reverse charge service tax

8/22/2019 Reverse Charge Service Tax

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Service Tax Updates

Reverse Charge under Service Tax

(A) Background: Section 68(2) of the Finance Act, 1994 provides for liability to pay service tax by a

person other than service provider for certain specified services. This is generally known as reverse

Charge. The scope of services covered by the reverse charges mechanism has been enhanced by

the Finance Act, 2012 read with Notification No. 15/2012- ST. Many services which were hitherto not

covered by reverse charge shall now come within its purview. We shall examine the services covered

by the reverse charge mechanism and any possible implications arising out of them with special focus

on new services added by the Notification No. 15/2012-ST.

(B) Nature of Services: Notification No. 15/2012 covers following kind of services under reverse charge

along with the percentage of tax liability payable by service provider and service receiver respectively.

We have divided the services covered by the Notification under three categories for ease of

reference.

a) Services already covered under reverse charge:

S.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%


provided by a goods transport agency in

respect of transportation of goods by road

Nil 100%


provided by way of sponsorship

Nil 100%

b) Services earlier covered under reverse charge but now exempted from applicability of service

tax: Services by a mutual fund agent or distributor to mutual fund or Asset Management

Company for distribution or marketing of mutual fund.

c) Services covered under Reverse Charge for the first time vide Notification No. 15/2012-

S.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 Nil 100%


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provided by an arbitral tribunal

2. in respect of services provided or agreed to be

provided by individual advocate

Nil 100%


provided by way of support service by

Government or local authority

Nil 100%

4. (a) in respect of services provided or agreed

to be provided by way of renting or hiring

any motor vehicle designed to carry

passenger on abated value.

(b) in respect of services provided or agreed to

be provided by way of renting or hiring any

motor vehicle designed to carry passenger

on non abated value.

Nil

60%

100 %

40%


provided by way of supply of manpower for any

purpose

25% 75 %


provided by way of works contract

50% 50%

7. 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%

We will discuss the provisions relating to few of the above services below.

Support services by Government or local authorities: Services provided by the

government are covered by section 66D i.e. Negative list of services and accordingly not

liable to service tax. However, support services by Government to business entities are not

part of negative list and accordingly liable to service tax. Support services are defined by

clause 49 of Section 65B which reads as follows:

"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.

The services covered by the support services are mainly those which can be carried out by

the business entities but instead of doing by themselves, these are outsourced to third parties

due to some commercial, economical, operational or other similar benefits/convenience. The

intention to tax these services when provided by government is to provide level playing field to

private players who are engaged in providing similar kind of services. It would be important for

service receiver to examine whether services availed from government is covered by the

support services because liability shall be on the service receiver to pay services tax under

reverse charge. Any omission or failure to pay service tax may lead to unnecessary payment


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of interest and penalty by service receiver. Following checklist may act as guideline for

determining liability of business entities under reverse charge.

(i) Identify whether service receiver is business entity: liability to pay service tax under

this category arises only when services are availed by the business entities. As persection 65B (17) "business entity" means any person ordinarily carrying out any

activity relating to industry, commerce or any other business. If person receiving

services is not a business entity, there shall be no liability to pay service tax.

(ii) Identify if any payment has been made to government: Once it is established that

service receiver is business entity is, it become relevant to examine if any payment

has been made to government during the relevant period. It should be noted that the

Government does not include government companies, PSU, autonomous institutions

etc. Any payment made to these organizations would not be considered as payment

to government. It may be relevant to examine the constitution of service provider to

ascertain whether it is a government organization or not.

(iii) Examine the nature of payment: Next step is to examine the nature of payment made.

If payment is made as duty, tax, fine, penalty etc. it will not come within preview of

support services as these activities performed by government are in the nature of

performance of sovereign functions or statutory obligation. If payment is not of above

nature, then check the following.

(iv) Whether services performed by the government could have been done by business

entity in-house: It should be examined whether the services availed from thegovernment could have been done or are ordinarily done by business entity in house.

If answer is yes, it is in the nature of support services on which service tax payment

should be made by business entity under reverse charge. If no, then examine the

next point.

(v) Whether similar kind of services are performed by other business entities by

themselves in the ordinary course of business: If the nature of services are such that

they are generally performed by other business entities by themselves in the ordinary

course of business, it may be covered by the support services requiring payment by

service receiver under reverse charge. If not, examine the next point.

(vi) Whether payment is covered by second limb i.e. inclusive part of the definition of

support service:It may be possible that the services availed are not in the nature of

outsourced services yet it is covered by the second limb i.e. inclusive part of the

definition of support service. If it is covered, business entity is required to make

payment on reverse charge notwithstanding that the service availed are not in the

nature of outsourced services.

