Service Tax- Reverse Charge and Joint Charge

1. Discussion on Reverse/Partial Charge Mechanism
CA Sri Harsha
harsha@sbsandco.com
by

2. A Peek Into
Reverse & Partial Charge:
Rationale & Concept;
Basics;
Detailed Discussion on Notified Services;
Registration;
Returns;
Point of Taxation;
Place of Provision of Service Rules, 2012
Cenvat Credit & Refund;
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Rationale & Concept
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4. Rationale
 The TRU Circular vide F. No 334/1/2012-TRU dated 16.03.2012 has stated as under:
“12. Secondly it has been noticed that a number of registrants collect the tax but do not pay the same to
the Department. There is a serious loss of revenue even though the compliant section at the recipient end
is often not benefitted. To ensure proper collection, while not inconveniencing small business, a new
scheme is proposed to be introduced”.
 No Nodal Agency is in place to monitor certain type of constitutions of assessees. Inadequate manpower to
trace them and collect the tax. Hence, in order to increase the tax collections, as stated above, a new
concept by name Partial Reverse charge has been introduced along with the Negative List of Taxation.
 The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the
least possible amount of squawking - Jean-Baptiste Colbert – Ministry of Finance for France.
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5. Concept
 Normally, person providing the service, is required to collect and pay the tax – Section 68(1).
 However, Section 68(2) makes provision for reverse charge i.e. making person receiving the service liable to
pay tax in specified circumstances. The proviso to the said section introduces the concept of partial reverse
charge.
 The above existed even under the earlier law for GTA services, Sponsorship services and services received
from a country outside India more famously known as Import of services.
 The challenge under the new law is partial charge mechanism- where both service provider and service
receiver is responsible for making payment for notified services – Rent-a-Cab, Works Contract Services,
Manpower Supply Services, Security Service etc..
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Basics - Reverse & Partial
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7.  Small Service Provider Exemption is not available for the service receiver – Liability arises for even payment
of Single Rupee/Single Invoice for the services notified;
 Cenvat Credit cannot be used for payment of liability under Reverse or Partial Charge –
 Rule 2(p) of CCR, 2004 excludes ‘services where the whole of service tax is liable to be paid by the SR’.
 Further, 2nd Explanation to Rule 3 of CCR, 2004 also bars the utilization of credit to make payment of ST
under reverse or partial charge.
 Payment under Reverse & Partial Charge has to be made under the Service Receiver's STC and not in the
STC of the Service Provider. No Option to pay the tax of the SR by the SP or vice-versa. Independent
obligation.
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Basics
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8. Services Notified – 68(2)
Notification No. 30/2012-ST dated 20.06.2012
S. No. Services Share of SP Share of SR
1 Insurance Agent to Insurance Company Nil 100%
1A Recovery Agent to a Banking Company/Financial Institution/NBFC Nil 100%
2 GTA Services Nil 100%
3 Sponsorship Nil 100%
4 Services provided by an arbitral tribunal Nil 100%
5 Individual Advocate or Firm of Advocates - Legal Services Nil 100%
5A Director to Company Nil 100%
6 Support Services by Govt - (RIPS & specified services - Section 66D) Nil 100%
7A Rent - A- Cab - Abated Value Nil 100%
7B Rent - A- Cab - Non - Abated Value 50% 50%
8 Manpower Supply or Security Services Nil 100%
9 Service Portion in WCS 50% 50%
10 SP - Non Taxable Territory & SR - Taxable Territory Nil 100%
11 Aggregator Nil 100%
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Detailed Discussion on Notified Services
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10.  Services provided by Insurance Agents:
 Taxable in the hands of the person carrying Insurance Business;
 Service Provider is not required to pay service tax on his services provided;
 Service Receiver is required to pay 100% of service tax on such services received;
 All sorts of Insurances are covered under this category;
 Service Provider if registered has to disclose the income in the ST Returns and claim exemption.
