Miscellaneous - Taxation of Services an Education Guide by CBEC - Service Tax

Guidance Note 10 - Miscellaneous 10.1 Partial Reverse Charge With effect from 1.7.2012 a new scheme of taxation is being brought into effect whereby the liability of payment of service tax shall be both on the service provider and the service recipient. Usually such liability is affixed either on the service provider or the service recipient, but in specified services and in specified conditions, such liability shall be on both the service provider and the service recipient. The enabling provision has been provided by insertion of Proviso to section 68 in the Finance Act, 2012 as per which Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of Chapter V 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. Under this clause the Central government has issued notification no. 30/ 2012 dated 20.6.2012 notifying the description of specified services when provided in the manner so specified where part of the service tax has to be paid by the service receiver. The extent to which tax liability has to be discharged by the service receiver has also been specified in the said notification. The manner of operation of the reverse charge mechanism has been explained in this point. 10.1.1 What are the services on which such partial reverse change mechanism shall be applicable? In terms of serial nos. 7(b), 8 and 9 of the table in notification no. 30/2012 dated 20.6.12, the new partial reverse charge mechanism is applicable to services provided or agreed to be provided by way of ( a ) renting of a motor vehicle designed to carry passengers on non-abated value to any person who is not engaged in a similar business, or ( b ) supply of manpower for any purpose, or ( c ) service portion in execution of a works contract; 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 a body corporate located in the taxable territory. Thus the nature of the service and the status of both the service provider and service receiver are important to determine the applicability of partial reverse charge provisions. 10.1.2 What does a service provider need to indicate on the invoice when he is liable to pay only a part of the liability under the partial reverse charge mechanism? The service provider shall issue an invoice complying with Rule 4A of the Service Tax Rules 1994 . Thus the invoice shall indicate the name, address and the registration number of the service provider; the name and address of the person receiving taxable service; the description and value of taxable service provided or agreed to be provided; and the service tax payable thereon. As per clause (iv) of sub-rule (1) of the said rule 4A the service tax payable thereon' has to be indicated. The service tax payable would include service tax payable by the service provider. 10.1.3 If the service provider is exempted being a SSI (turnover less than Rs 10 lakhs), how will the reverse charge mechanism work? The liability of the service provider and service recipient are different and independent of each other. Thus in case the service provider is availing exemption owing to turnover being less than Rs 10 lakhs, he shall not be obliged to pay any tax. However, the service recipient shall have to pay service tax which he is required to pay under the partial reverse charge mechanism. 10.1.4 Will the credit of such tax paid be available to the service recipient? Normally, the credit of the entire tax paid on the service received by the service receiver would be available to the service recipient subject to the provisions of the CENVAT Credit Rules 2004 . The credit of tax paid by the service provider would be available on the basis of the invoice subject to the conditions specified in the CENVAT Credit Rules 2004 . The credit of tax paid by the service recipient under partial reverse charge would be available on the basis on the tax payment challan, again subject to conditions specified in the said Rules. 10.1.5 What shall be the point of taxation for the service recipient? When will he need to pay the service tax in respect of his liability? Both the service provider and service recipient are governed by the Point of Taxation Rules 2011 in respect of the service provided or received by him. Usually it is the invoice or date of receipt of payment which is the point of taxation for the service provider. However for the service recipient, in terms of rule 7 of the said rules, point of taxation is when he pays of the service. Thus in the case where the invoice is issued in say July 2012 and the service recipient pays for the same in August 2012 the point of taxation for the service provider will be the date of issue of invoice in July 2012. The point of taxation for the service recipient shall be the date of payment in August 2012. The service provider would be required to pay tax (to the extent liability is affixed on him) by 5th/6th August, 2012 or 5th/6th October 2012 depending upon the admissibility of benefit under the proviso to Rule 6 of the Service Tax Rules 1994 . The service recipient would need to pay tax (to the extent liability is affixed on him) by 5th/6th September 2012. 