Manpower Supply Services: Any service provided as supply of manpower for carrying out

work of any nature will be taxable under reverse charge. It is interesting to note that the


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service tax in such situation shall be payable partially by service provider i.e. 25% any

partially by service receiver i.e. 75%.

Works Contract Services: This is another entry where liability to pay service tax shall be

partially on the service provider and partially on the service receiver. The definition of workscontract as passed by the Finance Act is as follows:

"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, f itting

out, improvement, repair, renovation, alteration of any building or structure on land or for

carrying out any other similar activity or a part thereof in relation to any building or structure

on land; out, repair, main tenance, renov ation, alterat ion of any mov able or immo vable

proper ty or for carry ing out any oth er simi lar act iv i ty or par t thereof in relat ion to s uch

proper ty.

[Strike out part was originally proposed by the Finance Act, 2012 but subsequently substituted by the

later part marked as bold in the definition. The impact of the said amendment is that above activities

pertaining to movable property has also been covered by the definition and thereby the scope of

coverage under works contract has been widened]

Notification No. 15/2012 for introducing partial reverse charge on works contract was

introduced when the definition of works contract included activities pertaining to immovable

property only. But now after widening the scope of works contract by including the activities

related to movable property also in the definition, it needs to be seen whether government

brings any amendment in the reverse charge provision for works contract. If no amendment is

made, it will be necessary that the service receiver pay 50% service tax under reverse charge

on all the transactions of works contract whether movable or immovable property. It is

expected to have widespread implication in practical life as large numbers of transactions are

in the nature of works contract. Service receiver has to be cautious to make sure that no

transaction of work contract is escaped from payment of service tax under reverse charge.

Renting of Motor Vehicle designed to carry passengers: Renting or leasing of motor

vehicle designed to carry passengers is also covered by the reverse charge mechanism.

Notification No.13/2012 provides abatement of 40% on renting of motor vehicle provided no

Cenvat credit is availed on input, input services and capital goods. Where abatement is

claimed by the service provider, entire service tax thereon shall be payable by the service

receiver on reverse charge. Alternatively, if the no abatement is claimed, service provider and

service receiver shall be liable to service tax on 60% and 40% respectively.

(C) Applicability: Above provisions as to reverse charge in respect of manpower supply, works

contract and renting of motor vehicle services will be applicable only when the parties providing

and receiving the services are covered by the following:


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Status of service provider Status of service receiver

Individual Company registered under the Companies Act

Hindu Undivided Family business entity registered as body corporate

Proprietary firm

Partnership firm, whether registered or

not

Limited Liability Partnership firm

Association of Persons

(D) Services provided by a person located in the non taxable territory and received by a person

located in the non taxable territory: These services were earlier also covered in the reverse charge

and popularly known as import of services. Now the scope is widened as any services provided by a

person located in J&K to a person located in the rest of India shall also be liable under reverse

charge. Location of service provider and service receiver shall be determined as per Place of

Provision of Services Rules, 2012 which have not been notified yet.

(E) Rationale of partial reverse charge mechanism: With negative list based service tax system,

government has introduced the concept of partial reverse charge when services are provided by the

small service provider i.e. individual, HUF, partnership firm etc. Main object behind introducing the

concept may be to widen tax base as these small service provider may not take the registration and

thereby may escape from the eyes of the department. Now, as the companies or body corporate have

been made responsible to pay service tax under reverse charge, these service providers may be

chased by the department. Above provisions are likely to have adverse impact on the small service

provider who may not be able to face the competitions of big service providers.

(F) Small scale exemption: Small scale exemption is not available when the service receiver is liable to

pay service tax under reverse charge. It may be possible that total turnover of service provider is less

than 10 lacs. However, service receiver shall be liable to pay service tax on above services. It means

effectively service provider providing above services may not avail the benefit of small scale

exemption for the portion of services on which service receiver is liable to pay service tax.

(G) Availment of Cenvat Credit by service receiver:Service receiver may claim the credit of service tax

paid based on the invoice issued by the service provider. For service tax paid on reverse charge,

credit may be claimed based on the TR-6 challan by which payment is made.

In nutshell, the proposal of government to increase the gamut of services covered by reverse

charge is expected to have widespread implications. Many service providers which were hitherto

escaping from the eyes of the department may now be chased by them. How much additional

revenue will government raise from these small service providers need to be seen in future.


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Contact: CA Arun Poddar Cell No. +91 94611 92150Cell No. +91 98202 57312

Branches: Mumbai | Kolkata | Jaipur | New Delhi | Ahmedabad | Raipur | Bengaluru | Chandigarh

website:www.skpatodia.in

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