REVERSE CHARGE MECHANISM UNDER SERVICE TAX REGIME
CONTENTS Budget Highlights – Service Tax Payment of Service Tax Person liable to pay Service Tax Specified Services Utilization of CENVAT Credit by Service Provider Utilization of CENVAT Credit by Service Receiver Half Reverse – Double Workload Undue Hardship on Service Receiver Miscellaneous Way Forward
BUDGET HIGHLIGHTS – SERVICE TAXEighteen years old “Service Tax Regime” attains majority vide Finance Act, 2012 and theGovernment has cheered this event by enlarging the arms of Services Tax Regime byintroducing Negative List approach for taxing services.All services would now be taxable except those listed in Negative list and provided inExemption Notifications.First time in the history of this law the term “Service” has been defined u/s 65b(44) ofthe Act.General Rate of Service tax has been increased to 12% with consequential changes inrates of some individual services.New provisions/rules, superseding the exiting ones, have been introduced fordetermining the chargeability of services and place of provision of services.Provision of Reverse Charge Mechanism has been widened by inserting more services.Government, through these amendments, has made a big move towards the mostawaited and contentious tax reform in India “Goods and Service Tax” and intend toprepare the Industrialists, professionals and the tax authorities for GST.It is expected that GST may be implemented from April 1, 2013 wherein the similarnegative list approach may be adopted.
PAYMENT OF SERVICE TAXIn terms of section 68(1) of the Act, liability to pay service tax falls on the serviceprovider.Overriding the aforesaid position, section 68(2) of the Act empowers the CentralGovernment to notify such services on which such person, as may be prescribed, shallbe liable to pay service tax .By virtue of this section, a person other than the service provider can be made liable topay service tax and he shall be deemed as if he is the person liable for paying theservice tax on such service and all other provisions of this Act shall apply accordingly.Finance Act, 2012 inserts a proviso to section 68(2) of the Act, wherein it is providedthat the service provider and the service receiver can jointly be made liable to payservice tax on the same transaction.Benefit of threshold limit of Rs.10 lakhs is not be available to Service Receiver and thus the service receiver has to pay service tax on all the specified input services received.
PERSON LIABLE TO PAY SERVICE TAX….Government has notified Notification No. 30/2012 for the purpose of Section 68(2) ofthe Act. The said Notification supersedes the erstwhile Notification in this context i.e. N.No. 36/2004 and thereby widening the scope of “person liable to pay service tax” . Salient FeaturesLiability to pay service tax has been shifted, wholly or partly, from service provider toservice receiver.Business Entities are now made liable to pay service tax, consequently, the burden ofindividual service providers to comply with the provisions of Service Tax Regime havebeen reduced. In some cases partnership firms have also been relieved from thisburden.Conversely, burden to comply with the provisions of Service Tax Regime has beendoubled where service provider and service receiver are jointly liable to pay service tax. Notification No. 30/2012 dated 20th June, 2012 will come in effect from 01st July, 2012
PERSON LIABLE TO PAY SERVICE TAX…. Extent of service tax payable by Service Provider and Service Receiver Liability on Liability onS. Services Provided Service ServiceNo By Description of Service Service Provided To Provider (%) Receiver (%)1 Person carrying Insurance Agent Insurance Auxiliary Service Insurance Business Nil 100%2 Body Corporate or Any person Sponsorship Service Partnership Firm Nil 100%3 Any person Any Taxable Service Any person Nil 100%4 Goods Transport Transport of Goods by Road Consignor or Agency Service Consignee Nil 100%5 Director of a Company Any Taxable Service Company Nil 100%6 Arbitral Tribunal Legal Service Nil 100%7 Individual or Firms of Advocate Legal Service Nil 100% Business Entity8 Support service by Government or Government or local Local Authority authority Nil 100%
….PERSON LIABLE TO PAY SERVICE TAX Extent of service tax payable by Service Provider and Service Receiver Liability on Liability on S. Services Service Service Service No Provided By Description of Service Provided To Provider (%) Receiver (%) 9 Renting or hiring of motor vehicle to carry passenger on abated value i.e. 40% Nil 100% 10 Renting or hiring of motor vehicle to carry Individual, passenger on non abated value Body 60% 40% 11 HUF, Firm, Corporate AOP Supply of Manpower Service or Company 25% 75% 12 Security Services 25% 75% 13 Works Contract Service 50% 50%In terms of Point of Taxation Rules, service receiver shall pay service tax by 5th or 6th day of the monthfollowing the month/quarter in which value of service has been paid to service provider.However, if payment is not made to service provider within six months from the date of invoice thenthe service tax would have to be paid by 5th or 6th day of the month following the month/quarter inwhich such invoice was issued. Interest on delay in payment, if any, will be applicable.
