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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

- Payment is made on the value of input service and
- 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.

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:


 Sr. No.

Description of service

Service Provider

Service Receiver

Liability of service tax

1

Services of insurance agent [Rule 2(d)(i)

Insurance Agent

Insurance Company

100% by insurance company

Note : As per the NN 6/2014 : included in Mega Exemption w.e.f. Sept 2014

 '(c) life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum amount of cover of fifty thousand rupees.'

1A

Recovery Agent Service

Recovery Agent

banking company

or a financial institution or a non - banking financial company

Entire tax is payable by service receiver.

2

Services of Goods Transport Agency (GTA) of goods transport

Goods Transport Agency (one who issues consignment note)

Consignor or consignee who is (i)

  1. factory,
  2. society,
  3.  registered dealer of excisable goods,
  4.  body corporate,
  5.  partnership firm,
  6.  AOP

and

(ii) who pays or is liable to pay freight either himself or through his agent for transportation of such goods in goods carriage

Entire tax is payable by service receiver.

Tax payable on 25% of value if Cenvat credit has not been availed by service provider. Hence, it is necessary to obtain certificate from the service provider (GTA) that he has not availed any Cenvat credit. Otherwise, service tax will be payable on 100% of the value.

 Person liable to pay freight for transportation of goods, located in taxable territory, shall be the person who receives the service. If such person is located in non-taxable territory, the provider of service shall be liable to pay service tax.

3

Sponsorship service

Any person

  1. Any Body corporate or
  2.  partnership firm

located in the taxable territory

Entire tax payable by service receiver.

Other than above

If the receiver of service is not body corporate or partnership firm or if such body corporate or partnership firm is not located in taxable territory, the service provider (i.e. person receiving the sponsorship money) will be liable to pay the service tax.

4

Services of Arbitral Tribunal

Arbitral Tribunal

Business Entity

Entire tax payable by service receiver

5

Legal Services of Advocate or Advocate Firms

Individual Advocate or Advocate Firms

Business Entity having turnover exceeding ` ten lakhs per annum, located in taxable territory.

Entire tax payable by service receiver

Other than Above

Individual Advocate or Advocate Firms who is providing services need to pay service tax.

5A

Services of director to company (entry added NN 45/2012 w.e.f. 7-8-2012)

Director

Company or body corporate (w.e.f. july 2014)

Entire tax payable by service receiver

6

Support Services by Government or Local Authority  Excluding renting of immovable property and services specified in clauses (i), (ii) and (iii) of Section 66D(a) of Finance Act, 1994 (These cover postal, port, airport and railway services)

Government or Local Authority

Business Entity located in taxable territory

Entire tax payable by service receiver

7

Renting or hiring of motor vehicle designed to carry passengers to any person who is not in the similar line of business

Individual, HUF, proprietary or partnership firm, AOP located in taxable territory

Business entity registered as body corporate located in the taxable territory

  1. With Abatement: No CENVAT Credit is availed by Service Provider - Tax on 40% of value by service receiver and Nil by service provider.
  2. W.e.f. 1st Oct 2014 rate will be 50% by Service Receiver.
  1. Without Abatement: If the service provider intends to avail CENVAT credit, he can pay service tax on balance 60%. Thus, service receiver is liable to pay service tax only on 40% value.
  2. W.e.f. 1st Oct 2014 rate will be 50% by provider and 50% by Service Receiver NN 10/2014

Similar line of activity

Any Body

Any Body

Entire Tax payable by Service Provider. Abatement benefit can be availed.

8

Supply of Manpower for any purpose or security service (The words ‘or security service’ were added w.e.f. 7-8-2012

Individual, HUF, proprietary or partnership firm, AOP located in taxable territory

Business entity registered as body corporate located in the taxable territory

Tax on 25% of value by service provider and

75% by service receiver

9

Service portion in execution of Works Contract

Individual, HUF, proprietary or partnership firm, AOP located in taxable territory

Business entity registered as body corporate located in the taxable territory

Tax on 50% of value by service provider and 50% by service receiver

10

Services received from non-taxable territory (Import of Service)

Located in non-taxable territory

Located in taxable territory

Entire tax payable by service receiver.


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’.

- "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’.

- "Body Corporate" - Company, LLP, Cooperative Society is Body Corporate - Firm, HUF, Trust is not ‘Body Corporate’ [Society registered under Societies Act is legally not ‘body corporate’].

Reverse charge in works contract service

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

- Service receiver is business entity incorporated as body corporate.

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

 Reverse charge in case of manpower supply and security service 

- 75% tax by service receiver if service provider of manpower supply is individual, HUF, proprietary or partnership firm or AOP AND

- Service receiver is company or business entity incorporated as body corporate. Balance 25% by service provider.

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

- '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].

- 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.

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

 Other services under reverse charge

- Services of Advocate or Advocate Firms or Arbitral Tribunal to Business Entity having turnover over Rs10 lakhs. Then Business Entity is liable to pay entire service tax.

- '(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.

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Category Service Tax, Other Articles by - CA Vijaykumar Gutte 



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