10.1.6 How is the service recipient required to calculate his tax liability under partial reverse charge mechanism? How will the service recipient know which abatement or valuation option has been exercised by the service provider? The service recipient would need to discharge liability only on the payments made by him. Thus the assessable value would be calculated on such payments done. (Free of Cost material supplied and out of pocket expenses reimbursed or incurred on behalf of the service provider need to be included in the assessable value in terms of Valuation Rules) The invoice raised by the service provider would normally indicate the abatement taken or method of valuation used for arriving at the taxable value. However since the liability of the service provider and service recipient are different and independent of each other, the service recipient can independently avail or forgo an abatement or choose a valuation option depending upon the ease, data available and economics. 10.1.7 Is the reverse charge applicable on services provided and complete before 1.7.2012 though payments were made after 1.7.2012? For any service whose point of taxation has been determined and whole liability affixed before 1.7.2012 the new provisions will not apply. Merely because payments are being made after 1.7.2012 will not add any additional liability on the service receiver in respect of such services. 10.2 Export of Services 10.2.1 What does the export of a service mean under the new system? Export of services shall now be governed by new provisions in the Service Tax Rules 1994 , namely Rule 6A. The essential requisites before a service can be designated as export service are: It must be a service as defined under sub-section 44 of section 65B by a service provider located in the taxable territory to a service receiver is located outside India the service is not a service specified in the negative list the place of provision of the service is outside India the payment for such service is received by the service provider in convertible foreign exchange the service provider and service receiver are not merely establishments of a distinct person by virtue of item ( b ) of Explanation 2 of clause 44 of section 65B of the Act The answer to all questions above must be yes to avail the status of export of service. 10.2.2 Can there be an export between an establishment of a person in taxable territory and another establishment of same person in a non-taxable territory? No. Even though such persons have been specified as distinct persons under the explanation to clause (44) of section 65B , the transaction between such establishments have not been recognized as exports under the above stated rule. 10.3 ISD: Input Service Distributor The facility of registering as an input service distributor exists to allow businesses to operate at their convenience and allow centralized procurement of services while distribution of credit to units where such services are used. The provisions have been slightly altered in Budget 2012 to align the practice with the intent stated above. 10.3.1 Credit of which services can be distributed? Credit of only input services can be distributed. Hence a services procured needs to be assessed whether it is an input service at any of the units of the ISD. Only if it qualifies as an input service it can be distributed. Further the credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services cannot be distributed. 10.3.2 How do I calculate the credit to be distributed? While the status of the service as input service is ascertained, the units where it is used is also ascertained. The credit of a service used exclusively in one unit can be distributed only to that unit. If it is used in more than one unit, the credit can be distributed proportionate to the turnover of the units. The total turnover shall be determined in the same manner as determined under rule 5 and shall be determined for the month previous to the month during which the CENVAT credit is distributed. In case if any of its unit pays tax or duty on quarterly basis as provided in rule 6 of Service Tax Rules, 1994 or rule 8 of Central Excise Rules, 2002 then the relevant period shall be the quarter previous to the quarter during which the CENVAT credit is distributed. The turnover so calculated would be ex-duty i.e not inclusive of the taxes and duties on the goods and services supplied. e.g. a company manufactures fans in 2 units and other appliances in 2 other units. Advertisement services for fans would qualify as an input service for the units manufacturing fans and hence could be distributed to such units based on the turnover of the previous month of the 2 units. 10.3.3 How do I distribute credit in a new unit when there is no turnover? In case of an assessee who does not have any total turnover in the said period as in the case of a new company, the ISD shall distribute any credit only after the end of such relevant period wherein the total turnover of its units are available. In case of a new unit wherein any credit is exclusively used the credit can be distributed in total to such unit. 10.3.4 Will such credit which is distributed need to be reverse on account of any exempted turnover? Credit so distributed is availed on the strength of a challan issued by the ISD. It shall be subject to rule 6 of CENVAT Credit Rules 2004 and depending upon the option exercised under the rule 6 due reversals will be required to be effected by the unit to which the credit has been distributed.