SPECIFIED SERVICES…. Service tax payable on the services provided by INSURANCE AUXILIARY an Insurance Agent to a person carrying on SERVICES Insurance Business shall be discharged by the person receiving such services. Service tax payable on the services provided by SPONSORSHIP SERVICES Any Person receiving sponsorships shall be discharged by the Body Corporate or Partnership Firm receiving such services. Service tax payable on the services provided by SPONSORSHIP SERVICES Government in relation to Support Services* shall be discharged by the Business Entity receiving such services. Service tax payable on the services provided by SERVICES BY A DIRECTOR a Director of a Company shall be discharged by that Company. (applicable w.e.f 07-08-2012)*Support Services means infrastructural, operational, administrative, logistic, marketing or anyother support of any kind comprising functions of an entity which may be outsourced to othersincluding advertisement, promotion, security, construction, testing & analysis etc.
SPECIFIED SERVICES…. Service tax payable on the services provided by a Goods Transport Agency in relation to transport of goods by road shall be discharged in following TRANSPORT OF GOODS BY manner: ROAD SERVICE o Where consignor or consignee of the goods falls under organized sector* then by the consignor or consignee whoever pays or liable to pay freight; o In all other cases, by Goods Transport Agency . Service tax payable on the services provided by Individual Advocates or Firms of LEGAL SERVICES Advocates or Arbitral Tribunal shall be discharged by the Business Entity** receiving such services. Service tax payable on the services provided by any person located in Non-taxable territory*** ANY TAXABLE SERVICE to any person located in Taxable territory shall be discharged by the person receiving such services in taxable territory.*Organized Sector means a Body Corporate, Partnership Firm, Society, Factory etc.**Business Entity includes a company, firm, AOP, BOI but does not include an individual.***Non-Taxable territory means the territory to which service tax provisions shall not apply.
SPECIFIED SERVICES….Services provided by a Individual, HUF, Firm or AOP to a Company or Body Corporate other than those engaged in similar line of business In relation to Hiring/Renting of Motor Vehicle for carrying passengers Service provider claims Service provider does abatement of 60% not claims abatement without availing CENVAT and avails CENVAT Credit Credit 100% Service tax to 40% of Service 60% of Service be paid by Service tax to be paid by tax to be paid by Receiver Service Receiver Service ProviderIt is noted that hiring/renting of metered cabs or radio taxis is not a taxable service.
….SPECIFIED SERVICES Services provided by a Individual, HUF, Firm or AOP to a Company or Body Corporate other than those engaged in similar line of business In relation to In relation to Supply execution of Works of Manpower or Contract Security Services*50% of Service tax 50% of Service 75% of Service 25% of Service to be paid by tax to be paid by tax to be paid by tax to be paid by Service Receiver Service Provider Service Receiver Service Provider*Security Services means services in relation to the security of any property, movable or immovable,or of any person, in any manner and includes the services of investigation, detection or verification,of any fact or activity. Reverse Charge Applicable on Security Services w.e.f. 07-08-2012.
