19 March 2013
As per new reverse charge mechanism (notification no 15/2012-ST dated 17-3-2012) where under work contract service if service provider charges full amount of service tax instead of 50% then what is the liability of service receiver ??????????? Because in my case the service receiver has taken the whole bill amount including service tax as his cost..........??,,
20 March 2013
Though it is a matter of consideration that where the provider is liable to pay part of service tax but the receiver is paying entire tax..yet there is no loss to the revenue. There has been case laws on the similar matter, where double taxation had been avoided on the ground that Government treasury has not been affected.
Yet it is advisable, in your case, to comply with the provisions now onwards, in order to avoid any proceedings.
18 July 2013
Service Tax: Reverse Charge Mechanism & Accounting Treatment January 25, 2013 by Sanyam Jain 22 Comments
Background of Reverse Charge Mechanism Service tax is normally collected by the Service Provider and deposited with the Government. However, with effect from 1-7-2012 a new scheme of taxation has been brought into effect whereby the liability for depositing service tax for services received/consumed shall be on the Service Recipient. This liability for depositing the service tax directly with the Government is either in full or jointly between the Service Provider and the Service Recipient in certain ratios as prescribed.
When the liability to deposit service tax is on the Service Recipient on the basis of services consumed, it is called as a Reverse Charge Mechanism. Under the Reverse Charge Mechanism the Service Recipient is liable to pay service tax directly to the Government instead of paying the service tax to the Service Provider.
Notification No. 30/ 2012 dated 20-6-2012 and Notification No. 45/2012 dated 07-08-2012 issued by the Central Government has notified 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 Recipient. The extent to which tax liability has to be discharged by the Service Recipient has also been specified in the said notifications. The same is tabulated below:
List I – Services under Full Reverse Charge Mechanism: SN Nature of Service
Description of a Service Percentage of Service tax payable by Service Provider
Percentage of Service tax payable by Service Recipient
(1) Goods Transport Services Transport of goods by road NIL 100%
(2) Sponsorship Service Sponsorship service NIL 100%
(3) Legal Services Legal services by Individual advocate or a firm of advocates including arbitral services NIL 100%
(4) Government Services Support services by Government or local authority (excluding renting of immovable property and certain other specified services) NIL 100%
(5) Directors Fees Services provided or agreed to be provided by a Director of a company to a said company NIL 100%
(6) Import of Service Any taxable service where the Service provider is located in a non taxable territory and service recipient located in a taxable territory NIL 100%
List II – Services under Partial Reverse Charge Mechanism:SN
Nature of Service
Description of a Service
Percentage of Service tax payable by Service Provider
Percentage of Service tax payable by Service Recipient
(1) Manpower Supply Service* Supply of manpower for any service 25% 75%
(2) Security Service* Security service 25% 75%
(3) Works Contract Service* Works Contract service 50% 50%
(4) Rent-a-cab Service* Renting of passenger motor vehicles- With abatement (40% taxable)- Without abatement NIL 60% 100% 40%
* Only in cases where the Service Provider is an individual, HUF, partnership firm, AOP or Trust
1. Would the Full Reverse Charge Mechanism be applicable in all the above cases as listed in List-I?
If the type of service received/consumed falls under any of the 6 categories as given in List – I above, then we (BD) as a Service Recipient will be liable to pay the service tax directly to the Government under the Full Reverse Charge Mechanism.
2. Would Partial Reverse Charge Mechanism be applicable in all cases as listed in List-II?
Partial Reverse Charge Mechanism is not applicable for all cases. For Partial Reverse Charge Mechanism to apply, it needs to fulfil 2 conditions:
The Service Provider is a non corporate entity (See Separate FAQ on how to identify whether the service provider is a non corporate entity). The service received/consumed should fall under the type of service as listed in List –II. (See separate FAQs on how to identify the service). If both these two conditions together are satisfied then the service tax will be applicable under the Partial Reverse Charge Mechanism wherein we (BD) will be required to deposit part of the service tax to the Government directly, and part of the service tax will be billed to us by the Service Provider.
3. How to identify if the Service Provider is a non corporate entity?
The PAN of the vendor will guide us to identify if the Service Provider is a non corporate entity. As you are aware, the 4th alphabet of the 10 digit alphanumeric PAN decides the status of the person.
If the 4th digit of the PAN is any letter other than “C” then Partial Reverse Charge Mechanism will apply. That means that if the 4th alphabet of the 10 digit PAN is “C” then Partial Reverse Charge Mechanism will not apply.
4. What is the meaning of “Supply of Manpower”?
Supply of manpower means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. “Supervision and control” guide whether or not the contract is for supply of manpower. Example: Housekeeping service through housekeeping staff deployed at office will not be covered under supply of manpower since the staffs do not work under our supervision and control, but they work under the supervision and control of the contractor.
