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By CA Rajkamal Shah

Payment of service tax under Reverse charge – A comprehensive study With effect from 1.07.2012, the Government has introduced payment under Reverse Charge Mechanism on number of new services including partial reverse charge in certain cases. The scope of reverse charge payment is expanded considerably. In pursuance of amended Section 68(2) of the Finance Act, 1994, notification No. 30/2012 – ST dtd. 20th June, 2012 and notification no. 45/2012 – ST, 46/2012 – ST both dated 7th August 2012 are issued which prescribe the persons liable to pay service tax under Reverse Charge Mechanism. Necessary changes have been made in R.2(1) of Service Tax Rules by Notification No. 36/2012 – ST dtd. 20th June, 2012. These rules have created ripples in the trade and industry as the persons who are not providing any taxable service and not liable to pay service tax hitherto, will now be liable to pay tax on account of receipt of certain services. A trader or a businessman commonly receives some of these services like advocate services, renting or hiring of motor cabs, engaging manpower to do certain jobs, availing of some of Government services like renting of Government property or some other business like taxable services, works contract service including for maintenance of goods as in case of AMC contracts for air-conditioners, computers, etc. First time the concept of partial reverse charge is introduced wherein in case of persons availing renting of passenger vehicle service, manpower supply service and works contract service are liable to pay service tax on certain portion of service and the provider of service would pay service tax on the remaining portion. The persons availing such services have also been cast responsibility to know that whether the provider of service such as hiring of passenger vehicles has obtained abatement or not, which may be nearly impossible task. In this regards, it has been provided that the Service provider shall issue an invoice complying with R.4A of Service Tax Rules indicating interalia service tax payable thereon. It has been further provided that the recipient of service can decide his liability on his own without having regard to the manner of discharge of liability by the provider of service. All these provisions have cast onerous responsibility on those who are not even the assessees under service tax and they will have to take registration for effecting payment under reverse charge. Further, the person making payment under reverse charge is not eligible for basic exemption limit, however the provider of service would be eligible for such basic exemption limit even in case of partial reverse charge. In case of new services covered under reverse charge mechanism, the payment under reverse charge would not be required to be paid when a service is provided and completed before 1.07.2012, merely because the payment of such input service is made after 1.07.2012. Further, Point of taxation for the recipient of service liable to pay service tax under Reverse charge shall be the date when the payment is made to the provider of service or within six months from the date of invoice if no such payment is made. An attempt is made in this article to discuss the repercussions of these provisions and possible solutions to meet the responsibility of complying with the provisions. In many cases, service tax is payable only in case the recipient is a business entity as discussed below. The term "business entity" is defined to mean any person ordinarily

carrying out any activity relating to industry, commerce or any other business or profession.

Working methods for computation and discharge of liability under reverse charge: I. Insurance Agents Description of service

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Insurance agent

Nil

100%

Service provided by an insurance agent to any person carrying on the insurance business. In such a case, the insurance company would be liable to pay tax on commission paid to the insurance agent. II. Payment to Goods Transport Agencies

Description of service

GTA (except when Service Receiver is individual or HUF)

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Nil

100% (by a person liable to pay freight either himself or through his agent)

In respect of services provided or agreed to be provided by a goods transport agency in relation to transportation of goods by road, where the person is liable to pay freight.

Abatement : 75 % On value of service tax Condition of abatement: Declaration: CENVAT credit on duty paid inputs and capital goods and service tax paid on input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. Exemption for services provided by a goods transport agency by way of transportation of – a. fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage;

b. goods where gross amount charged for the transportation of goods on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or c. goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty

III. Sponsorship payments

Description of service

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Sponsorship

Nil

100% (if Service Receiver is a body corporate or partnership firm located in taxable territory)

