As a general rule in Service Tax regime, the person who is receiving Services (popularly known as the Service Receiver or the Service Recipient) pays the Service Tax to the person who provides Services (also known as Service Provider) and in turn, the same is remitted to the governmental authorities [as a result of which these Taxes are known as indirect Taxes]. However, having a small variant of the above convention was brought in to directly levy the Service Tax from the Service Receivers, which is the crux of Reverse Charge Mechanism.
B. Brief History
The Reverse Charge Mechanism (a.k.a. RCM) was introduced first by Notification No. 36/2004 specifying Persons liable to pay Service Tax. Where section 68(1) of the Finance Act provided, in the year 1994 that the Service Provider shall be the person liable to pay Service Tax, section 68(2) empowered the Government to prescribe Services wherein the Service Receiver instead of the Service Provider to be person liable to pay Service Tax. However the applicability of this mechanism was restricted to a few Services like Goods Transportation Services, Sponsorship Services and other 5 types of Services.
A new proviso was introduced to section 68(2) where a slight variation of the above concept of Reverse Charge Mechanism was introduced; this was the ‘Joint Charge Mechanism’ wherein the burden of payment of Service Tax were shared between the Service Provider and Service Receiver. The onus of payment of Service Tax was shared between these two. This new concept was introduced and made operational by the Government after a notification following the enactment of Finance Act, 2012.
C. Services Covered
The manner of Service Tax payable and its extent to be shared between the Service Provided and Service Receiver as per Notification No. 30/2012 are:
|SL||NATURE OF SERVICE||PROVIDER||RECEIVED|
|Who?||How much?||Who?||How much?||Effective Rate|
|1||Insurance Agent Service||Any insurance agent||0%||Any person carrying on insurance business||100%||12.36%|
|2||Transportation of goods by road||A Goods Transport Agency||0%||6 kinds of specified persons located in Taxable territory||100%||12.36%|
|3||Sponsorship Services provided in Taxable territory||Any person||0%||Partnership firm or a body corporate||100%||12.36%|
|4||Import of Services||Any person in a non-Taxable territory||0%||Any person in a Taxable territory||100%||12.36%|
|5||Advocate Services||Any individual advocate of firm of advocates||0%||Any business entity||100%||12.36%|
|6||Arbitral Tribunal Services||An arbitral tribunal||0%||Any business entity||100%||12.36%|
|7||Support Services||Government or Local Authority||0%||Any business entity||100%||12.36%|
|8||Hiring/renting of Motor vehicles designed to carry passenger||An individual, a HUF, a firm or an AOP||60%||A body corporate business entity [not involved in such hiring or renting].||40%||4.94%|
|10||Supply of Man Power||An individual, a HUF, a firm or an AOP||25%||A body corporate business entity||75%||9.27%|
|11||Works Contract Service||An individual, a HUF, a firm or an AOP||20%||A body corporate business entity||20%||2.47%|
|15||Security Services||An individual, a HUF, a firm or an AOP||25%||A body corporate business entity||75%||9.27%|
|16||Service by a director of a company||An individual||0%||A body corporate business entity||100%||12.36%|
Generally, a Service Renderer may not be concerned with payment of Service Tax under Reverse Charge Mechanism/Joint Charge Mechanism. However, its ignorance may lead to an additional cost in the form of payment of Service Tax, Interest, Penalty and other related costs both in terms of money and time. Hence, it is important to understand this requirement to ensure that a business does not get hit by this requirement.
Usually, all the Services in which the Service Provider is an individual, a firm, an AOP or a HUF and the Service Receiver is a body corporate (or any other specified person) are covered under this mechanism and this is the crux of its operations.
However, if hit by the requirements,
- the business has to obtain a Service Tax Registration within 30 days of applicability of the requirement,
- make payment of Service Tax by within the due dates as applicable and
- file half-yearly Service Tax returns.
D. Service-specific issues involved under RCM
- The payments in the names of sitting fees, commission, bonus, etc. are subject to Service Tax. And in case of nominee director, the nominating company who receives fees will be liable to pay Service Tax.
