (refere Note-1)

Sl. No	Description of Service	Service Recipient (Body Corporate)	Service Provider (Individual, Firm, LLP)
1	Hiring of Motor vehicles designed to carry passenger (a)with abatement (b)without abatement	100%  40%	NIL 60%
2	Supply of manpower for any purpose	75%	25%
3	Works contract service	50%	50%

Description of a service	Service provider	Service receiver	Percentage of  service tax payable by the person providing service	Percentage of service tax payable by the person receiving the service
Insurance Services in respect of services  provided or agreed to be provided  by an insurance agent to any person carrying on insurance business	Insurance agent	Business man carrying on insurance business	Nil	100
GTA in respect of services  provided or agreed to be provided  by a goods transport agency in respect of transportation  of goods by road	Goods transport agency	Consignor or Consignee is specified person	Nil	100
Sponsorship in respect of services  provided or agreed to be provided  by way of sponsorship	Any person	Body corporate or partnership firm	Nil	100
Arbitral Tribunal in respect of services  provided or agreed to be provided  by an arbitral tribunal	Arbitral tribunal	Business entity	Nil	100
Advocate Services in respect of services  provided or agreed to be provided  by individual advocate	Individual advocate	Business entity	Nil	100
Support Service in respect of services  provided or agreed to be provided  by way of support service by Government or local authority	Government	Business entity	Nil	100
Service provided from Non-Taxable Territory to Taxable Territory in respect of any taxable services provided or agreed to be provided  by any person who is located in a non-taxable territory and received by any person located in the taxable territory	Any person	Any person	Nil	100

à Whether Cenvat credit is available of service tax paid under reverse charge?

Yes, Service Recipient is allowed to take the credit of the service tax paid by him under reverse charge method on the basis of Challan as being specified under Rule 9(1)(e) of the Cenvat Credit Rules, 2004 provided the same is input service to him and Cenvat credit can be availed/utilized :-

Note :- As per IInd proviso of Rule 4(7) of the CENVAT Rules, If payment of value of service and service tax thereon is not paid within three months of the date of invoice, an amount equal to CENVAT credit availed on such input service shall be payable, and credit can be taken again when the said payment is made.

è What shall be the point of taxation under reverse charges? When will service recipient need to the service tax in respect of his part of liability?

o    Rule 7 of Point of Taxation (POT) Rules provides for the Payment under Reverse Charge Mechanism.

o    As per Rule 7, where the service tax is payable by the recipient of service, POT would be the date of payment of value of service, if made within 6 months from the date of invoice. In case, value of service is not paid within prescribed 6 months period, service tax would become payable as per rule 3 of POT rule.

o    Illustration:- Mr. X provided services to Mr. Y under RCM. The date of invoice is 01.01.2013.

o    Situation 1: Mr. Y made payment to Mr. X on 01.04.2013 –Since the payment is made within 6 months from the date of invoice i.e. payment made before 01.07.2013. Therefore, the liability to pay service tax on part of Mr. Y will arise from the date of payment to Mr. X .i.e. from 01.04.2013. Mr. Y is liable to pay service tax by 06.05.2013 (if he pays electronically another wise 05.05.201 3 is the due date)

o    Situation 2: Mr. Y made payment to Mr. X on 01.08.2013 –Since the payment is NOT made within 6 months from the date of invoice i.e. before 01.07.2013. Therefore, the liability to pay service tax will arise from 01.01.201 3. Mr. Y will now be liable to pay interest @ 18% along with service tax to the department.

è Whether small scale exemption of Rs. 10 Lakhs would be available under Reverse Charge Mechanism?

No, this will not be available for liability to be paid by Service Recipient under Reverse Charge Mechanism in termsof Notification no. 33/2012-ST dated 20^th June 2012. Notification No. 33/20 12-ST which provides that whereby the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:

Provided that nothing contained in this notification shall apply to,-

(i)                        taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or

(ii)              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 said Finance Act read with Service Tax Rules, 1994.

è Can the Service Receiver use CENVAT to pay tax under reverse charge?

Explanation to Rule 3(4) - Service Receiver cannot use the CENVAT credit to dispose off his liability. He is required to pay the amount in cash only.

è Under Partial RCM, what amount do service provider is required to show on the invoice?

The service provider is required to charge only that on the invoice for which he is liable to pay. For e.g. If the service providers liability is of 25% and the remaining liability is of service receiver. Then the service provider is required to charge only 25% of the service tax amount in the invoice.

è If service provider has agreed to pay entire payment of service tax liability. He is willing to give an undertaking in that regard. In that case, do service receiver is liable to pay service tax?

Yes, because only person who is liable to pay service tax should pay the same and no one can undertake such responsibility.

Furthermore, please refer details and applicability of new reverse charge mechanism in case of all the services as mentioned in the table below:-

·                     Point of Taxation for Service tax liability under Reverse Charge Mechanism:Point of taxation is normally the date of payment but, if payment is not made within 6 months from date of invoice then Point of taxation would be date of invoice, which will results in demand of service tax from the month in which invoice is raised. Hence, there might be demand of interest by the Service tax dept on late payment of service tax. Further, it would be pertinent to note that payment of service tax beyond 6 months under reverse charge would not be available as Cenvat credit though it is inputs service for the Service Recipient[c1] .

·         Other Relevant Aspects

·         1. Business Entity and Body Corporate

·         -Business Entity– means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. [Government, charitable organization is not a “business entity”].

·         - Body Corporate – Company is a Body Corporate – Firm, HUF, Trust is not a body corporate. [Society registered under Societies Act is legally not ‘a body corporate’].

·         2.  Partial RC on Renting or Hire of Motor Vehicle designed  to carry passengers

·         - Reverse charge when renting to a person who is not engaged in  similar line of business

·         - Service Provider should be HUF, Individual, firm.

·         - Service Receiver – Business entity registered as body corporate

·         - If motor vehicle is taken on hire without driver it is ‘transfer of right in goods’. It is deemed sale of goods VAT will apply – Service Tax will not be charged.

·         3. Partial RC on Manpower Supply Service

·         - “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. [Rule 2(g) of Service Tax Rules, inserted w.e.f 01.07.20 12].

·         - 75% of ST shall be paid by service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 25% of ST shall be paid by service provider.

·         - Security Service, cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.

·         - Service tax in such cases shall be payable on – SALARY + PF + ESI + Commission of labour contractor.

·         4. Partial RC in Work Contract Service

·         - 50% of ST shall be paid by the service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 50% shall be paid by service provider.

·         - Service Receiver is a business entity incorporated as body corporate.