 Services provided by Recovery Agents:
 Effective from 11.07.2014 – Notification No 10/2014-ST dated 11.07.14;
 Taxable in the hands of Banking Company/Financial Institution/NBFC;
 Service Provider is not required to pay service tax on his services provided;
 Service Receiver is required to pay 100% of service tax on such services received;
 Service Provider if registered has to disclose the income in the ST Returns and claim exemption.
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Insurance & Recovery Agent Services
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11. GTA Services
 Obligation Arises – If Service Receiver is :
 Specified Person &
 Liable to pay Freight either by himself or through his Agent
 Specified Persons – Rule 2(1)(d)(B) of STR, 1994:
 Factory;
 Society;
 Co-operative Society;
 Dealer of Excisable Goods;
 Any Body Corporate;
 Partnership Firm including AOP
 Service Receiver has to pay 100% of the tax payable:
 Tax Payable – 30% * 14.5 % of the Freight – 70% is abated as per Notification No - 26/2012-ST dated 20.06.2012.
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Individual is not
covered – all others are
covered
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12. GTA Services – Case Studies
 Facts:
 ABC – Goods Transport Agency located in Delhi;
 XYZ Ltd – Manufacturer books a consignment with ABC to Mumbai to KLM, a dealer;
 As per the contract – XYZ Ltd is responsible to pay the freight expenses.
 Query:
 Who is liable to pay the service tax to the credit of Central Government – XYZ or ABC or KLM?
 Response:
 Since XYZ is a specified person and responsible to pay the freight, he is responsible for payment of
service tax.
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13. GTA Services – Case Studies
 Facts:
 ABC – Goods Transport Agency located in Delhi;
 XYZ Ltd – Manufacturer books a consignment with ABC to J&K to KLM Ltd, a dealer;
 As per the contract – KLM Ltd is responsible to pay the freight expenses.
 Query:
 Who is liable to pay the service tax to the credit of Central Government – XYZ or ABC or KLM?
 Response:
 Even the freight is required to be paid by KLM Ltd, ABC is obliged to pay service tax in light of the proviso
to Rule 2(1)(d)(B) of Service Tax Rules, 1994 – which states that ‘Provided that when such person is
located in a non-taxable territory, the provider of such service shall be liable to pay service tax’
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J&K is covered under
non-taxable territory
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14. GTA Services – Returns Disclosure
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15. GTA Services – Returns Disclosure
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16. Sponsorship Services & Arbitral Tribunal
Sponsorship Services:
 Obligation Arises – If Service Provider – (person receiving sponsorship money) is :
 Body Corporate;
 Partnership Firm;
 Located in Taxable Territory;
 Service Provider is exempted from payment of service tax on such sponsorship;
 Service Receiver has to pay service tax on 100% @ 14.5% on the sponsorship money provided.
Arbitral Tribunal Services:
 Services provided by arbitral tribunal to any business entity located in taxable territory are covered;
 Service Receiver has to pay service tax on 100% @ 14.5% on the value paid to services of arbitral tribunal;
 Exempted:
 If service receiver is a person other than business entity;
 Business Entity with a turnover up to Rs 10,00,000/- in the preceding FY.
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17. Legal Services
 Legal Services:
 Has been defined vide Rule 2(cca) of STR, 1994: means any service provided in relation to advice, consultancy or
assistance in any branch of law, in any manner and includes representational services before any court, tribunal or
authority.
 From the definition of legal services, it is evident that any services provided by advocate (either individual or
through a firm) are covered under the reverse charge obligation.
 No obligation under Reverse Charge, if:
 SR – advocate or partnership firm of advocates providing legal services;
 SR – Not a Business Entity;
 SR – Business Entity with a turnover Rs 10 lakhs in the preceding FY;
 Care has to be taken while accounting for legal fee and legal expenses. If clubbed, the department might compel to
comply reverse charge obligation even on the legal expenses amount. Pay Advocates only Legal fee despite even
there invoice claims service tax separately.