- The invoice/receipt would have to be issued by the directors within 30 days to the Company. In case of nominee directors, the invoice will be issued by the nominating company to the Service Receiver Company.
- However, WTDs/MDs/EDs who are under contractual employment with the company and receive salary or remuneration from the company will not be covered as these would be considered as employees of the company. Further, interest on loan by director to company, dividend on shares, other professional charges on account of Services not rendered as a director (i.e., in professional capacity) are not liable to Service Tax.
- In the case of Government nominees, the Services would be deemed to be provided by the Government, but liable to be Taxed under reverse charge basis.
(b)Manpower Supply Services
- The crucial essence of this type of Service is that a manpower supply Service will be called so only if the labour supplied do under the command of principal employer.
- Services such as cleaning Service, piece basis/job basis contracts etc. are not manpower supply Services.
- Service Tax will be applicable and calculated on salary, PF, ESI, commission of labour contractor and other charges to labours taken in aggregate.
- Security Services are those Services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the Services of investigation, detection or verification, of any fact or activity.
- A general dubiety might usually arise as to whether Service provided by a Chartered Accountant on securing the documents of a client is a Security Service. To be clearly understood is that a Chartered Accountant’s Services is not a security Services.
- In case of renting of motor vehicles to carry passengers where abatement is also available, Reverse Charge basis would act proportional depending upon the abatement, on the condition that no Cenvat Credit has been availed. The Service Provider should provide a certificate, either in the invoice itself or separately.
- Reverse charge applies only where Service Receiver is not engaged in same business and he pays 40% in every case, whether abatement is claimed or not.
(e)Goods Transport Agency Service (a.k.a GTA)
- Service Tax liability arise when consignment note is issued and a GTA will be liable to pay Tax only when both Service Provider and Service Receiver are individuals.
- The rate of Tax is @ 25% (i.e., abated value as seen from the above table), if the GTA avails Cenvat Credit to set them off with its output liability;
- If the GTA avails any Cenvat Credit, the rate of Tax would be @ 100% value.
(f) Services provided by Government or local authority
- Reverse charge applies to all Services except certain specified Services;
- The Government Department needs to be registered and pay Service Tax on support Services of –
ü Renting of immovable properties and
ü Speed post, express parcel, life insurance
E. Other issues egressed
(a) Constitution of persons
In order for the Reverse Charge Mechanism (or the Joint Charge Mechanism) to apply, the Service Provider shall be either any individual, Hindu Undivided Family or Partnership Firm (whether registered or not), including Association of Persons, located in the Taxable Territory. And, the Service Recipient shall be a Business Entity registered as a Body Corporate located in a Taxable Territory.
(b) No Basic Exemption of Rs. 10 lacs
Generally under the Service Tax law, the Service Provider is entitled to get benefit of basic exemption of Rs. 10 lacs, i.e., if his total Taxable Service in a financial year and in the immediate previous financial year is less than Rs. 10 lacs, he is not required to collect and pay Service Tax to the government; and this is governed by the Notification No. 33/2012 dated 20-06-2012.
However, a Service Receiver in this case of Reverse Charge Mechanism does not get this benefit of basic exemption of Rs. 10 lacs. That is, if he is required to pay Service Tax on Re. 1, then he will have to pay Service Tax under Reverse Charge Mechanism.
This most disappointing part under RCM is that a Service Recipient is required to pay Service Tax under Reverse Charge Mechanism/Partial Reverse Charge Mechanism, even if he is required to pay Re. 1 for specified Services utilised by him. In other words, a Service Receiver does not get benefit of basic exemption of Rs.10 lakhs which is available to a Service Provider.
Illustrating this, say having availed the Service of an Advocate in a proceedings, A Ltd. (a body corporate) had paid a fee of Rs. 2 lacs to the Advocate. Now that since RCM comes into play, A Ltd. cannot restrain from paying the Service Tax @ 12.36% [i.e., Rs. 24,720] citing the Advocate fee of Rs. 2 lacs to be below the basic exemption of Rs. 10 lacs. A Ltd. has to pay this Tax portion of Rs. 24,720 duly within the due dates.
