Service tax under Reverse Charge Mechanism

[Ashwarya Agarwal]

The issue of reverse charge under service tax has now gained momentum with the Central Government now expanding the scope of this machinery in the negative list regime. This single step seems to have impacted the industry/ business segment of the country the most.

Section 66B of the Finance Act, 1994 provides that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Section 68 of the Finance Act, 1994 has empowered the Central Government to notify certain services in respect of which the service tax would be payable by the service recipient either under reverse charge mechanism (RCM) or joint charge mechanism (JCM).

Accordingly notification no. 30/2012-ST, dated 20.06.2012 (As amended from time to time) has been issued by the Central Government which notifies various taxable services and the extent of service tax payable thereon by the person liable to pay service tax for the purposes of the said sub-section.

Services under 100% Reverse Charge Mechanism

The services on which total service tax is payable by the service recipient are listed as below:

Sl.	Services by way of-	Service Provider	Service Recipient	Service Provider	Service Recipient
1	Insurance agent	NIL	100%	Insurance agent	Any person carrying on insurance business
2	Recovery Agent	NIL	100%	Recovery Agent	Banking Co. / Financial Institution / NBFC
3*	Mutual Fund Agent / Distributor	NIL	100%	Mutual Fund Agent / Distributor	Mutual Fund / Asset Management Co.
4*	Selling or marketing lottery ticket	NIL	100%	Selling or marketing agent	Lottery distributor or selling agent
5	Transport of goods by road	NIL	100%	Goods transport agency	When person liable to pay freight is any of the specified person
6	Sponsorship	NIL	100%		Body corporate or partnership firm
7	Legal service by advocate	NIL	100%	Individual advocate or firm of advocate	Business entity with turnover more than 10 lacs in preceding F/Y
8	Arbitral Tribunal	NIL	100%		Business entity with turnover more than 10 lacs in preceding F/Y
9	Support services	NIL	100%	Government or Local Authority	Business entity
10	Provided by person located in non taxable territory (Import)	NIL	100%		Person located in taxable territory
11	Directors’ services	NIL	100%		Company
12	Supply of Manpower	NIL	100%	Individual/ HUF/ Partnership Firm (Regd./ Non-regd.)/ AOP	Business Entity, regd. as a body corporate.
13	Security Service	NIL	100%
14#	Aggregator service	NIL	100%	Person involving Aggregator

(#) Inserted and effective from 01.03.2015

(*) Inserted and effective from 01.04.2015

Various services and its impact are summarized below-

1. Transportation of goods by road

100% service tax on the service provided or agreed to be provided by goods transport agency in respect of transportation of goods by road, shall be paid by the service recipient if the person liable to pay freight is any of the following persons:

1. any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
2. any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;
3. any co-operative society established by or under any law;
4. any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made there under;
5. any body corporate established, by or under any law; or
6. any partnership firm whether registered or not under any law including association of persons;

Under this arrangement, the service recipient has been allowed 70% (w.e.f 01.04.2015 - Earlier it was 75%) abatement on the value of service subject to the condition of non-availment of cenvat credit.

2. Sponsorship

The RCM shall be applicable in the service of sponsorship in which 100% service tax shall be paid by the service recipient (i.e. the sponsor), provided it is a Body Corporate or a Partnership Firm.

3. Legal services by advocates

In regard to any legal service provided by an individual advocate or a firm of advocates, the service tax shall be paid by the service recipient. The RCM is subject to the condition that the service recipient should be a business entity.

However specific exemption has been provided to service provided by an advocate to any business entity having turnover of less than 10 lacs in the preceding financial year.

‘Business Entity’ has been defined as any person ordinarily carrying out any activity relating to industry, commerce or any other business.

4. Director service

The RCM shall also be applicable on the service provided by the director of a company to that company. 100% service tax on the payment made by the company to its director, shall be payable by the company itself (Service recipient).

