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Reverse Charge Methodology under Service tax

CA. RAVIKUMAR  
on 17 January 2013

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The responsibility to pay service Tax:

With effect from 1st July, 2012 The Government of India has notified the concept called reverse charge Methodology, A brief explanation about the same has been incorporated in this article.

As per Sec-68 (1) of Finance act 1994, Every person providing taxable service to any person shall pay service tax, and as per proviso to Sec-68(2) of Finance act 1994, Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of Chapter V 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, This is called Reverse charge methodology.

Services covered under reverse charge methodology:

Up to 30th June, 2012 seven services are covered under this methodology but from 1st July, 2012 three services are deleted and some new services added after all the changes made following are the services covered under the reverse charge methodology.

By virtue of power conferred under Sec- 68(2) of Finance act 1994, Central Government has issued the amended notification no.45/2012-ST, dated 07-08-2012 in the place of notification no. 30/2012-ST, dated 20-06-2012  as follows;

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

1.

in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business

Nil

100%

2.

in respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road

Nil

100%

3.

in respect of services provided or agreed to be provided by way of sponsorship

Nil

100%

4.

in respect of services provided or agreed to be provided by an arbitral tribunal

Nil

100%

5.

in respect of services provided or agreed to be provided by individual advocate or a firm of advocates by way of legal services

Nil

100%

5A.

in respect of services provided or agreed to be provided by a director of a company to the said company

Nil

100%

6.

in respect of services provided or agreed to be provided by Government or local authority by way of support services excluding,- (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994  ( refer note: 1 for more details)

Nil

100%

7.

(a) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business

Nil

100 %

(b) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business

60%

40%

8.

in respect of services provided or agreed to be provided by way of supply of manpower for any purpose [or security services]

25%

75 %

9.

in respect of services provided or agreed to be provided in service portion in execution of works contract

50%

50%

10.

in respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory

  Nil

  100%

Explanation-I;

The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.

Explanation-II;

In works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

Some important definitions defined under sec- 65 of Finance act 1994 need to be keep in mind;

1)"Local authority" means—

(a) A Panchayat as referred to in clause (d) of article 243 of the Constitution;

(b) A Municipality as referred to in clause (e) of article 243P of the Constitution;

(c) A Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund;

(d) A Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);

(e) A regional council or a district council constituted under the Sixth Schedule to the Constitution;

(f) A development board constituted under article 371 of the Constitution; or

(g) A regional council constituted under article 371A of the Constitution;

2)"Non-taxable territory" means the territory which is outside the taxable territory;

3) "Taxable territory" means the territory to which the provisions of this Chapter apply;

4) "Notification" means notification published in the Official Gazette and the expressions "notify" and "notified" shall be construed accordingly;

5) "Business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession;

6) "Support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations  themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis;

7) "Works contract" means 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;

(55)  words and expressions used but not defined in this Chapter and defined in the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder, shall apply, so far as may be, in relation to service tax as they apply in relation to a duty of excise.

Notes:

1) Services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D

(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;

(iii) Transport of goods or passengers;

2) For the above Sl. No’s 7, 8 and 9 the service provider should be either individual or HUF or partnership Firm or LLP or association of person and a recipient is corporate, otherwise the reverse charge methodology shall not apply.

Important Points to be noted:

1) By virtue of notification no. 33/2012 the aggregate value of taxable services up to 10 lakh rupees has been exempted from service tax, However the benefit of threshold exemption is not applicable to reverse charge methodology.

2) As per Rule 5B of cenvat credit Rules 2004, if the service provider is unable to utilize the cenvat credit which is paid under reverse charge methodology is eligible for refund subject to safeguards, conditions and limitations.

It may be noted that this refund of unutilized cenvat credit is not available for service recipient who pays service tax on reverse charge methodology.

3) The cenvat credit should not be utilized for the Payment of service tax under reverse charge methodology, In other words it should be paid in cash only.

4) Cenvat credit on service tax paid on reverse charge methodology can be utilized towards the discharge of excise duty or service tax liability and should be based on the copy of GAR-7 challan.

5) Reverse charge methodology in respect of legal services is applicable only if the business entity (Service receiver) turnover exceeds ten lakh rupees in the preceding financial year.

Thanks for reading my first article. 

CA Ravikumar.B

Email: rkb@icai.orgg




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