Additions in Reverse Charge Mechanism

[Pradeep Jain]

The budget 2015 has also bought some additions to the reverse charge list. Altogether 3 services have been added to this list w.e.f. 01/04/2015 by notification no. 7/2015 dt 01/03/2015. These are:

1. Services provided or agreed to be provided by a mutual fund agent or distributor, to a mutual fund or asset management company”;

Earlier there was service tax on mutual fund agent and was exempted. Now, the service is re-introduced from this budget. At the same time, reverse charge mechanism has also been introduced. The commission of mutual fund agent is very small and normally they do not cross the threshold limit of ₹ 10 Lakh. Hence, if the service tax was to be paid by the mutual fund agent only, then the service tax would have been exempted. But the service tax has been imposed under reverse charge mechanism and it is not covered under threshold exemption of ₹ 10 Lakhs. Hence, service tax is to be paid on each and every commission earned by mutual fund agent.

2. Provided or agreed to be provided by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent;”;

Here it is interesting to know that the intention of the law was to levy service tax on the service provided by chit fund foremen and distributor or selling agent agents of lottery but various courts have taken a contrary view in the cases listed below:

1. Delhi Chit fund association 2013 (4) TMI 630 - DELHI HIGH COURT
2. All Kerala Association of Chit Fund 2013 (6) TMI 53 - KERALA HIGH COURT
3. AP Federation of Chit Funds 2008 (7) TMI 227 - HIGH COURT ANDHRA PRADESH
4. P Muraleedharan 2011 (8) TMI 653 - KERALA HIGH COURT

The crux of these decisions was that the transactions of chit funds were transactions in money which was excluded from the purview of the service tax. As a result the courts held that these are not liable to be taxed under service tax. Yet the government has bought this amendment which not only overrides the decisions of High courts but puts the services in the ambit of reverse charge. Is it the initiation of new round of litigation ?

3. Provided or agreed to be provided by a person involving an aggregator in any manner;”;

The definition of aggregator has been provided in the Service Tax rules by insertion of clause (aa) under rule 2(1):

“aggregator” means a person, who owns and manages a web based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator;’;

It is worth noting that in all the above three cases, the 100% liability to pay service tax has been cast on the service receiver.

Apart from the above the percentage portion payable by both service provider and service receiver in case of man power supply has also been changed and contrary to the earlier ratio of 25:75, now the 100% liability has been put on the service receiver to pay the service tax on this service.