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Reverse charge and partial reverse charge mechanism in ST

CA. K S Chauhan , Last updated: 05 December 2014  
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Service Tax is levied under Section 66B[1] of the Finance Act, 1994 as amended up to date. Section 68(1)[2] confers liability to pay service tax on service provider but section 68(2)[3], which has overriding effect over section 68(1), confers liability to pay service tax on the receiver of such taxable service as notified by Central Government.

The reverse charge mechanism (RCM) was first introduced effectively from 01-01-2005 vide Notification No. 36/2004-ST dt. 31-12-2004 read with Rule 2(1)(d) of Service Tax Rules, 1994. With effect from 01-07-1012 a new mechanism of reverse charge (RCM) and partial reverse charge or joint charge (PRCM / JCM) was introduced with the introduction of negative list regime of service tax.

Some fundamental concepts of reverse/partial charge mechanism are;

1. Applicability of RCM/PRCM is dependent on the status & location of Service Receiver (SR) and Service Provider (SP) and taxability of service. RCM does not apply on non-taxable and exempted services but applies on abated services and where value is determined by valuation rules.

2. No threshold exemption of Rs. 10 lacs is available to Service Receiver (SR) as this exemption is available to Service Providers only. (refer NN 33/2012-St dt. 20-06-2012)

3. Service Receiver is liable to pay service tax under this mechanism from very first invoice received under this category. It means SR is liable to pay ST even when SP is within the ambit exemption limit under NN 33/2012-ST.

4. This service tax liability has to be met in cash i.e. no Cenvat Credit facility is available to meet out this liability as Cenvat Credit facility is available for output services only while it will be input service for SR. Rule 2(p) of Cenvat Credit Rules, 2004 (as amended by NN 28/2012-CE (NT) dt. 20-06-2012, the term output service means any service provided by SP located in taxable territory but shall not include a service;

- Specified in section 66D of the Finance Act, 1994, or

- Where whole of ST liability is of SR i.e recipient of service.

As a result, who is engaged in providing taxable services falling under full RCM, will not be able to take Cenvat Credit of ED & ST in respect of ‘input’/’capital goods’ and ‘input services’ respectively.

1. Service Receiver is liable to discharge service tax liability under Rule 7 of Point of Taxation Rules, 2011 (NN 18/2011-ST as amended by NN 25/2011-ST, NN 41/2011-ST, NN 4/2012-ST and NN 37/2012-ST)

2. In case of Service Providers (SP) rendering the services all of which falls within the ambit of complete reverse charge mechanism; he cannot avail Cenvat credit of input or input services.

But, Service Receiver (SR) who is paying service tax under RCM can avail Cenvat credit as per Rule 4(7) of CCR, 2004 for any output service [refer Rule 3(4)(e) of CCR, 2004] on the basis of challan evidencing payment of ST [refer Rule 9(1)(e) inserted by NN 18/2012-CE (NT)].

The golden rule of Cenvat is that SP cannot claim refund of Cenvat if he is not able to utilise Cenvat credit against its output ST liability. There are two exception to this rule;

1. Export of service (Rule 5A of CCR, 2004)

2. A service provider also discharging ST liability under section 68(2), is unable to utilise such Cenvat credit against his ST liability on output services, refund is admissible as per Rule 5B of CCR, 2004 as amended by NN 28/2012-CE (NT) dt 20-06-2012[4] but CBEC has not notified its claiming procedure so far so practically it can’t be claimed till date. It is pertinent to mention here that Rule 5B does not cover refund of Cenvat credit availed on capital goods.

