CA Sunny Kachalia, CA & CA Lucky Ahuja

Union Budget 2015 introduced several changes under Service Tax, particularly with regard to changes in exemptions, rationalising penal provisions, simplifying procedural aspects, clarifying disputed areas, Reverse charge, etc. This article highlights the important changes under Reverse charge mechanism.

Reverse charge mechanism in a concept wherein in case of provision of service, the liability to deposit Service Tax is shifted to service receiver or service provider/service receiver; instead of service provider. From July 2012, the number of services taxable under reverse charge increased to 10 vide Notification no. 30/2012 dated 20th June 2012.

Important changes under Reverse charge mechanism introduced in Budget 2015 is covered below:

1. Manpower Supply or Security services:

Currently in case manpower supply or security services is provided by individual, HUF, partnership firm (specified service providers) to a body corporate, service provider to liable to deposit Service Tax is to the extent of 25% and service receiver liable to deposit Service Tax is to extent of 75%.

W.e.f 1 April 2015 in the above scenario, Service Tax is not required to be charged by specified service provider and the same is to be paid by service receiver entirely. The same can be viewed as a relief to service providers as there would not be any burden to charge Service Tax and comply with the provisions. Further, there was always an ambiguity and confusion amongst body corporates, as to whether service provider has charged Service Tax at appropriate rate, whether service provider is registered/not registered, etc. The same can be seen as resolved with this change since those service providers would not be required to charge Service Tax henceforth.

2. Services provided by Mutual fund agents/distributors and lottery distributors:

Currently (from July 2012), services provided by mutual fund agent to mutual fund/asset management company, services provided by mutual fund distributor to mutual fund/asset management company and services provided by selling or marketing agent of lottery ticket to distributor is exempt from Service Tax.

W.e.f 1 April 2015 the aforesaid exemptions would be withdrawn and Service Tax would be applicable on these transactions. However the burden to pay Service Tax is shifted mutual fund/asset management company/distributor as the case may be.

3. Aggregator services covered under reverse charge:

Aggregator is defined to mean “a person, who owns and manages a web based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator” (effective 1 March 2015).

Accordingly aggregator engaged in carrying out the above would be required to deposit Service Tax w.e.f 1 March 2015. Here, it requires to be analysed as to who shall qualify as aggregator such as web-based taxi service providers, hotel services providers, etc. Further, it is not clarified on which value Service Tax is to be deposited, whether abatement can be applied as available to radio taxis, whether credit can be claimed, etc.

4. CENVAT Credit claim for reverse charge services:

Currently, services covered under partial reverse charge, credit can be claimed by service receiver once the payment is made to service provider and the amount of Service Tax is deposited with the Authorities.

W.e.f 1 April 2015, the provisions of claiming credit has been relaxed and the same can be claimed once Service Tax is deposited with the Authorities without linking with the payment to service provider. The same is a welcome move and relief as it would result in reduce of time and efforts to track payments to service providers and Service Tax for services under partial reverse charge.

Considering the aforesaid changes, businesses needs to be cautious which ascertaining the services covered under reverse charge, making computations at appropriate rates, etc before depositing Service Tax.

Though the provisions of reverse charge could have been made simpler by removing partial reverse charge and keeping the burden either with service provider or service receiver on services such as care hire services, works contract services, etc; however the same is not announced.

(The authors are Managers of SKP Business Consulting LLP and the above views expressed are personal)

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One response to “Changes in Reverse Charge Mechanism – Union Budget 2015”

  1. Ashok Kumar says:

    Partnership to Partnership how much ST Chargeable

  2. NIRAV MEHTA says:

    COMPANY A – BUILDER & HE IS BODY CORPORATE
    INDIVIDUAL MR. B – CONTRACTOR FOR MANPOWER SUPPLY
    INDIVIDUAL MR.C – SUB CONTRACTOR OF MR. B. FOR MANPOWER SUPPLY.
    IF A GIVES CONTRACT TO MR. B FOR Rs. 3000000/-; UNDER REVERSE CHARGE MECHANISM.
    MR. B ON HIS OWN CAN COMPLETE CONTRACT FOR Rs. 1800000/-; AND HE GIVES SUB CONTRACT TO MR. C FOR BALANCE RS. 1200000/-.
    NOW QUESTION IS WHAT ARE THE SERVICE TAX LIABILTY OF ABOVE A, B, and C ?
    KINDLY REPLY ME ON MY MAIL id.

  3. Sainul says:

    The condition for claiming CenVAT credit:
    1. payment is made to service provider
    2. and the amount of Service Tax is deposited with the Authorities.
    as per my knowledge wef. 1/7/2014, the dept. has given relaxation of payment condition for availing CenVAT CREDIT. But in this article it is showing wef. 1/4/2015 only, please clarify the same.

  4. Raj says:

    In my opinion it would not be correct to say that the service provider(SP) in case of man power supply need not charge service tax (ST) as mention in the second para of point 1. SP has to charge ST in the invoice but the payment would be made by the service recipient to that extent to the Government and balance to the Service provider.The SP also can take input credit of the ST paid by him. If ST is not charged in his invoice then he may not be able to claim input credit . Correct me please if I am wrong.

  5. CA Seshadri says:

    It only increases compliance burden on the service receiver.But when Advocates themselves are left out of the stringent requirements of not filing ST3 etc why not the small timers !

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