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18. Legal Services – Case Studies
 Case Study : 1
A Chartered Accountant Firm engaged in providing legal services and obtains certain services from an individual advocate. Does
reverse charge applies to the CA Firm?
 Case Study : 2
A company procures advocate services for Rs 1 lakh. During the course of services, advocate incurs a court fee on behalf of the
company amounting to Rs. 50k. Quantum for Reverse Charge?
 Case Study : 3
A Charitable Institution registered under Section 12A of the Income Tax Act, 1961 procures legal services. Does reverse charge
obligation attracts?
 Case Study : 4
A sole proprietor is engaged in trading of goods. He availed the services from an advocate. Does reverse charge obligation
attracts?
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65B(17) - means any person
ordinarily carrying out any activity
relating to industry, commerce or
any other business or profession.
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19. Legal Services – Returns Disclosure
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20. Director to Company/Body Corporate
 Services provided by Director to Company:
 All services are covered but not all directors;
 Non – Executive, Nominee and Independent Directors are covered;
 MD or WTD or ED – Not covered if in Full Time Employment;
 Service Provider is not required to pay service tax on his services provided;
 Service Receiver is required to pay 100% of service tax on such services received;
 How to find out whether director is in FTE?
 Resolutions passed at Board Meeting are helpful to conclude;
 Deduction of Income Tax at Source is not a conclusive evidence.
 Amendment vide Finance Act, 2014:
 Body Corporate has been added with effective from 11.07.2014 to cover entities other than companies. Services provided by director to body
corporate/company are taxable.
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21. Partial Reverse Charge Mechanism
 Partial Reverse Charge Mechanism:
 Introduced with effective from 01.07.2012;
 Both the SP & SR are obliged to pay the service tax;
 Liability Independent to each other – No SSP Exemption for SR;
 Only:
o If SP – Other than Body Corporate;
o If SR – Body Corporate;
o If Services are:
 Manpower Supply Services;
 Security Services;
 Works Contract Services;
 Rent – A – Cab
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22. Manpower Supply Services
 Service Provider other than Body Corporate and Service Receiver is body corporate- then service receiver has to pay
service tax on 75% of the gross amount charged.
 The question for deliberation is whether the contract for deliverable is also to be called as manpower supply
contract and attracts partial charge obligation?
 Supply of Manpower – Defined vide STR, 1994 – Rule 2(1)(g) - means supply of manpower, temporarily or
otherwise, to another person to work under his superintendence or control.
 Very interesting issue and subjected to litigation – deliverable based vs Manpower based. The core processes or
activities can never be said out of SR’s control and superintendence.
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23. Manpower Supply – Case Studies
Case Study: 1:
Scope of Work:
Work Order for deployment of manpower for fabrication, erection of plates and structural steel work & AC/CI sheet fixing,
equipment erection and other miscellaneous jobs for our Cement Unit. The schedule of rates for man power supply as per
enclosed Annexure.
Terms & Conditions:
 You shall ensure and supply the sufficient labour are to be deployed as per the requirement of the company to carry out
the work (1).
 You and your workmen are to be abiding by the instructions given by the authority specified and follow the same. Any
violation of the same will amount to the violation of the terms of the agreement and you will have to reimbursement for
the losses caused to the company and decisions taken by the Management will bind on you this regard (5).
 10% extra amount shall be paid on man power bills as supervisor charges (26).
 You have to complete all the works in stipulated time period as per the instructions of the site in-charge.
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24. Manpower Supply – Case Studies
Case Study: 2:
Scope of Work:
 You shall be assigned various horticultural works at specified area as advised by the officials authorized by the
company;
 You shall be assigned other miscellaneous works at same area in accordance with instructions of the company’s
authorized officers.
Terms & Conditions:
 You shall ensure to deploy appropriate personnel as per the requirement of the company to carry out the assigned
work (1).