Following services are covered under reverse charge/partial reverse charge mechanism under Rule 2(2)(d)(i) read with Notification No. 30/2012-ST as updated by NN 45/2012-ST, NN 46/2012-ST & NN 10/2014-ST:

1. Insurance Agent Service

1A. (Banking) Recovery Agent Service (w.e.f. 11-07-2014)

a. Goods Transport Agency Service

b. Sponsorship Service

c. Legal Service

d. Arbitral Tribunal Service

e. Services by Directors of the company body corporate to the company body corporate (w.e.f. 07-08-2012 11-07-2014)

f. Support Services provided by Government/Local Authority

g. Rent-a-Cab Service

h. Manpower Supply Service

i. Security Service (w.e.f 07-08-2012)

j. Service portion in execution of Works Contract

k. Import of Taxable Services

1. Analysis of Insurance Agent Service:

NN 30/2012-ST (as amended up to date)

SL

NATURE OF SERVICE

PROVIDER

RECEIVED

Who?

How much?

Who?

How much?

Effective Rate

1

Insurance Agent Service

Any insurance agent (any person)

located in the taxable territory

0%

Any person carrying on insurance business i.e. insurance company located in the taxable territory

100%

12.36%

Rule 2(1) [(d) of Service Tax Rules 1994: “person liable for paying service tax”, -

(i) in respect of the taxable services notified under sub-section (2) of section 68 of the Act, means,-

(A) in relation to service provided or agreed to be provided by an insurance agent to any person carrying on the insurance business, the recipient of the service;

(i). Exemption vide Clause number 29(g) of Mega-Exemption NN 25/2012-ST: Services by the following persons in respective capacities -

(g)  business facilitator or a business correspondent to a banking company or an insurance company, in a rural area

(ii). As per rule 9 of Place of Provision of specified services, (w.e.f. 01-10-2014): The place of provision of following services shall be the location of the service provider;

.........(c) Intermediary services; (as amended by NN 14/2012-ST dt 11-07-2014)

So it becomes non taxable service.

1A. Analysis of  (Banking) Recovery Agent Service:

NN 30/2012-ST (as amended by NN 10/2014-ST Dated 11-07-2014)

Sl. No.

Description of a service

Percentage of service tax payable by the person providing service

Percentage of service tax payable by the person receiving the service

1A

in respect of services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company[5]

Nil

100%

 

Rule 2(1) [(d) of Service Tax Rules 1994: “person liable for paying service tax”, -

(AA) in relation to service provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company, the recipient of the service;

2. Services provided by Goods Transport Agency (GTA):

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

2.

Goods Transport Agency (Applicable to transport by road)

Goods Transport Agents

located in the taxable territory

Persons specified in Rule 2(1)(d)(i)(B) of Service Tax Rules, 1994

located in the taxable territory

NIL

Effective Rate *

(in case of abatement) 0%

100%

Effective Rate *

(in case of abatement)

3.09%

Reverse Charge: if the person liable to pay freight falls within the category of persons specified under Rule 2(1)(d)(i)(B), reverse charge apply.

Under Rule 2(1)(d)(i)(B) if the person liable to pay freight is;

(I) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);

(II) any ‘society’ registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;

(III) any ‘co-operative society’ established by or under any law;

(IV) any ‘dealer of excisable goods’ who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder;

(V) any ‘body-corporate’ established, by or under any law; or

(VI) any ‘partnership firm’ whether registered or not under any law including association of persons;

any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage is liable to pay service tax.

Provided that when such person is located in a non-taxable territory (i.e. in J&K or abroad), the provider of such service (i.e. GTA) shall be liable to pay service tax.

Non-applicability of reverse charge i.e. GTA is liable to pay service tax:

1. If consigner or consignee, who pays or is liable to pay freight either himself or through his agent, does not falls in above mentioned categories of specified,

2. If consigner or consignee, who pays or is liable to pay freight either himself or through his agent, is located in a non-taxable territory (i.e. in J&K or abroad), [refer Rule 2(1)(d)(B) of Service Tax Rules, 1994]

*Exemptions for GTA vide Clause 21 of NN 25/2012-ST: Services provided by a goods transport agency, by way of transport in a goods carriage of,-

(a) agricultural produce;

(b) goods, where gross amount charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees;

(c) goods, where gross amount charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred fifty;

(d) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages;

(e) chemical fertilizer and oilcakes;[6]

(f) chemical fertilizer, organic manure and oil cakes;

(g) newspaper or magazines registered with the Registrar of Newspapers;

(h) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap; or

(i) defence or military equipments;”[7]

(j) cotton, ginned or baled.[8]

*75% Abatement for GTA Service vide NN 26/2012-ST:

Sl.
No.

