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Partial Reverse Charge Issues Suppressing Tourism

The tourism sector is booming at a rate that none other sector have thought of. Today maximum revenue for any country’s or even state’s government is earned from tourism sector, but where different states are trying to promote their tourism, the CENTRAL Government with the introduction of Partial Reverse Charge in Service Tax has raised many issues for the Tour Operators. One of them is related to the Rent-A-Cab services availed by the Tour Operators to facilitate their customer with cabs and land arrangements.

For providing tour related services it is very essential for every Tour Operator to provide Cab Services. Since every Tour operator cannot have its own fleet of cabs, so generally they tend to rent the cab from Cab Operators or other Tour Operators (hereinafter also referred as Cab Operators) who own their fleet. Now Cab Operator do not show on their bills whether they are availing abatement under Notification No.  26/2012,Service Tax  Dated- 20.06.2012 and the Tour operators get confused at what part of Bill they need to pay the service tax on. As per  Notification No.  30/2012,Service Tax  Dated- 20.06.2012 (Summary Table produced in the end) if the cab operator is availing aforesaid abatement under Notification No.  26/2012,Service Tax  Dated- 20.06.2012 then Tour Operator is obligated to pay 100% of service tax on abated value and if cab operator is not availing the aforesaid abatement then tour operator is obligated to pay 40% of service tax.

An Extract of Notification No.  26/2012,Service Tax  Dated- 20.06.2012 is provided as under


  1. No.
Description of taxable
service
     % Conditions
Renting of any motor vehicle designed to carry passengers 40 CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

To clear the whole thing let us take up an illustration.

For example ABC Tour Operator Ltd. (body corporate) (hereinafter referred as Tour Operator) availed service of renting cab from Ram (individual cab operator) (hereinafter referred as Cab operator) and Ram raised an invoice of Rs. 10000. Now if Cab Operator has mentioned on its invoice that he has availed abatement then Tour Operator needs to pay service tax of Rs. 494.40(10000*40%*12.36%) which is the 100% Service tax to be paid, and if Cab Operator has not mentioned whether he has availed benefit of abatement then also assuming that he has not availed the abatement Tour Operator needs to pay Rs. 494.40[(10000*12.36%)*40%] as their Service tax which is the 40% of Service Tax.

So in short the tour operator should simply pay Service Tax on the 40% part of the Invoice value only whatever the case maybe i.e. whether the cab operator has availed abatement or not it should not be of any concern to the Tour Operator. In other words Service Tax is to be paid @ 4.994% of the invoice value.

I would like to bring it to the attention of the all Tour Operators that liability to pay Service Tax on 40% of the bill is their responsibility, do not pass it to the Cab Operator in any circumstance. It will be counted as procedural lapse and may bring penalty upon you.

To Illustrate:

Continuing the above example

ABC Tour Operator Pvt. Ltd. (hereinafter referred as Tour Operator) is availing Rent-a-Cab Service from Ram (hereinafter referred as Cab operator) and Cab Operator invoiced for Rs. 10,000(exclusive of ST). So Tour Operator instead of paying Rs. 494.40 to Government on its own, Remit Rs. 10,494.40 to Cab Operator which is wrong. Instead of this Tour Operator should pay Rs. 494.40 to the credit of Government on its own and pay Rs. 10000/- only to the Cab Operator after deducting TDS if applicable.

Secondly I would also like to draw the attention towards the common practice that is being followed by the small Tour Operators. Tour operators after obtaining the bill from Cab operators, are deducting the Service Tax amount from the billed amount to be paid to Cab operator instead of bearing the burden himself. This may bring heavy penal provision upon them and may invoke “Prosecution” provisions.

To Illustrate:

Continuing the above example

ABC Tour Operator Pvt. Ltd. (hereinafter referred as Tour Operator) is availing Rent-a-Cab Service from Ram (hereinafter referred as Cab operator) and Cab Operator invoiced for Rs. 10,000. So Tour Operator instead of paying Rs. 494.40 from its own pocket deduct it from payment to be made to Cab operator and remit Rs. 9,505.60 to Cab operator. However this payment of Service Tax of Rs. 494.40 will be shown as indirect expenditure and become the part of the expenses.

So it is advisable to Tour operators to avoid such practices and pay Service tax on Rent a Cab Service under Partial Reverse Charge from their own Pockets.

