PAYMENT UNDER REVERSE CHARGE MECHANISM

[Dr. Sanjiv Agarwal]

The provisions of Section 68(2) of the Finance Act, 1994 read with rule 2(i)(iv)(d) of Service Tax Rules, 1994 and Notification No. 30/2012-ST dated 20.06.2012 provide for service receiver to be one of the persons liable to pay Service Tax. The liability of payment of Service Tax could, therefore be discharged by any one of the following -

• Service providers in ordinary course
• Service receivers under reverse charge
• Jointly by service providers and service receivers (proportional reverse charge)

Thus, for specified services as per Notification No. 30/2012-ST dated 20.06.2012 and conditions stipulated therein, payment of Service Tax shall be under reverse charge basis or mechanism.

New Reverse Charge Mechanism (w.e.f. 1.7.2012)

Under new reverse charge mechanism w.e.f. 1-7-2012, the service receiver is liable to pay tax, without any benefit of threshold exemption alongwith service provider also liable for certain percentage on case to case basis (w.e.f. 1.7.2012 as per Notification No. 30/2012-ST, dated 20.6.2012 as amended by Notifications No. 45/2012-ST, dated 7.8.2012 and 10/2014-ST, dated 11.7.2014).

The rationale behind the reverse charge mechanism was explained by CBEC in the Letter

D.O.F. No. 334/1/2012-TRU, dated 16-3-2012 in its Para 12 as follows:

"12 it has been noticed that a number of registrants collect the tax but do not pay the same to the Department. This is a serious loss of the revenue even though the compliant section at the recipient end is often not benefited. To ensure proper collection, while not inconveniencing small business, a new scheme is proposed to be introduced."

Under the reverse charge mechanism, there is no option to service provider to pay Service Tax on his own as under normal course. Also, under partial reverse charge, the law does not provide the option of discharging Service Tax liability either by service provider or by service receiver. Both are under statutory obligation to comply with the requirements of reverse charge mechanism as notified

Liability to pay under Reverse Charge by Service Receiver
Under Partial Reverse Charge (Proportional)	Under full reverse charge (100%)
Renting of motor vehicles to carry passengers Manpower supply and security services Works contracts	insurance business services by agents Services by recovery agents goods transportation by road sponsorship arbitral tribunals legal services company body corporate director's services services provided by Government/ local authority excluding specified services services provided by persons located in non-taxable territory to persons located in taxable in territory.

Important Points in Reverse Charge Mechanism

• Governed by Notification No. 30/2012-ST dated 20.06.2012 w.e.f. 1.7.2012 as amended by Notification Nos. 45/2012-ST, dated 7.8.2012 and 10/2014-ST, dated 11.7.2014.
• Liabilities of both the service provider and service receiver are independent of each other.
• Liability of the two persons is for respective amounts (under proportional reverse charge) and is not influenced by compliance or the lack of it by the other party.
• Reverse charge will not apply where the service receiver is located in non-taxable territory.
• Service recipient shall obtain registration under service tax as recipient of service.
• For three specified services provided by business entities being company, society, cooperative society, trust etc, reverse charge will not apply.
• Reverse charge will also not apply where the service recipient is any person or business entity not being a body corporate in case of three specified services.
• Small scale benefit is available only to service provider (not to service receiver), if entitled.
• Service receiver under reverse charge is not eligible to avail exemption of ₹ 10 lakh

under Notification No. 33/2012-ST dated 20.06.2012.

• Point of taxation shall be the time when payment is made by the service recipient.
• Valuation of services by services provider and service receiver can be on different principles, if permitted by law (e.g. works contract - + Refer Notification No. 30/2012-ST, explanation II).
• Liability to pay Service Tax for ongoing contracts as on 1-7-2012 will be as per Point of Taxation Rules, 2011.
• Reverse charge shall not be applicable if provider of service was liable before 1.7.2012
• Service Tax will not be payable by service receiver under reverse charge, if service was provided prior to 1.7.2012, even if payment is made after 30.06.2012
• In case of proportional reverse charge (manpower supply, works contract and motor vehicle hire to carry passengers), service provider should charge Service Tax only on his portion of Service Tax in the invoice and mention that Service Tax on balance amount is payable by service receiver.
• It is the statutory obligation on the service recipient to pay Service Tax, whether under full or proportional reverse charge
• Service Tax under reverse charge has to be paid by cash vide GAR Challan No. 7 and it cannot be paid by way of utilization of Cenvat Credit. Once it is paid, CENVAT Credit can be claimed if it is an input sources.
• Service provider can claim refund of excess CENVAT Credit arising due to discharge of service tax liability under reverse charge by the service receiver (Rule 5B of CENVAT Credit Rules, 2004).
• In case of renting of motor vehicles to carry passengers where abatement is also available, reverse charge basis is proportional depending upon the abatement on the condition that no Cenvat Credit has been availed. The service provider should provide a certificate, either in the invoice itself or separately. The ratio is 60:40 upto 30.9.2014 and 50:50 w.e.f. 1.10.2014 where abatement is taken by service provider.
• In case of renting of motor vehicle to carry passengers, reverse charge applies only where the motor vehicle is provided with driver and the service recover is not engaged in similar line of business.
• In case of director's services, the service provider should not be employed (whole time) director. Employees are not covered under the scope of Service Tax.
• In respect of (i) manpower supply and security services, (ii) works contract services and, (iii) renting of motor vehicles to carry passenger, reverse charge shall be applicable only when following two conditions are satisfied -

1. service receiver is a business entity registered as a body corporate, and
2. service provider is any one of the following entities -

• Individual
• Hindu undivided family (HUF)
• Firm (including limited liability partnerships)
• Association of persons

If both the above conditions are not satisfied in respect of these three services, Service Tax shall be payable by the service provider in ordinary course.

• Services provided by directors to companies are under reverse charge w.e.f. 07.08.2012.
• Services provided by specified security agencies to specified recipients are under partial reverse charge w.e.f. 07.08.2012.
• Services of directors of body corporate shall also be covered under reverse charge w.e.f. 11.07.2014.
• Services provided by recovery agents to banks, financial institutions and NBFC's have been brought under reverse charge w.e.f. 11.07.2014.