Description of taxable
service

Percent-

Age Taxable

Conditions

(1)

(2)

(3)

(4)

7

Services of goods transport agency in relation to transportation of goods.

25

CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken by the service provider[9]  under the provisions of the CENVAT Credit Rules, 2004.

3. Analysis of Sponsorship Service:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

3.

Sponsorship Service

Any person

located in the taxable territory

Body Corporate or Partnership Firm located in the taxable territory,

NIL

100%

Rule 2(1) [(d) of Service Tax Rules 1994: “person liable for paying service tax”, -

(C) in relation to service provided or agreed to be provided by way of sponsorship to anybody corporate or partnership firm located in the taxable territory, the recipient of such service

Note: When service provider is located in a non-taxable territory (i.e. in J&K or abroad), the receiver of such service shall be liable to pay service tax under reverse charge mechanism in all cases.

4. Analysis of Arbitral Tribunal Service:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

To

4.

Arbitral Tribunal Service

Arbitral Tribunal

located in the taxable territory

Any business entity located in the taxable territory,

NIL

100%

Note: When service provider is located in a non-taxable territory (i.e. in J&K or abroad), the receiver of such service shall be liable to pay service tax under reverse charge mechanism in all cases.

I would also like to discuss mega exemption notification 25/2012-ST, entry no. 6(a) & (c) which exempts the following taxable services from the whole of the service tax leviable thereon under section 66B of the said Act and reverse charge mechanism does not apply over exempted services.

Services provided by-                                    

(a) an arbitral tribunal to –

(i)  any person other than a business entity; or

(ii) a business entity with a turnover up to rupees ten lakh in the preceding financial year;

(b) a person represented on an arbitral tribunal to an arbitral tribunal;

5. Analysis of Legal Service:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

5.

Legal Service

Individual Advocate or a Firm of Advocates by way of support services

located in the taxable territory

Any business entity located in the taxable territory,

NIL

100%

Note: When service provider is located in a non-taxable territory (i.e. in J&K or abroad), the receiver of such service shall be liable to pay service tax under reverse charge mechanism in all cases.

I would also like to discuss mega exemption notification 25/2012-ST, entry no. 6(b) & (c), which exempts the following taxable services from the whole of the service tax leviable thereon under section 66B of the said Act and reverse charge mechanism does not apply over exempted services.

Services provided by-

(a) an individual as an advocate or a partnership firm of advocates by way of   legal services to,-

(i) an advocate or partnership firm of advocates providing legal services ;

(ii) any person other than a business entity; or

(iii) a business entity with a turnover up to rupees ten lakh in the preceding financial  year; or

(b) a person represented on an arbitral tribunal to an arbitral tribunal;

6. Analysis of Services by Directors:

NN 30/2012-ST (as amended by NN 45/2012-ST   NN 10/2014-ST)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

5A.

Service provided by Directors of Company / Body Corporate

Directors  

(Part time/ Independent/ Nominee)

Company / Body Corporate

located in the taxable territory,

NIL

100%

Note: Payments made by the company to its Managing Director/Working Director by any nomenclature, like commission etc., amounts to salary and therefore out of ambit of service tax being employer-employee relationship among the company and such directors. Refer CBEC instruction letter [Dy. No. 324/Comm (Service Tax)/2008 dated 01-12-2008]

Relevant Definitions: Section 65(14) of Finance Act, 1994 and Rule 2(bc) of STR, 1994: “body corporate” has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956 (1 of 1956);

Section 2(7) of the Companies Act, 1956:  "body corporate" or "corporation" includes a company incorporated outside India but does not include

(a) a corporation sole ;