 You shall ensure that compliance with the instructions and directions given in respect of safety precautions
stipulated in the course of discharge of assigned works (4).
Price Schedule:
 You will be paid at the following rate:
 Rs. 198/- per head per day, in respect of horticulture works maximum of Rs. 75,000/- per month.
 Rs. 305/- per head per day, in respect of other miscellaneous works maximum of Rs. 95,000/- per month.
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25. Manpower Supply – Case Studies
Case Study: 2:
Validity:
 However, in case your performance is found unsatisfactory or in contraventions to the terms & conditions of this
work order, the company reserves the right to terminate this work order without any prior notice or any
compensation in lieu thereof, to you.
Penalty:
 The essence of this work order is unflinching achievement of prescribed target of production, with due regard for
safety of the equipment and personnel deployed by you, and any dereliction on this count shall attract penal
provisions as a deterrent.
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26. Manpower Supply Services – Returns Disclosure – For SR
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27. Manpower Supply Services – Returns Disclosure – For SR
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28. Manpower Supply Services – Returns Disclosure – For SP
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29. Manpower Supply Services – Returns Disclosure – For SP
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30. Works Contract Services
For falling under Works Contract:
 There shall be a contract wherein transfer of property in goods involved in execution of such contract from the
service provider to service receiver and;
 such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any
other similar activity or a part thereof in relation to such property.
For falling under Partial Reverse Charge Obligations & Compliance thereof:
 Service Provider shall be a person other than a body corporate;
 Service Receiver shall be a body corporate;
 Services shall be satisfying the definition of works contract as laid above;
 Service Provider shall be liable to pay 50% of the value of service tax;
 Service Receiver shall be liable to pay 50% of the value of service tax;
 Both can follow different valuation mechanisms for arriving service tax.
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31. Works Contract – Valuation Mechanism
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32. Works Contract Services – Case Studies
Case Study : 1
XYZ Ltd gives a contract to Mr A for construction of compound wall. As per the contract, XYZ Ltd has to provide the
material for construction and Mr A is responsible only for provision of construction services. Please answer the following:
 Do services provided by Mr A fall into the scope of WCS?
 Is XYZ Ltd is required to pay service tax under partial reverse charge obligation under WCS?
 Do services provided by Mr A shall fall under any other category of PCM?
Case Study 2: Further Facts Added:
As per the contract major materials are to be supplied by XYZ Ltd and remaining materials to be supplied by Mr A. In such
a scenario, please answer the following:
 Do services provided by Mr A fall into the scope of WCS?
 Is XYZ Ltd is required to pay service tax under partial reverse charge obligation under WCS?
 What is the value on which XYZ Ltd is required to pay service tax?
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Free Supply of Materials has to be
included while arriving value of
service tax
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33. Works Contract Services – Returns Disclosure
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34. Works Contract Services – Returns Disclosure
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35. Rent – A – Cab Services
 For falling under Partial Reverse Charge Obligations :
 Service Provider shall be a person other than a body corporate;
 Service Receiver shall be a body corporate;
 Service Receiver shall not be in the similar line of business;
 How much is to be paid towards service tax:
 If SP avails abatement – SR shall pay the entire service tax to CG;
 If SP does not avail abatement – SR shall pay 50% of the service tax payable to CG – 60% abatement – 26/2012-ST
Case Study:
Whether hotels providing cab services can be called as engaged in similar line of business and hence not required to
comply partial charge obligations?
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Registration & Point of Taxation
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37. Registration & POT
 Service Receiver for all purposes deemed as Service Provider. Hence:
 Has to apply for registration in Form ST-1;
 Has to obtain registration in Form ST-2;
 Has to file periodical returns in Form ST-3.
 Due Date for Payment of Service Tax under Reverse & Partial Charge:
 As per Rule 7 of Point of Taxation Rules, 2011 – the point in time when service under reverse or partial charge is
the date on which payment is made. If payment is not made within 3 months from the date of invoice, the due
date shall be next month falling from the date of invoice.