In this case, the person providing sponsorship service is the recipient of consideration and the sponsor is the recipient of sponsorship service. In case the provider of service is other than company or a partnership firm located in taxable territory, then the sponsor is liable to pay tax. In other cases, such provider of service is liable to pay tax. Exemption is available for services by way of sponsorship of sporting events organized: a. by a national sports federation, or its affiliated federations, where participating teams or individuals represent any district, state or zone; b. by Association of Indian Universities, Inter-University Sports Board, Sch Games Federation of India, All India Sports Council for the Deaf, Paralym Committee of India or Special Olympics Bharat; c. by Central Civil Services Cultural and Sports Board d. as part of national games, by Indian Olympic Association or e. under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme

IV. : Payment to Advocates and Arbitral Tribunals

Description of service

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Nil

100%

Individual advocates or Arbitral tribunals (applicable only if Service Receiver is Business Entity having turnover of more than Rs. 10 Lakhs in prev. year)

If assessee being a business entity having turnover of more than Rs. 10 Lakhs in the previous year receives any legal services from an individual advocate or a firm of advocates or Arbitral tribunals then service tax is payable by service receiver @ 12.36% of amount charged by service provider.

V : Service provided by Government or local authority

Description of service

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Nil

100%

Services provided by Government or local authority (including support service to Business Entities but excluding renting of immovable property and services specified in 66D (a)(i),(ii), (iii)]

In respect of services provided or agreed to be provided by Government or local authority by way of support services excluding,a) renting of immovable property; b) services by department of posts by way of speed post, express parcel post, life insurance and agency services; c) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport and d) transport of goods or passengers

If assessee being a business entity receives any services from government or local authority by way of support services other than exclusions mentioned above, then service tax shall be payable by service receiver @ 12.36% of amount charged by service provider. Definition of Support Service: S.65B (49) "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis;

VI: Service by a director to the company

Description of service Service provided or agreed to be provided by a Director of a company to the said company

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Nil

100%

A working director / managing or executive director / whole time director is in employment with the company. The director's remuneration would not be therefore covered under service tax. The directors may also be paid commission in addition to salary and issue could be that whether such remuneration would be covered under Service tax. In view of the writer, the commission received by the director based on certain percentage of sales or profits or any other criteria should not be covered, if it is a part of employment contract. The salary certificate issued by the company in Form - 16 may be helpful to show that the commission is a part of salary and it is only a different measurement to arrive at the gross amount of consideration. Reimbursement of expenditure actually incurred by the director for company's business would not be covered under service tax. However, there can be an issue as regards to deductions from salaries like HRA or any supplies by the employer, etc as it may be regarded as taxable as service provided by an employer to the employee and the exclusion from definition of service is only in relation to service provided by employee to the employer. In view of the writer, even such services may not be covered if they are part of the employment contract and it should be regarded that the consideration paid by the employer to the employee by way of salary is lower to that extent. Services by nominee directors and sitting fees are liable to tax. It may be noted that, the company would be eligible to take credit on such service tax paid.

Notification as regards to payment of service tax under reverse charge mechanism on director’s remuneration is issued on 7th August, 2012. Therefore, for payment received prior to this date, the directors would be liable to take registration and pay tax, however, subject to basic exemption limit of Rs. 10 lakh. VII: Renting of passenger vehicles Description of service

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Nil

100% (if Service Receiver is a Business Entity registered as body corporate )

60%

40% (if Service Receiver is a Business Entity registered as body corporate )

Renting or hiring of a passenger motor vehicle where SP is indl. , HUF, partnership, AOP - If abatement is claimed - If abatement is not claimed

In respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers, where service provider is a individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory; In this case, service receiver is liable to pay 100% of the value of service tax payable for services provided if service provider is availing abatement benefit. In other words, service receiver have to pay service tax @ 12.36% on 40% of value of service, wherein service provider will not be entitled to avail CENVAT credit of duty paid on inputs and capital goods and service tax paid on input services, used for providing the taxable service. Service receiver is not entitled to avail Cenvat credit of service tax paid on rent-a-cab service. Invoice of service provider should be like: Availed abatement of 60% of Rs. ___ in accordance with Notification No. 26/2012-ST Service Tax inclusive of education cess shall be payable by you (receiver of service) @ 12.36% on balance 40% of Rs.____ If service provider is not availing abatement benefit then service receiver will have to pay service tax on 40% of the value of service on reverse charge basis and service provider will collect and pay on 60% of the value of service. Invoice Note:

Service Tax inclusive of education cess payable by you (receiver of service) @ 12.36% on 40% of Rs………….. Service Tax inclusive of education cess levied @ 12.36% on balance 60% of Rs……… CENVAT credit of service tax paid for service received for hiring motor vehicles is mentioned in negative list of CENVAT Credit Rules, 2004 w.e.f. 01.04.2011. So assessee cannot avail credit for service tax either paid by him on reverse charge basis or collected by service provider. Thus, it will be cost to company. It is advised that service provider takes abatement benefit so that the cost to company can be restricted to only 12.36% of service tax on 40% of value of service provided.

VIII. : Man power supply Description of service

Supply of man power for any purpose or security services (incl. investigative, detection or verification) by indl., HUF, partnership or AOP

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

25%

75% (if Service Receiver is a Business Entity registered as body corporate )

In respect of services provided or agreed to be provided by way of supply of manpower for any purpose including security service, where service provider is a individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory; “Security service” means services relating to any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity. Notification as regards to payment of service tax under reverse charge mechanism on security service is issued on 7th August, 2012. Therefore, for payment received prior to this date, the security agencies would be liable to and pay the entire tax, however, subject to basic exemption limit of Rs. 10 lakh.

In this case, service receiver is liable to pay 75% of the value of service tax, on reverse charge basis, leviable on amount charged for service provided and for balance 25% of the value of service tax the provider of service is liable to collect service tax and pay to government. Invoice of service provider should be like:

Service Tax inclusive of education cess payable by you (receiver of service) @ 12.36% on 75% Rs.____ Service Tax inclusive of education cess levied @ 12.36% on balance 25% of Rs. _____.

IX. : Works contract Description of service

Works contract by indl., HUF, partnership or AOP

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

50%

50% (if Service Receiver is a Business Entity registered as body corporate )

In respect of services provided or agreed to be provided in service portion in execution of works contract, where service provider is a individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory; In this case, service receiver is liable to pay 50% of the value of service tax, on reverse charge basis, leviable on amount charged for service provided and for balance 50% of the value of service tax the provider of service is liable to collect service tax and pay to Government. Determination of value of service portion in the execution of a works contractWhere value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause. Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:A. in case of works contracts entered into for execution of original works, service tax shall be payable on forty percent of the total amount charged for the works contract; B. in case of works contract entered into for maintenance or repair or reconditioning or

restoration or servicing of any goods, service tax shall be payable on seventy percent of the total amount charged for the works contract; C. in case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property ,service tax shall be payable on sixty percent of the total amount charged for the works contract; “Original works” meansI. all new constructions; II. all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; III.erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise; D :“total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract after deducting(i) the amount charged for such goods or services, if any; and (ii) the value added tax or sales tax, if any, levied thereon: Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles. The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004. However, the contractor is eligible to take such credit. Invoice of service provider should be like: (i)

For Original works:

"Service Tax inclusive of education cess payable by you (receiver of service) @ 12.36% on 50% of 40% Rs.____ Service Tax inclusive of education cess levied @12.36% on balance 50% on 40% of Rs. ____ Example: Gross bill amount Rs.1000 Less: Deduction 60% Rs. 600 Taxable portion (40%) Rs. 400 50% of Service Tax @ 12.36% on Rs. 400 payable by both service provider and service receiver