(b) a co-operative society registered under any law relating to co-operative societies; and

(c) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf;

New definition of Body Corporate as per the Companies Act, 2013 is yet not applicable here which is as hereunder;

Section 2(11) of the Companies Act, 2013: “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;

Director is not defined in Service Tax Law. Director has been defined in Section 2(13) of the Companies Act, 1956 as hereunder;

"director" includes any person occupying the position of director, by whatever name called;

7. Analysis of Support Service provided by Government or Local Authority:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

6

Support Service*

Government or Local Authority

Any Business Entity

located in taxable territory

Nil

100%

(*) Note: This reverse charge mechanism does not apply in case of specified services as referred in clause I(A)(iv)(C) (1) & (2) of NN30/2012-ST dated 20-06-2012 rendered by Government or Local Authority to any business entity located in taxable territory.

Clause (1): Renting of Immovable Property And

Clause (2): Specified Services are as specified in clause (i), (ii) & (iii) of Section 66D(a) under negative list, ...........which are as hereunder;

(i): services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government;

(ii): services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; or

(iii): transport of goods or passengers;

8. Analysis of renting/hiring of motor vehicle [complete and partial reverse charge]:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

7

Renting / hiring any motor vehicle designed to carry passenger motorcab on abated * value

(i)      any individual

(ii)    HUF

(iii)  Proprietary firm

(iv) partnership firm

(v)   Association of Persons

located in the taxable territory

(i)  Any company registered under the Companies Act

(ii)    business entity registered as body corporate

which is not in similar line of business

located in the taxable territory

Nil

100 %

 

Renting / hiring any motor vehicle designed to carry passenger motorcab on non-abated value

(i)      any individual

(ii)    HUF

(iii)  Proprietary firm

(iv) partnership firm

(v)   Association of Persons

located in the taxable territory

(i) Any company registered under the Companies Act

(ii) business entity registered as body corporate

which is not in similar line of business

located in the taxable territory

60%

(60% of 12.36%) =

7.416%

w.e.f 1/10/14

50%

(50% of 12.36%) =

6.18%

40%

(40% of 12.36%) =

4.944%

w.e.f 1/10/14

50%

(50% of 12.36%) =

6.18%

 (*) Note: NN 26/2012-ST dated 20/06/2012 provides 60% abatement on gross value.    NN 10/2014-ST dt 11-07-2014 (effective from 01-10-2014)

9 & 10. Analysis of Manpower Supply Service and Security Services:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

8.

Supply of Manpower for any purpose

OR

Securities Services (added by NN45/2012-ST)

(i) any individual

(ii) HUF

(iii) Proprietary firm

(iv) partnership firm

(v) Association of Persons 

located in the taxable territory

(i) Any company registered under the Companies Act

(ii) business entity registered as body corporate

located in the taxable territory

25%

Effective rate

(25% of 12.36)

3.09%

75 %

Effective rate

(75% of 12.36)

9.27%

11. Analysis of Service portion in execution of Works Contract:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

9.

Works Contract

(i)  any individual

(ii) HUF

(iii)  Proprietary firm

(iv)  Partnership firm

(v)  Association of Persons 

located in the taxable territory

(i) Any company registered under the Companies Act

(ii) business entity registered as body corporate

located in the taxable territory

50%

Effective

ST Rate:

Case (i)

12.36*40%*50% =2.472%

Case (ii)

12.36*70%*50% =4.326%

50%

Effective

ST Rate:

Case (i)

12.36*40%*50% =2.472%

Case (ii)

12.36*70%*50%

=4.326%

 

Works Contract

(i)  Government

(ii) Local Authority

located in the taxable territory

(i) business entity

located in the taxable territory

NIL

100%

Note: When service provider is located in a non-taxable territory (i.e. in J&K or abroad), the receiver of such service shall be liable to pay service tax under reverse charge mechanism in all cases.

Valuation of service rendered [NN 24/2012-ST]

S. No.

Where Works Contract is for...