 Invoice Date – 23/12/14; Payment Date – 23/02/15; Due Date for payment of service tax –
 Invoice Date – 23/12/14; Payment Date – 23/05/15; Due Date for payment of service tax –
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06/03/15
06/01/15

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Place of Provision of Service Rules, 2012
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39. Place of Provision of Service Rules, 2012 - Impact
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 The service receiver shall be liable only if:
 The consumption of the service is in taxable territory as per POPS Rules, 2012;
 The service provider is located in the Non-taxable territory.;
 Service provider is not required to pay any service tax;
 Service receiver has to pay service tax @ 100% * 12.36% on the value of services
Case Study :
ABC Ltd has entered a rental agreement for an immovable property to set up office with Mr X located in USA. The
immovable property has been located in Hyderabad. Please answer the following:
 Where has the consumption of the service taken place?
 Who is required to pay service tax on such rental incomes – ABC Ltd or X?
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Cenvat Credit
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41. OutputService
any service provided by a provider of a
service in a taxable territory
but shall not include
services specified in Section 66D
Where whole of service tax is labile to
be paid by service recipient
Output Service - Rule 2 (p)
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42. Rule 4 (7)
Normal Services Reverse Charge Services Partial Reverse Charge
Services
Rule 4 (7) – Timing of availment for CC on Input Service
Provided if the payment of
input service + service tax is
not paid within 3 months from
the date of invoice, the CC
availed shall be reversed
Credit shall be allowed only after
payment of service tax to the
central government
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Credit shall be allowed only after
payment of value of input
service + service tax as indicated
in the vendor’s bill.
After the payment of value of
input service + service tax, re-
credit can be taken

43. Cenvat Credit – Eligibility thereof:
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S. No. Services Cenvat Credit When?
1 GTA Services Yes 2nd Limb
2 Sponsorship Yes 2nd Limb
3 Services provided by an arbitral tribunal Yes 2nd Limb
4 Individual Advocate or Firm of Advocates - Legal Services Yes 2nd Limb
5 Director to Company Yes 1st Limb
6 Support Services by Govt - (RIPS & specified services - Section 66D) Litigation Prone 1st Limb
7 Rent - A- Cab - Abated Value Yes If falls under exception to 3rd Limb
8 Rent - A- Cab - Non - Abated Value Yes If falls under exception to 3rd Limb
9 Manpower Supply or Security Services Yes 2nd Limb
10 Service Portion in WCS Yes If falls under exception to 3rd Limb
11 SP - Non Taxable Territory & SR - Taxable Territory Yes 1st Limb
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Refund for Service Providers
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45. Refund of Cenvat Credit
5 - Export
5A – Units in Specified
Areas
5B – SP falling under
Reverse Charge Obligations
Rule 5B – Refund of Cenvat Credit
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SP falling under the reverse
charge obligation – not in a
position to utilize the CC, he can
claim refund of such CC
12/2014-CE (NT) dated 03.03.14 –
Conditions Notified

46. Refund of Unutilized Cenvat Credit – SP – PCM
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 The service providers shall be eligible to refund of unutilized cenvat credit taken on inputs and input services for
provision of services falling under partial reverse charge mechanism.
 Refund of Unutilized Cenvat Credit during the half year shall be granted to the extent of A - B , where:
A = [CC on Inputs + Input Services] * Turnover of Output Service under PCM
Total Turnover of Goods + Services
B = Service Tax paid by SP for such partial reverse charge services.
 Conditions & Procedure:
 Refund claimed should not exceed the ST paid or payable by SR on such partial reverse charge services provided;
 Cenvat Credit account has to be debited with the refund amount at the time of claiming the refund;
 Refund shall be claimed for every half year- after filing of the respective half year period;
 Refund shall be submitted to AC/DC in Form A along with relevant docs.
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Please reach me for any queries – harsha@sbsandco.com
– 95 81 00 03 27
Thank You !!