UTILIZATION OF CENVAT CREDIT BY SERVICE PROVIDER Cases where Service Provider is engaged in rendering specified services only Under Full Reverse Under Half Reverse CENVAT Credit available with the Service provider can utilize 100% service provider will remain of CENVAT Credit available, as per unutilized since the liability to pay rules, despite the fact that liability service tax has been shifted to to pay service tax has been service receiver. reduced. CENVAT Credit will form part of the cost of the service provider which may be pass on to service receiver by way of price increase.In case of Full Reverse, Service provider should carry forward the unutilized amount ofCENVAT Credit so that it can be adjusted against any liability of service tax that may arise infuture.
UTILIZATION OF CENVAT CREDIT BY SERVICE RECEIVER Cases where Service Receiver is engaged in rendering taxable services or manufacturing excisable goodsService Receiver cannot utilize CENVAT Credit available for discharging the liability of service tax arise by virtue of section 68(2) of the Act. Under Full Reverse Under Half Reverse Service tax on input services Part amount of Service tax on can be availed/utilized only input services can be after making the payment of availed/utilized after making value of service & service the payment of value of tax. service & service tax. Part amount of Service tax on input services can be availed/utilized as and when the invoice is received.
HALF REVERSE – DOUBLE WORKLOADExtra workload whereService provider andreceiver are jointly liableto pay service tax. Cases where service provider has availed benefit of any Abatement, service receiver has to make sure that service provider has not availed CENVAT Credit. Any irregularity found may attracts interest & penalty on both service provider and service receiver.
UNDUE HARDSHIP ON SERVICE RECEIVER EVERY PERSON LIABLE TO PAY SERVICE TAX In terms of Section 69(1) of the Act, shall get itself registered under Service tax Provisions. In terms of Section 70(1) of the Act, shall furnish periodic return of service tax. In terms of Rule 5 of Service tax rules, shall maintain such records for a period of five years.Interest or penal provisions under this Act shall accordingly apply on the service receiver. All the above provisions will be applicable even if the service receiver is not engaged in rendering any taxable service. Service Tax needs to be paid by service receiver even if specified services are availed from a small service provider since threshold limit does not apply on service recipient.
MISCELLANEOUSNo Service tax is chargeable on the services where service provider is located in Non-taxable territory and received, in taxable territory, by Government, Local Authority,Entity registered u/s 12AA of Income Tax Act, 1961 and Individuals for non-businesspurpose. Thus, Reverse Charge Mechanism shall not apply in such cases and Servicereceiver shall not be liable to pay service tax on such input services.Where Service receiver has make an advance payment to Service provider beforeavailing any of the Specified service then the Service receiver shall have to pay Servicetax chargeable on the amount paid to Service provider.Cases where services are provided from Jammu & Kashmir, being a non-taxableterritory, and received in any other part of India, a taxable territory, then such servicesshall be taxable in the hands of service recipient.Service provider shall issue an Invoice with in 30 days from the date of completion ofservice or receipt of any payment whichever is earlier. The amount of service tax to bepaid by the service receiver should be reflected on the Invoice for better compliance.Service provider cannot be made liable to pay tax even if service receiver has failed todischarge its service tax liability on recipient basis.
WAY FORWARD • All the persons receiving specified services must get itself registered or amend their existing registration so as to include the Service specified service as recipient of service.Receiver • Timely compliance of the provisions under Services Tax Regime by way of paying taxes and furnish service tax returns for avoiding interest and penalties. • All the persons providing specified services, where whole of the service tax is payable by service receiver, need not to file service taxService returns.Provider • A return of CENVAT Credit may be filed in order to carry forward and utilize the CENVAT credit against any service tax liability that may arise in future. A relief may be expected to the service receiver who has purchased its input services from the small service providers whose threshold limit has not been exhausted.
PREPARED BY:- CA ASHISH GUPTA B-116, Ist Floor, Amar Colony, Lajpat Nagar-IV, New Delhi (M) +91-9891670570 (E) firstname.lastname@example.org (W) www.ashishca.comDisclaimer: This presentation is provided purely for yourinformation and knowledge. Information provided in thispresentation do not purport or should not be treated aslegal opinion in the fact specific situations that may effectyou and your business.