Value of the Service portion shall be..

1

Execution of original contracts

40%  of the total amount charged for the works contract

Effective ST Rate:

  1. 12.36*40%*50%=2.472%

2

Maintenance or repair or reconditioning or restoration or servicing of any goods

70% of the total amount charged including such gross amount

Effective ST Rate:

  1. 12.36*70%*50%=4.326%

3

In case of other works contracts, not included in S. No. 1 & 2 above,

including contracts for maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings.[10]

60% of the total amount charged for the works contract

Valuation of service rendered NN 26/2012-ST [as amended by 02/2013-ST (applicable up to 07/05/2013)]

  “12.

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004;

 

(a) for a residential unit satisfying both the following conditions, namely:–

(i) the carpet area of the unit is less than 2000 square feet; or

(ii) the amount charged for the unit is less than rupees one crore;

25

(ii) The value of land is included in the amount charged from the service receiver.”.

 

 (b) for other than the (a) above.

30

 

  “12.

[F. No. 334 /3/ 2013-TRU]

w.e.f. 8th May, 2013

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004;

 

(a) for a residential unit satisfying both the following conditions, namely:–

(i) the carpet area of the unit is less than 2000 square feet; and

(ii) the amount charged for the unit is less than rupees one crore;

25

(ii) The value of land is included in the amount charged from the service receiver.”.

 

 (b) for other than the (a) above.

30

 

12. Analysis of taxable service provided by person located in a non-taxable territory to a person located in a taxable territory:

NN 30/2012-ST (as amended up to date)

Sl.

No.

Description of service

Provided

Percentage of  ST payable by the person

providing service

Percentage of ST payable by the person

receiving the service

By

to

10

any taxable services i.e. imported

any person

located in a non-taxable territory

any person

located in the taxable territory

Nil

100%

1. Exception to general rule that no one could render service to himself [Explanation(3) to Section 65B(44)]:

If a person has two establishments/branches, one in taxable territory and another in non-taxable territory, both shall be treated as two distinct establishments of two distinct people[11]. 

2. Exemptions vide Clause 34 of Mega Exemption NN 25/2012-ST. Services received from a   provider of service located in a non- taxable territory by-

(a)  Government, a local authority, a governmental authority or an individual in  relation to any purpose other than commerce, industry or any other business or profession;

(b)  an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or

(c)   a person located in a non-taxable territory.

3. As per rule 9 of Place of Provision of specified services, (w.e.f. 01-10-2014): The place of provision of following services shall be the location of the service provider;

.........(c) Intermediary services; (as amended by NN 14/2012-ST dt 11-07-2014)

So it becomes non taxable service.

CA. Kamlesh Singh Chauhan

FCA, LL B, DISA(ICA)

E-mail: ks_chauhans@yahoo.com

[1] Section 66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.]

[2] Section 68 (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.

[3] Section 68(2) Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.

[4] Rule 5B of CCR, 2004: Refund of CENVAT credit to service providers providing services taxed on reverse charge basis. - A provider of service providing services notified under sub-section (2) of section 68 of the Finance Act and being unable to utilise the CENVAT credit availed on inputs and input services for payment of service tax on such output services, shall be allowed refund of such unutilised CENVAT credit subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette.

[5] NN 10/2014-ST Dated 11-07-2014

[6] Substituted by NN 6/2014-ST Dated 11-07-2014

[7] Replaced by NN 3/2013-ST…Old Clause No. 21.Services provided by a goods transport agency by way of transportation of -

(a)  fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage;

(b)  goods where gross amount charged for the transportation of goods on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or

(c)  goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty;

[8] NN 6/2014 Dated 11/07/2014

[9] Inserted by NN 8/2014-ST dt 11/07/2014

[10] NN 11/2014-ST dt 11-07-2014

[11] Section 65B(44)Explanation(3):  For the purposes of this Chapter......(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.


Published by

CA. K S Chauhan
(Proprietor)
Category Service Tax   Report

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