5. What is a Works Contract?
“Works Contract” has been defined to mean a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods 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.
6. Would contracts for repair or maintenance of assets be treated as ‘works contracts’? If so, how would the value be determined for ascertaining the value portion of service involved in execution of such a works contract?
Yes. Contracts for repair or maintenance of moveable properties are also works contracts if property in goods is transferred in the course of execution of such a contract. Service Tax has to be paid in the service portion of such a contract. Therefore in our case, all comprehensive annual maintenance contracts for repair, maintenance, for all assets will get covered under this category.
7. Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’?
Yes, if such contracts involve provision of materials as well.
8. Is the entire contract value liable for service tax under the Partial Reverse Charge Mechanism?
No the entire contract value is not leviable to service tax. Only the “Service portion” of the Works Contract is declared and deemed to be a “service”.
9. What is the manner of determination of value of “service portion” in execution of a works contract from the total contract?
The manner for determining the value of “service portion” of a works contract from the total works contract is given in Rule 2A of the Service Tax (Determination of Value) Rules, 2006. As per sub-rule (i) of the said Rule 2A the value of the service portion in the execution of a works contract is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract
Gross amount includes Gross amount does not include Labour charges for execution of the works Value of transfer of property in goods involved in the execution of the said works contract.Note:As per Explanation (c) to the said sub-rule (i), where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract. Amount paid to a sub-contractor for labour and services Charges for planning, designing and architect’s fees Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract Cost of consumables such as water, electricity, fuel, used in the execution of the works contract Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract. Profit earned by the service provider relatable to supply of labour and services 10. Is there any simplified scheme for determining the value of “service portion” in a works contract?
Yes. The scheme is contained in the clause (ii) of rule 2Aof the Service Tax (Determination of Value) Rules, 2006. As per this scheme the value of the service portion, where value has not been determined in the manner as provided in clause (i) of rule 2A (explained in point 8.2.1 above), shall be determined in the manner explained in the table below –
Where works contract is for… Value of the service portion shall be… (A) execution of original works 40% of the total amount charged for the works contract (B) maintenance or repair or reconditioning or restoration or servicing of any goods 70% of the total amount charged including such gross amount (C) in case of other works contracts, not included in serial nos. (A) and (B) above, including contracts for maintenance, repair, and completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings. 60% of the total amount charged for the works contract Important-As per the Explanation (II) to clause (ii) of rule 2A of the said Rules ‘total amount’ referred to in the second column of the table above would be the sum total of gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of works contract, under the same contract or any other contract, less (i) the amount charged for such goods or services provided by the service receiver; and (ii) the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount, as the case may be.
11. What are “original works’?
As per Explanation (I) to clause (ii) of rule 2A of the Valuation Rules ‘Original works’ means:
all new constructions; all types of additions and alterations to abandoned or damaged structures on land that is required to make them workable; erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise. 12. 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; our (BD) name and address as a Service Recipient 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.
13. 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, we as Service Recipient shall have to pay service tax which we are required to pay under the partial Reverse Charge Mechanism.
14. 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?
We as the Service Recipient would need to discharge liability only on the payments made by us. 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.
15. What is Rent-a-cab service?
Services in relation to renting of a motor vehicle designed to carry passengers (cars, buses, vans, etc.) is covered under the rent a cab service.
16. Is the entire contract value liable for service tax under the Partial Reverse Charge Mechanism?
No, the entire contract value is not leviable to service tax. There are options available to the service provider of abatement or no abatement.
However as mentioned earlier, 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 abatement or choose a valuation option depending upon the ease, data available and economics.
Whether or not the Service Provider has taken abatement or no, in either case as a Service Recipient our liability under Partial Reverse Charge Mechanism will always be effectively 4.944%.
17. Is CENVAT credit allowed to be taken of the service tax partially billed by the Service Provider and partially paid by us as a Service Recipient under the Partial Reverse Charge Mechanism?
Yes, CENVAT Credit can be availed on all the service tax amount paid to the vendor under as well as paid by us directly into the Government Treasury under the partial Reverse Charge Mechanism, except CENVAT credit cannot be taken on rent-a –cab services and CENVAT credit also cannot be taken for any expenses incurred on any of the passenger vehicles.
17. In case the vendor has wrongly billed service tax in his invoice but his service is covered under the Full Reverse Charge Mechanism what should be done?
In case the service rendered by the Service Provider falls under List-I as above and therefore covered under the Full Reverse Charge Mechanism, we should ask the Vendor to raise a fresh invoice without service tax.
18. In case the vendor has wrongly billed full service tax in his invoice but his service is covered under the Partial Reverse Charge Mechanism what should be done?