Thirdly some of the Cab Operators are contending that no partial Reverse charge should be applicable as both Cab Operators and Tour Operators are in the same business line, as provided under Notification No.  30/2012,Service Tax  Dated- 20.06.2012. As per the said notification, partial reverse charge is only applicable on Rent-a-Cab Service if the “service of renting a cab is provided to any person who is not engaged in the similar line of business”. So the Cab Operators are making an implication out of it that no partial reverse charge should be charged as the Cab Operator and Tour Operator are in the same line of business. But it is to be reminded that the service of Renting Cab and Tour Operator are two different Services which cannot be mixed. So it is to be kept in mind that Partial Reverse Charge is applicable to Tour operator arranging Cabs from other Tour Operators.

For your further perusal summary of Notification No.  30/2012,Service Tax  Dated- 20.06.2012 is provided

Table

 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%
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 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

 

(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

Nil

 

 

 

 

 

 

60%

100 %

 

 

 

 

 

 

40%

in respect of  services  provided or agreed to be provided  by way of supply of manpower for any purpose 25% 75 %
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%

 Hope this will resolve your issues to an extent. For any further queries please contact at pallavguptapg@gmail.com.

Written by Pallav Gupta

Categories: Service Tax

View Comments (5)

  • Isn't it true that under reverse charge the service recipient should deduct the service tax paid by him directly to the government from the billed amount and pay only the balance to the service provider? Doesn't this reverse charge work like TDS? Can you please sight the provision of law which requires the payment to be made from the service receiver's own pocket? Also please sight the provisions which call for penalty if service tax is deducted from the billed amount and paid. My email id is agarwal_sket@yahoo.co.in
    Thanks in advance. It was an awesome article.

  • "Generally, the liability to pay service tax has been placed on the ‘service provider’. However, in respect of the taxable services notified under Sec.68(2) of the Finance Act,1994, the service tax shall be paid by such person and in such manner as may be prescribed at the rate specified in Sec.66 of the Act and all the provisions of Chapter-V shall apply to such person as if he is the person liable for paying the service tax."

    from the above you can verify that the obligation of depositing the Service Tax has been shifted to Service Recipient and generally too in case where Reverse charge is not applicable the Service Tax is paid by the service recipient only but indirectly,
    like the service provider charges it with his invoice and the service receiver pays the amount for the service received and for the Service tax, this also provides that liability to pay Service tax was always with Service receiver whether directly or indirectly but in case of reverse charge now the obligation along with liability has been shifted to service receiver.

    Secondly as you can read in the above given provision, in case of applicability of Sec 68(2) all the provision of the acts shall apply to service receiver as they are applicable to Service provider in case where Reverse charge is not applicable.

    hope this resolves your query

  • “Generally, the liability to pay service tax has been placed on the ‘service provider’. However, in respect of the taxable services notified under Sec.68(2) of the Finance Act,1994, the service tax shall be paid by such person and in such manner as may be prescribed at the rate specified in Sec.66 of the Act and all the provisions of Chapter-V shall apply to such person as if he is the person liable for paying the service tax.”
    from the above you can verify that the obligation of depositing the Service Tax has been shifted to Service Recipient and generally too in case where Reverse charge is not applicable the Service Tax is paid by the service recipient only but indirectly,
    like the service provider charges it with his invoice and the service receiver pays the amount for the service received and for the Service tax, this also provides that liability to pay Service tax was always with Service receiver whether directly or indirectly but in case of reverse charge now the obligation along with liability has been shifted to service receiver.
    Secondly as you can read in the above given provision, in case of applicability of Sec 68(2) all the provision of the acts shall apply to service receiver as they are applicable to Service provider in case where Reverse charge is not applicable.
    hope this resolves your query
    - See more at: https://taxguru.in/service-tax/partial-reverse-charge-issues-suppressing-tourism.html#comment-1000625

  • Nice post..

    I have one query,

    Situation: where cab operator doesn't avail abatement and RCM is applicable

    As explained above and considering recent amendments, 50% of ST need to be paid by Service Provider and balance 50% by Service receiver. Here, can the service provider charge his portion of 50% of ST liability in invoice value. ie., If service value is 10000, then on what amount he needs to raise invoice (i) Rs. 10000 (excluding ST) or (ii) Rs. 10618 (including 50% of ST)?

    As per my understanding, In any case Service receiver is liable to pay his portion of 50% ST under RCM ie., Rs. 618 to govt. But if the invoice value is 10618, then the total 100% ST burden is on Service receiver, (618 paid to service provider and 618 to govt).

    From the above, it is understood that, if Service Provider has not availed abatement and RCM is applicable, the ST burden of Service receiver increased from Rs. 494 (100% ST on 40% value) to Rs. 1236 (Rs. 618 paid to Govt and 618 to Service Provider charged in invoice)

    Pls clarify where I have gone wrong in my understanding.

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