Service Tax is levied under Section 66B of the Finance Act, 1994 as amended up to date. Section 68(1) confers liability to pay service tax on service provider but section 68(2), 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;
a. Specified in section 66D of the Finance Act, 1994, or
b. 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.
5. 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)
6. 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)].
7. 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;
a. Export of service (Rule 5A of CCR, 2004)
b. 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 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)
2. Goods Transport Agency Service
3. Sponsorship Service
4. Legal Service
5. Arbitral Tribunal Service
6. Services by Directors of the body corporate to the body corporate (w.e.f.11-07-2014)
7. Support Services provided by Government/Local Authority
8. Rent-a-Cab Service
9. Manpower Supply Service
10. Security Service (w.e.f 07-08-2012)
11. Service portion in execution of Works Contract
12. Import of Taxable Services
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