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Amendment in reverse charge mechanism by Finance Bill 2015 and critical analysis of RCM

CA Vijaykumar Gutte 
on 11 May 2015

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Finance Budget 2015 Changes Included.

Critical Analysis of Reverse Charge Mechanism in Service Tax

Earlier I had posted an article on critical analysis on reverse charge mechanism on 24th July 2014, now there are certain changes took place by Finance Budget 2015 and other by way of Notification. Here I am considering original article and will incorporate all updated information with their reference.

Background

Government of India has started now negative list in June 2012 instead of selective List, Due to such changes all services has been bought in the Service tax regime except negative list & Specific exemption given under Finance Act and revenue to the government has been increased drastically. While introducing the Negative list some of important change also took place where CBEC introduces some of services under Reverse Charge Mechanism. These are as follows

Reverse Charge (Tax Shift)

a. Generally, service tax is payable by person providing the service who actually collect the tax and pays to government.

b. But Section 68(2) introduced and makes provision for reverse charge i.e. making person receiving the service liable to pay tax.

c. Provision can be made that part of tax will be paid by service receiver and part by service provider or entire by Service Receiver.

d. Provisions relating to reverse charge are contained in Notification No. 30/2012- ST dated 20-6-2012. See Appendix 2 for tax of the Notification and amended from time to time.

Procedural part for Reverse Charge Mechanism

1. Update Service Tax Registration Certificate for Services covered under reverse charge mechanism before payment or filling of service tax return under reverse charge mechanism.(Service Recipient)

2. CENVAT CREDIT: In case of an input service where service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall allowed on or after the day on which

a. payment is made on the value of input service and

b. Service tax paid or payable as indicated in invoice referred in Rule 9.

3. Even if Service Provider is liable for payment of service tax in certain portion say e.g. 25%, 50% etc can avail Cenvat Credit on entire input w.r.t.334/1/2012.

4. Cenvat credit cannot be used to pay tax by service receiver. Service tax as to be paid by cash only i.e. GAR-7 challan.

5. Once paid, Cenvat credit can be taken if otherwise it is his eligible ‘input service’ as per the above mentioned Point 2.

6. Reverse charge with condition of non-availability of Cenvat: In some services (e.g. GTA, renting or hire of motor vehicle designed to carry passengers), the abatement is subject to condition of non-availment of Cenvat credit by service provider (not by service receiver)

7. Payment of Service Tax by Service receiver only after making payment to service provider: Now the service tax is payable on accrual basis but in case of reverse charge service tax is payable only after payment is done to service provider, subject to payment done within 6 months.

8. Payment of Service Tax: Payment of service tax under reverse charge mechanism shall be in cash and can’t be utilized Cenvat credit against service tax liability in reverse charge mechanism.

9. Small Service Provider : No benefit of Basic exemption limit of Rs ten lacks is available as per the NN 6/2005, Except in case of legal service provided by Advocate.

10. TDS Matter: with my opinion TDS to be deducted on net billing amount instead of service tax paid i.e. excluding service tax under reverse charge mechanism.

11. What if Service Provider paid service tax instead of service receiver. In such cases no need to pay service tax again under reverse charge mechanism to avoid the double taxation on single income. Some case laws a. Lilason Breweries vs CCE, CCE Vs Om Tea Company

12. Refund of CENVAT Credit : AS per Rule 5B of CCR 2004 Refund, A provider of services is being unable to utilize the CENVAT credit on inputs and input services for payment of service tax on such output services, shall be allowed refund for unutilized service tax, subject to safeguard rules. Ref NOTIFICATION NO. 12/2014 for details.

13. Billing by service provider

a. Service provider should charge only his part of service tax Service receiver to pay service tax of his part by GAR 7 challan

b. Service receiver liable for only his part and not entire amount, even if service provider does not charge his portion of service tax.

c. A statutory liability cannot be shifted by mutual agreement. If statutory liability is of service receiver, he alone is liable. Reverse charge provisions at a glance

The provisions are summarized below:

Note : Business Entity and Body Corporate

a. In some cases, reverse charge is applicable only when service receiver is business entity registered as ‘body corporate’.

b. “Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, Government, charitable organisation is not ‘business entity’.

c. “Body Corporate” – Company, Cooperative Society is Body Corporate – Firm, HUF, Trust is not ‘Body  Corporate’ [Society registered under Societies Act islegally not ‘body corporate’].

Whether LLP is a body corporate or not?

Definition of Service tax

Section 65 (14) "body corporate" has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956 (1 of 1956);

Definition of Companies Act, 1956

(11) “body corporate” or “corporation” includes a company incorporated outside India, but does not include— (i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;

(20) “company” means a company incorporated under this Act or under any previous company law;

Based on the above LLP is not a Body Corporate and hence it is not under RCM.

Reverse charge in works contract service

a. 50% tax by service receiver if service provider of works contract service is individual, HUF, proprietary or partnership firm or AOP AND

b. service receiver is business entity incorporated as body corporate.

c. Construction, Job work with material, AMC covered under works contract.

Reverse charge in case of manpower supply and security service

a. There will be no tax by service Provider if service provider of manpower supply is individual, HUF, proprietary or partnership firm,LLP or AOP AND

b. Service receiver is company or business entity incorporated as body corporate.

c. Entire service tax amount i.e. 100% by service Receiver. Changes made by Finance Budget 2015

d. Issues relating to manpower supply service: Service should be manpower supply i.e. under command of Principal Employer.

e. “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.’ [Rule 2(g) of Service Tax Rules, inserted w.e.f. 1-7-2012].

f. Cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.

g. Assessable Value: Service tax payable on salary plus PF, ESI plus commission of labour contractor.

Other services under reverse charge

a. Services of Advocate or Advocate Firms or Arbitral Tribunal to Business Entity having turnover over ` 10 lakhs. Then Business Entity is liable to pay entire service tax.

b. “ (iva) provided or agreed to be provided by a director of a Company or a body corporate to the said company or the body corporate;”

“or the body corporate” has been inserted in 2014 which covers major all directors working under Company, LLP, Cooperative Society.

By CA Vijaykumar E. Gutte
ABM & Associates LLP
Chartered Accountants
Aundh Brach, Pune
Vijaykumar.gutte@abmllp.com
Web Site – abmllp.com


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