However, any payment made by the employer to its employee in the course of or in relation to his employment has been kept out of the purview of service tax applicability. It may therefore be interpret that any payment made to the director in the form of salary shall not attract any service tax liability. Therefore the question of reverse charge does not arise. But in case of payment made by the company to its director is in the form of ‘Remuneration, Commission or Sitting Fees’ the service tax liability shall arise and hence it shall be paid by the company under the RCM.

The RCM in this arrangement shall be applicable from 07.08.2012 (i.e. the date on which the respective notification 45/2012 was published)

5. Support service

RCM shall also be applicable in respect of services provided or agreed to be provided by Government or local authority by way of support services excluding,-

(1) renting of immovable property, and

(2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994.

6. Manpower supply / Security service

100% reverse charge is applicable (w.e.f. 01.04.2015) on the services provided or agreed to be provided by way of supply of manpower for any purpose or security services by any 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;

Services under Partial Reverse/ Joint Charge Mechanism

The services on which a notified portion of the service tax liability is to be paid by the service provider and the balance is to be paid by the service recipient are as listed below:

Sl.	Services by way of-	Service Provider	Service Recipient	Service Provider	Service Recipient
1	Renting of a motor vehicle	50%	50%	Individual/ HUF/ Partnership Firm (Regd./ Non-regd.)/ AOP	Business Entity, regd. as a body corporate.
2	Works contract	50%	50%

It is observed that the reverse charge provisions for the service of renting of motor vehicle, supply of manpower or security services or for the service portion in the execution of works contract shall apply only when the service provider is one among the specified persons and the service recipient is a business entity registered as body corporate, located in the taxable territory.

Cenvat Credit

1. It has been highly debatable whether cenvat credit can be utilized for discharging the service tax liability under reverse charge. Primarily cenvat credit of service tax paid on input service can be utilized for payment of service tax on the output service. In case of service tax liability under reverse charge provision, the service on which the service recipient is made liable, is naturally not an output service for him. Therefore, such liability cannot be discharged from cenvat credit account unless specifically otherwise provided for. Later w.e.f. 01.07.12, an ‘explanation’ has been added to Rule 3(4) of the Cenvat Credit Rules which provide 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, the position is now very clear. It must be paid in cash through GAR-7 challan and the cenvat credit for the same shall be available on the basis of such GAR-7 challan.

2. Cenvat credit of such service tax paid on reverse charge is available when the services received are covered under the definition of ‘input service’. For this purpose, ‘input service’ has been defined in Rule 2(l) of the Cenvat Credit Rules, 2004. The term ‘input service’ primarily covers any service used for providing an output service. In a case where the assessee is liable to pay service tax on their output service, say construction as a builder with an intention to sell, they can claim cenvat credit of the services used for providing such construction service.

As far as the service availed is covered under ‘input service’ and eligible for full credit subject to other provisions of the Cenvat Credit Rules, the credit can be claimed by the service recipient in full, irrespective of the fact that part of the service tax is paid by the input service provider and part of the same paid by the service recipient. For this purpose, the credit of one portion of service tax charged by the service provider can be claimed on the basis of the bill raised by the input service provider, and that of another portion of service tax can be claimed on the basis of the challan under which the service recipient paid his part of the service tax. For this purpose, Rule 4(7) of Cenvat Credit Rules has also been amended (w.e.f 01.04.2015) to allow cenvat credit of service tax paid under partial reverse charge by the service receiver without linking it to the payment to the service provider.

General Compliance

1. The assessee has to pay the service tax in above cases even if the service provider is availing the threshold exemption (i.e. small service provider) of ₹ 10 lacs;
2. If Service provider is charging the service tax in the Invoice in aforesaid cases wherein you are liable to pay service tax under the RCM/ JCM, you have to deduct the component of service tax which you are liable to pay, and pay the balance amount to him;
3. The Assessee is not responsible for failure of service tax payment by the service provider unless the assessee is not liable under the Reverse Charge Mechanism. The liability of both service provider and the service recipient is different and independent of each other;
4. Point of taxation shall be when payment is made to service provider. Provided that, if payment is not made within 3 months of the date of invoice, the point of taxation shall be the date immediately following the said period of 3 months;

One major benefit of such reverse/ joint charge mechanism, and expansion of its’ scope is that the Govt. is getting revenue from a significant portion of the service provided by small service providers. Earlier, they were enjoying full exemption at the end of the service providers. Now, although the service providers continue to enjoy such exemption, the service tax thereon is now being collected from the recipients of such services, subject to the other conditions.