Even in cases of Partial Reverse Charge Mechanism, it is possible that a Service Provider may not be required to pay Service Tax, as his annual Taxable Service turnover is less than Rs. 10 lacs, but a Service Receiver will be required to pay his share of Service Tax.
(c) Point of Taxation
The Point of Taxation, in case of RCM is –
- In case if the payment was made to the Service Provider and the debt cleared within 6 months of completion of Service, the date on which payment is made to Service Provider.
- However, in case if payment was not made to Service Provider within 6 months of completion of Service, the Point of Taxation would become the date of completion of Service. Which means that Service Tax is anyway payable, in addition interest is also payable.
(d) The credit of Tax paid by the Service Recipient under total/partial reverse charge would be available on the basis on the Tax payment challan (but usually invoice is also required);
(e) Service Provider under RCM may claim refund of Tax paid under rule 5(b) of Cenvat Credit Rules, 2004;
(f) Valuation of Services by Services Provider and Service Receiver can be on different principles, if permitted by law (e.g., in cases of works contract). The Service Recipient can independently avail or forgo abatement or choose a valuation option, which is independent of Service Provider.
(g) Invoice has to be prepared as per Rule 4A of Service Tax Rules, 1994;
(h) No agreement to shift liability
It is to be understood that it is a statutory obligation on the Service Recipient to pay Service Tax, whether under full or proportional reverse charge and not contractual; in the sense that even if the Service Provider and Service Receiver enter into a contract which has the effect of shifting the liability of payment of Service Tax from one of them to another, then such contracts might be void; the liabilities of both the Service Provider and Service Receiver are statutory and independent of each other; liability cannot be shifted by mutual agreement
(i) Availment of credit by Service Recipient
Service Tax under reverse charge has to be paid only by cash, vide GAR Challan No. 7 and it cannot be paid by way of utilization of Cenvat Credit. Therefore, the Service Receiver has no option but to make payment of Service Tax in cash. Once paid, Cenvat credit can be taken by Service Receiver for paying Service Tax on eligible input Service.
(j) Reverse charge will not apply if the Service Receiver is located in a non-Taxable territory;
(k) Registration of Service Receiver
The Service Recipient who becomes liable to pay Service Tax on a reverse charge will have to get registered as a Service Provider would do, even if he is not providing any Service. He will have to file the return as well even if it is a NIL return. As per Section 69 of Finance Act, 1994, “every person liable to pay the Service Tax should make an application for registration to the Superintendent of Central Excise within 30 days of the Service become chargeable under Reverse Charge in the manner and form as usually prescribed.
F. Procedures under Service Tax relating to Reverse Charge Mechanism
(a) Billing by Service Provider
In the invoice raised by the Service Provider, there should be charged only that portion of Service Tax for which he is liable as in the case of Joint Charge Mechanism. The Service Receiver would pay his portion of Service Tax only by GAR-7 challan. One point to be noted is that the Service Receiver is liable for only his part and not entire amount, even if Service Provider does not charge his portion of Service Tax.
The Service Provider shall issue an invoice in compliance with Rule 4A of the Service Tax Rules,1994. The invoice will indicate the name, address and the registration number of the Service Provider; name and address of Service Recipient receiving Taxable Service; the description and value of Taxable Service provided or agreed to be provided; and the Service Tax payable thereon and finally the Service Tax payable thereupon by the recipient of Service.
(b) Business Entity and Body Corporate
In some cases, reverse charge is applicable only when Service Receiver is business entity registered as ‘body corporate’.
A “Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, Government, a charitable organisation etc. are not ‘business entity’.
A “Body Corporate” includes a Company, an LLP, a Cooperative Society [a Cooperative Society is legally not a body corporate and is so only for the purpose of Service Tax laws]; however, a Firm, an HUF, a Trust is not a ‘Body Corporate’.
G. Winding Up
The total Service Tax revenue for the financial year 2012-13 to the Government has exceeded Rs. 1,33,833 crores and at least based on a rough estimate, Rs. 24,570 crores of them are from Reverse Charge Mechanism. This shows the very need of the hour to understand and implement the Reverse Charge Structure of Service Tax payment in the right manner in the right time.