In case the service rendered by the Service Provider falls under List-II as above and therefore covered under the Partial Reverse Charge Mechanism, we should ask the Vendor to raise a fresh invoice charging service tax only to the extent to be collected by him from us.
19. How are locations to report this information on Reverse Charge Mechanism?
We will ask you to capture this information on excel sheets. Formats will be circulated shortly. Once we get comfort on the process, recording and reporting of these transactions in excel formats, we will then automate in the Navision ERP.
Accounting Treatment in case of Reverse Charge of Service Tax Service Tax Liability The foremost point is when the liability for the payment of Service Tax will arise in case of Reverse Charge. The relevant extract of Rule 7 regarding this is as follows: -
Rule 7: - Determination of point of taxation in case of specified services or persons: -
Notwithstanding anything contained in these rules, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made: Provided that, where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist:
As this is clear from the above Rule 7 of Point of Taxation is that in case of Reverse Charge the Point of Taxation is when the payment is made .i.e.service tax liability is arise when service recipient make payment to service provider.
Example: - we have received the Taxable Service under Reverse Charge in the month of say Sept 2012, however the payment made to the party in the month of September 2012.In this case the Service Tax liability will arise in the month of September 2012 and the due date for the payment of Service Tax will be the 5th/6th of the succeeding month. Suppose extract of invoice received is as below:
Case-I where advocate charged service tax on his invoice. Case-II where advocate don not charge service tax on his invoice. Legal fees 10,000 Service Tax @ 12.36% 1,236 Total Bill 11,236 Legal fees 10,000 Service Tax @ 12.36% Nil Total Bill 10,000 2. Accounting Treatment in the Month of September 2012: - At the time of booking the Expense for the service received
Case-I Case-II Legal fees Dr. 10,000 Service tax input but not due Dr. 1,236 To XYZ 8,877 To TDS payable 1,123 To Service Tax Payable 1,236 Legal fees Dr. 10,000 Service tax input but not due Dr. 1,236 To XYZ 9,000 To TDS payable 1,000 To Service Tax Payable 1,236 3.Accounting Treatment at the time of making payment to Party
Case-I Case-II XYZ Dr. 8,877 To Bank/Cash 8,877 XYZ Dr. 9,000 To Bank/Cash 9,000 As we have made the payment to the concerned party, the liability for the payment of Service Tax has arised and since we have not paid the payment of Service Tax yet, so we are not eligible for the Input tax Credit of Service Tax at this stage.
Cenvat Credit of Service Tax: - The second important thing is when the Input Credit of the service tax paid above will be taken. The relevant extract of Rule 9 regarding this is as follows: - Rule 9 (1)(e), a challan evidencing payment of service tax by the person liable to pay service taxunder sub-clauses (iii), (iv), (v) and (vii) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994; 4. As from the above extract is clear that the Input Credit for the Service Tax payable is available only after the payment of Service Tax on the basis of Challan evidencing the payment of Service Tax.
Accounting Treatment at the time of making payment of Service tax to the Central Govt.
Case-I Case-II Service Tax Payable 1,236 Service Tax input due 1,236 To Bank 1,236 To Service tax input but not due 1,236 Service Tax Payable 1,236 Service Tax input due 1,236 To Bank 1,236 To Service tax input but not due 1,236 5. Now we can utilize Cenvat input to out tax liability as payment of service tax has been made
Case-I Case-II Service Tax Output Dr. 1,236 To Service Tax input due 1,236 Service Tax Output Dr. 1,236 To Service Tax input due 1,236 Let’s take another example of car hire charges where Cenvat Credit not available and TDS deducted @1%
Case-I when provider charge service tax at abated value @ 40% of 12.36% (i.e.4.944%) Case-II when Service provider charge service tax at full rate @ 12.36% Case-III when Service provider do not charge service tax on invoice Car Hire Charges 10,000 10,000 10,000 Service Tax 494 1,236 - Total 10,494 11,236 10,000 1.At the time of booking the Expense for the service received
Case-I Case-II Case-III Car Hire Charges 10494To XYZ 9,896 To TDS payable 104 To Service Tax Payable 494 Car Hire Charges 11,236To XYZ 10,630 To TDS payable 112 To Service Tax Payable 494 Car Hire Charges Dr. 10,000 Service Tax Paid Dr. 494 (claim as exp.) To XYZ 9,900 To TDS payable 100 To Service Tax Payable 494 2.At the time of making payment to party
Case-I Case-II Case-III XYZ Dr. 9,896To Bank/Cash 9,896 XYZ Dr. 10,630To Bank/Cash 10,630 XYZ Dr. 9,900To Bank/Cash 9,900 3. Accounting Treatment at the time of making payment of Service tax to the Central Govt.
Case-I Case-II Case-III Service Tax Payable 494To Bank 494 Service Tax Payable 494To Bank 494 Service Tax Payable 494To Bank 494
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