i.e. Service provider will collect and pay service tax of Rs.24.72 and service receiver shall pay Rs.24.72 under reverse charge basis. (ii) For Maintenance and repairs, etc of goods: "Service Tax inclusive of education cess payable by you (receiver of service) @ 12.36% on 50% of 70% Rs.____ Service Tax inclusive of education cess levied @12.36% on balance 50% on 70% of Rs. ____ Example: Gross bill amount Rs.1000 Less: Deduction 30% Rs. 300 Taxable portion (70%) Rs. 700 50% of Service Tax @ 12.36% on Rs. 700 payable by both service provider and service receiver i.e. Service provider will collect and pay service tax of Rs.43.26 and service receiver shall pay Rs.43.26 under reverse charge basis. (iii) For Other works contract: Service Tax inclusive of education cess payable by you (receiver of service) @ 12.36% on 50% of 60% Rs.____ Service Tax inclusive of education cess levied @12.36% on balance 50% on 60% of Rs. ____ Example: Gross bill amount Rs.1000 Less: Deduction 40% Rs. 400 Taxable portion (60%) Rs. 600 50% of Service Tax @ 12.36% on Rs. 600 payable by both service provider and service receiver i.e. Service provider will collect and pay service tax of Rs.37.08 and service receiver shall pay Rs.37.08 under reverse charge basis.

Note - In works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

X : Import of Service – taxable service provided or agreed to be provided by any person who is located in non-taxable territory and received by any person in taxable territory: Description of service

% of Service Tax payable by Service Provider

% of Service Tax payable by Service Receiver

Nil

100%

Taxable Service by a person located in non taxable territory to a person located in 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 No specification required on invoice. Ensure that payment for such service is made within six months from the date of invoice, or else tax liability will be considered from the date of issue of invoice.

Exceptions under Reverse Charge: ¾ In case of Goods Transport on Road Agency’s Service when the person liable to pay freight is located in non-taxable territory, then such GTA would be required to pay tax. ¾ In case of Legal Service provided in non-taxable territory by an Advocate or firm of advocates, such advocate or firm of advocates shall be liable to pay tax. ¾ In case of services covered under partial reverse charge when provided by a company or a body corporate to another body corporate or to an individual or a partnership firm or to any other person, no reverse charge applies. ¾ When service of renting of motor vehicle designed to carry passenger is provided by an individual/partnership firm/HUF/AOP to a body corporate in the similar line of business, no reverse charge applies. In other words, when there is sub-contract of service of renting of motor vehicle. ¾ The Government or local authority would be liable to pay tax in case of the following services— •

In relation to support service provided or agreed to be provided to any business entity located in non-taxable territory,

• • • •

Renting of immovable property to a Business entity Services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; and Transport of goods or passengers

Clarifications on Reverse Charge in Education Guide provided by the Government: “Computation of liability under partial reverse charge – the invoice issued by service provider would normally indicate the abatement taken or method of valuation used for arriving at taxable value. However, recipient can independently avail or forgo abatement or choose a valuation option depending upon the ease, data available and economics”. Cenvat credit / refund of payment under Reverse charge Refund of service tax paid on input service used by the person paying service tax on Reverse charge basis can be availed as provided in Notification No. 28/2012 – CX (NT) & R.5B of CCR. Further, credit of tax paid by recipient under partial reverse charge would be available on the basis of tax paid challan. Writer’s comments The reverse charge mechanism has thus cast enormous additional compliance burden on receiver of service who will be required to keep proper records to establish that he has discharged his liability diligently. Further, in case of partial reverse charge payments, it would be necessary to have knowledge of the status of service provider as the liability would arise only in case such service provider is individual, partnership, HUF, association of person or body of individuals. The provider of service should also know about the status of recipient of service as in case of the partial reverse charge, the recipient would be liable only if he is a business entity registered as body corporate, otherwise the entire liability would fall on the provider of service. A lot of hassles would also arise as the recipient of service would be required to know whether the person providing renting of passenger vehicles service has taken abatement or not. Imagine a case wherein a company executive hires a cab from residence to airport and the company would reimburse the expense, the executive would be required to know and should insist on the bill with details of claim of abatement from the driver. Similarly in case of works contract service, lot of complications will be created when both service providers and recipients adopt different methods of valuation, e.g. the provider of service adopts R.2A of Service Tax Valuation Rules and the recipient of service adopts fixed valuation of 40% on original works.

In case of partial reverse charge, receiver of service can avail Cenvat credit of service tax paid on different occasions. However, in absence of any liability of service tax, say in case of a trader, the credit may get accumulated.