This has further created new difficulty / burden of compliance on the service recipient companies/ business entities, who were otherwise not liable to any service tax compliance, as they do not provide any taxable service. Various exempted service providers like Hospitals, Education institutions, Government organizations, etc have also come within the ambit of this mechanism and are suffering with the tax burden.

Moreover, any area where the Central Government faces difficulty in imposition and collection of service tax, the obligation is easily conferred upon the business entities. The business community, who contributes the significant part (lions’ share) of the total revenue, has always been made the easiest target to take on any obligation, with stringent penal/ prosecution consequences for non-compliance.

Scope Limitation

This note is based on the statutory/ legal position including the judicial and administrative interpretations thereof prevailing as on the date of the note. The note is issued for easy understanding of the changes taken into effect. We had taken due care in preparation of it but not responsible for any adverse consequences.

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By: CA Ashwarya Agarwal, Rourkela, Odisha

Email: [email protected]

Mobile: +91 8018043801

Discussions to this article

[CA.Tarun Agarwalla]

Congrats Ashwarya it is really nice drafting keep it up

[KAMAL AGARWAL]

Dear Ashwarya,

Thanks for the article.

Please elaborate, in case of Renting of any motor vehicle designed to carry passengers under joint charge mechanism, the share will be 50% each. Whether it is on abated value or the whole bill amount.

CA Kamal Kumar Agarwal

9832022225

[Ashwarya Agarwal]

Renting of Motor Vehicle designed to carry passenger:

Service tax is payable on this service, however notification 26/2012-ST, dt. 20.06.2012 provides an option for abatement of 60% and charge service tax on balance 40% of the bill value, subject to the condition that CENVAT credit of Capital Goods, Inputs and Input Services has not been taken under the provision of Cenvat Credit Rules, 2004 (CCR), Other than :

CENVAT credit on input service of renting of motor cab has been taken under the provisions of the CCR, in the following manner:

(a) Full CENVAT credit of such input service received from a person who is paying service tax on forty percent of the value; or

(b) Up to forty percent CENVAT credit of such input service received from a person who is paying service tax on full value.

Further as per sl. 7 of Notification 30/2012-ST, dt. 20.06.2012 (Reverse Charge Mechanism - RCM)

* if the Service Provider (SP) and Service Receiver (SR) are any of the specified person as mentioned in the article above, and

* the SP avails the benefit of 60% abatement as discussed above, then the ST on abated value (i.e. 40%) is to be deposited by SR under RCM,

* However if the SP does not avail the benefit of 60% abatement, then the SP shall charge ST on 50% of the bill value and the ST on balance 50% of bill value is to be deposited by the SR.

 

[Debtosh Dey]

Thanks Mr Ashwara Agarwal for the article. I still need to have a have clear view if Cenvat is available in all cases of RCM e.g. sponsorship is not included in the definition of 'input service', though advertisement and sales promotion are covered. Again, 'sales promotion ' is not a defined service under Finance Act. Therefore, the question is : whether sponsorship can be treated as sales promotion ?

[Ashwarya Agarwal]

The definition of 'Input Service' includes Advertisement and Sales Promotion. Circular No. 334/1/2010 dt. 26.02.2010 clarifies that sponsorship is also a form of Advertisement.

Thanks and regards.

[Debtosh Dey]

Thanks Mr Ashwarya Agarwal once again. The cited notification clarifies the point.

[YAGAY AND SUN]

Dear Ashwarya,

Nice work. Keep it up.

YAGAY AND SUN