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Background of Reverse charge in India

Under Service Tax, the concept of ‘Reverse charge’ was introduced for the first time by Finance Act, 1997 wherein the customer / client of “clearing and forwarding agents and the goods transporter operator” was termed as “person responsible for collecting service tax”.

However, Hon. Supreme Court in Laghu Udyog Bharati Vs. Union of India (112) E.L.T. 365 (S.C.) struck down the provisions as being ultra vires the Act itself (Finance Act, 1994).

W.e.f. 16.10.1998, Section 68 of Finance Act, 1994 was amended to empower Central Government to notify certain taxable services for which the ‘prescribed person’ will be the ‘person liable for paying service tax’.

Reverse Charge Mechanism

In case of Reverse Charge mechanism the service receiver is either required to pay the whole amount of service tax or part of the amount of service tax.

Sec 68 (2) provides legal backing for the levying of Service Tax under reverse charge mechanism. Sec 68 (2) is worded as follows:-

– “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 66B 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.”

Point of Taxation Rules, 2011in relation to Reverse Charge Mechanism

In terms of Rule 7 of POT rules 2011, where the recipient of service is liable to pay service tax under RCM, the POT in respect of such persons shall be in the followng manner :

-If payment to Service Provider is made within 3 months from the date of invoice , the date in which payment is made to Service Provider shall be POT.

-If payment to Service Provider is not made within 3 months from the date of invoice the, the First day that occurs immidiately after a perio of 3 months from the date of invoice shall be POT.

Practical Example :  If a bill dated 02nd July is received, payment for the same if made on or before 01st October then point of taxation is date of payment. However if payment is made after 01st October, say on 02nd December, then point of taxation shall be 02nd October. Service tax is to be paid on or before 05th November. Hence every month this Service tax liability has to be assessed for all Service Provider/ Manufacture.

Discharge of Reverse charge liability:

Payment of service tax under reverse charge mechanism shall be only by cash and CENVAT credit is not to be used for making the payment. As per explanation to Rule 3(4) of CENVAT credit Rules, CENVAT credit can not be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient.

Reverse Charge liability has to be discharged only in Cash.

CENVAT Rules in Relation to Reverse Charge

Under Full Reverse Charge Mechanism Cenvat Credit of service tax can be taken on payment of taxes to Govt. Even if service amount have not been paid to Service provider & tax has been paid to Govt. Cenvat Credit can be availed.

Under Partial Reverse Charge Mechanism

Service Provider : Cenvat Credit of Service tax paid by service provider can be taken after receipt of Bill

Service Receiver : But Cenvat credit of service tax paid by service receiver can be taken only after payment of Taxes to Govt. as like Full Reverse charge Mechanism.

Earlier Cenvat Credit of service tax paid by service receiver under Partial Reverse Charge Mechanism can be taken when Service tax has been to Govt. and bill amount has also been made to Service provider. This change has been applicable from 01st April, 2015.

Cenvat Credit of service Tax can be availed within one year from date of payment of service Tax to Govt.

Earlier Time limit was only 6 Month. This change is applicable from 01st April, 2015

Issues

Issue No.-1:  Do SSI Exemption is available to Service Receiver?

Notification No. 33/20 12-ST which provides that whereby the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:

Provided that nothing contained in this notification shall apply to,-

(i) taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or

(ii) such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68  of the said Finance Act read with Service Tax Rules, 1994.

Issue No.-2: Under Partial RCM, what amount do service provider is required to show on the invoice?

The service provider is required to charge only that on the invoice for which he is liable to pay. For e.g.If the service providers liability is of 25% and the remaining liability is of service receiver. Then the service provider is required to charge only 25% of the service tax amount in the invoice.

Issue No.-3:  If service provider has agreed to pay entire payment of service tax liability. He is willing to give an undertaking in that regard. In that case, do service receiver is liable to pay service tax?

Only person who is liable to pay service tax should pay the same. Service receiver liable for only his part and not entire amount, even if service provider does not charge his portion of service tax.

A statutory liability cannot be shifted by mutual agreement. If statutory liability is of service receiver, he alone is liable.

Notification No. 30/2012-ST, dated 20th June, 2012

In order to charge service tax under reverse charge mechanism the Central Government is required to provide the list of taxable service by the way of notification. The notification no. 30/2012-ST provides for the list of service that will be taxable under reverse charge mechanism

Sl. No.

Description of a service

Service Provider              

Service Recipient

(1)

(2)

(3)

(4)

1

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

Nil

100%

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 (Effective from 01.04.2015)

Nil

100%

1B.

in respect of services provided or agreed to be provided by a mutual fund agent or distributor, to a mutual fund or asset management company (Effective from 01.04.2015)

Nil

100%

1C.

in respect of service provided or agreed to be provided by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent

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 to Company, Partnership Firm, Registered Factory, Registered Society, co-operative society, AOP, LLP, Person Registered Under Central Excise Act, 1944 including Excise Dealers

Nil

100%

3

in respect of services provided or agreed to be provided by way of sponsorship to anybody corporate or partnership firm

Nil

100%

4

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

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 to any Business entity

Nil

100%

5A

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

Nil

100%

6

in respect of services provided or agreed to be provided by Government or local authority 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 to any Business Entity

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 by individual, HUF, firm or AOP to Body Corporate

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 by individual, HUF, firm or AOP to Body Corporate (Revised wef 01.10.2014)

50%

50%

8.

in respect of services provided or agreed to be provided by way of supply of manpower for any purpose or security services by individual, HUF, firm or AOP to Body Corporate

Nil

100%

9.

in respect of services provided or agreed to be provided in service portion in execution of works contract by individual, HUF, firm or AOP to Body Corporate

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%

11.

in respect of any service provided or agreed to be provided by a person involving an aggregator in any manner to any Business Entity(Effective from 01.03.2015)

Nil

100%

Business Entity and Body Corporate

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’].


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Category Service Tax, Other Articles by - Chetan Bhatt 



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