A Presentation on Reverse Charge & Joint Charge – Updated till 31-03-2013

Section 68 of Finance Act, 1994

• 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.”

Brief History of Reverse Charge

The Reverse Charge was introduced in Service Tax vide Budget of the year 2005-2006. At that point of time there was only one service which was covered under Reverse Charge. However, with the passage of time this list has been expanded and at present this list contains 11  services into it which covers both Reverse Charge and Partial Reverse Charge.

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.

List of Services under RCM

S. No. Description of Services Provided By Provided To % of ST payable by Provider % of ST payable by Receiver
1 Insurance Auxiliary Service Insurance Agent Person carrying on Insurance business NIL 100%
2 Sponsorship Service By any service provider Body Corporate or Partnership firm NIL 100%
3 Transport of goods by Road Good Transport Agency Consignor or consignee in organized sector NIL 100%
4 Legal Service Arbitral Tribunal Business Entity NIL 100%
5 Legal Service Individual advocate or firm of advocates Business Entity NIL 100%
6 Support Service byGovernment or

local authority

Governmentor Local

Authority

BusinessEntity NIL 100%
7 Any Service Person in Non  Taxable territory Person in Taxable Territory NIL 100%
8 Any TaxableService Director ofthe company Company NIL 100%
9 Renting or hiring of motor vehicle to carry passenger on abated value. (60% abatement) Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate NIL 100% (i.e. 40% of liability)
10 Renting or hiring of motor vehicle to carry passenger on non abated value Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 60% 40%
11 Supply of Manpower Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 25% 75%
12 Security Service Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 25% 75%
13 Work ContractService Individual, HUF, Firm, AOP, BOI Business Entity registered as body corporate 50% 50%


Other Relevant Aspects

1. Business Entity and Body Corporate

Business Entity– means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. [Government, charitable organization is not a “business entity”].

Body Corporate Company is a Body Corporate – Firm, HUF, Trust is not a body corporate. [Society registered under Societies Act is legally not ‘a body corporate’].

2.  Partial RC on Renting or Hire of Motor Vehicle designed  to carry passengers

– Reverse charge when renting to a person who is not engaged in  similar line of business

– Service Provider should be HUF, Individual, firm.

– Service Receiver – Business entity registered as body corporate

– If motor vehicle is taken on hire without driver it is ‘transfer of right in goods’. It is deemed sale of goods VAT will apply – Service Tax will not be charged.

3. Partial RC on Manpower Supply Service

– “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. [Rule 2(g) of Service Tax Rules, inserted w.e.f 01.07.20 12].

– 75% of ST shall be paid by service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 25% of ST shall be paid by service provider.

Security Service, cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.

– Service tax in such cases shall be payable on – SALARY + PF + ESI + Commission of labour contractor.

4. Partial RC in Work Contract Service

– 50% of ST shall be paid by the service receiver, if service provider is an individual, HUF, proprietary or partnership firm or AOP. Balance 50% shall be paid by service provider.

– Service Receiver is a business entity incorporated as body corporate.


Utilization of CENVAT credit by Service Receiver

 RCM

Accounting Entries

  • In the following example, the service recipient should pay 25% to the service provider and should pay remaining 75% to the service tax authorities directly.
  • Accounting entry in the books of Service Provider:-
Particular Debit Credit
Service Receiver a/c 1,03,090.00
Sales 1,00,000.00
Service tax payable (1,00,000 X 12.36% X 25%) 3,090.00
  •  Accounting entry in the books of Service Receiver:-
Particular Debit Credit
Service Received a/c 1,00,000.00
Service Tax Credit (25%) 3,000.00
E-Cess Credit a/c 60.00
SHEC Credit a/c 30.00
Service tax recoverable a/c (75%) 9,000.00
E-Cess Recoverable a/c 180.00
SHEC Recoverable a/c 90.00
Service Provider a/c 1,03,090.00
Service Tax Payable 9,000.00
E-Cess Payable 180.00
SHEC payable 90.00

RCM in relation to Point of Taxation Rules, 2011

  • Rule 7 of POT Rules provides for the Payment under Reverse Charge Mechanism.
  • As per Rule 7, where the service tax is payable by the recipient of service like GTA service, POT would be the date of payment of value of service, if made within 6 months from the date of invoice. In case, value of service is not paid within prescribed 6 months period, service tax would become payable as per rule 3 of POT rule.
  • Illustration:- Mr. X provided services to Mr. Y under RCM. The date of invoice is 01.01.2013.
  • Situation 1: Mr. Y made payment to Mr. X on 01.04.2013 Since the payment is made within 6 months from the date of invoice i.e. payment made before 01.07.2013. Therefore, the liability to pay service tax on part of Mr. Y will arise from the date of payment to Mr. X .i.e. from 01.04.2013. Mr. Y is liable to pay service tax by 06.05.2013 (if he pays electronically another wise 05.05.201 3 is the due date)
  • Situation 2: Mr. Y made payment to Mr. X on 01.08.2013 Since the payment is NOT made within 6 months from the date of invoice i.e. before 01.07.2013. Therefore, the liability to pay service tax will arise from 01.01.201 3. Mr. Y will now be liable to pay interest @ 18% along with service tax to the department.

Issues

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.

Can the Service Receiver use CENVAT to pay tax under reverse charge?

Explanation to Rule 3(4) – Service Receiver cannot use the CENVAT credit to dispose off his liability. He is required to pay the amount in cash only.

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.

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.

PREPARED BY – CA JAYANT BOTHRA – TEAM VOICE OF CA

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