CA Ankit Gulgulia
Service tax legislation has been amended vigorously by Finance Act, 2012. One such amendment relates to the increase in number of services that shall be subject to reverse charge mechanism. The intention behind such restructuring is that it has been noticed that a number of registrants collect the tax but do not pay the same to the Department. This is a serious loss of the revenue even though the compliant section at the recipient end is often not benefited. To ensure proper collection, while not inconveniencing small business, a new scheme is proposed to be introduced.
To give effect to this new reverse charge mechanism, some changes are being proposed: firstly, a proviso is being added to sub-section (2) of section 68 and both the service provider and service receiver will be considered as persons liable to pay the tax on notified taxable services and to the extent specified against each one of them.
This article intends to discuss few practical issues that are relevant for trade, commerce & industry and are as below:
A. What are services covered under reverse charge?
B. What are proportions of service tax payable by SP & SR?
C. How to compute taxes?
D. How to raise an Invoice?
E. How shall the Cenvat be utilised?
F. If SP claims benefit of Rs 10Lacs exemption, will the SR be liable to pay taxes?
G. If SR is small entity / below Rs 10 Lacs, Is it still liable?
- Whether SR is required to be registered under service tax?
- Whether SR needs to file service tax returns?
- When can SR claim Cenvat of tax paid under reverse charge?
H. If either SP or SR defaults, whether the other is liable to pay?
I. Treatment when advance is received?
A. Services covered under reverse charge (Not. 15/2012 – ST)
| S.No | Service | By (SP) | To (SR) |
| 1 | Insurance | Insurance agent | Any Person |
| 2 | Goods Transport by Road | GTA | a) Factoryb) Societyc) Cooperative Society
d) Dealer under excise e) Body corporate f) Any partnership firm |
| 3 | Sponsorship | Any Person | a) Body corporateb) Partnership firm in taxable territory |
| 4 | Any service |
1. Arbitral tribunal 2. Individual Advocate 3. Support service provided or agreed to be provided by Government or local authority |
Any business entity in taxable territory |
| 5 | Renting or hiring any motor vehicle designed to carry passenger | a) Individualb) HUFc) Proprietorship firm
d) Partnership firm e) AOP |
a) Companyb) business entity registered as body corporate located in the taxable territory |
| 6 | Works Contract Service | a) Individualb) HUFc) Proprietorship firm
d) Partnership firm e) AOP |
a) Companyb) business entity registered as body corporate located in the taxable territory |
| 7 | Supply of manpower for any purpose | a) Individualb) HUFc) Proprietorship firm
d) Partnership firm e) AOP |
a) Companyb) business entity registered as body corporate located in the taxable territory |
| 8 | Any service | Any person in non taxable territory | Any person in taxable territory |
B. Proportions of service tax Attributable to SP & SR (Not 15/2012 – ST)
| S.No | Service | SP | SR |
| 1 | Insurance | Nil | 100% |
| 2 | Goods Transport by Road | Nil | 100% |
| 3 | Sponsorship | Nil | 100% |
| 4 | Any service by tribunal/advocates etc | Nil | 100% |
| 5 | 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. | Nil | 100% |
| 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. | 60% | 40% | |
| 6 | Works Contract Service | 50% | 50% |
| 7 | Supply of manpower for any purpose | 25% | 75% |
| 8 | Import of service | Nil | 100% |
C. Computing taxes
Example: Say A is SP and B is SR such that they fall under reverse charge and ratio applicable is 25-75 for SP & SR respectively. Say an invoice of 15 Lacs (excluding tax) has been raised on 1st August, 2012. For the given facts the computation of service tax shall be as under:
| Particulars | Amount (in Rs) | |
| Invoice Value (excluding tax) | 15,00,000/- | |
| Service Tax ( Total Service tax) @ 12.36% (A) | 1,85,400/- | |
| Total Value | 16,85,400/- | |
| Less: Tax Attributable to service receiver and to be borne by SR himself (75% of (A)) | 1,39,050/- | |
| Amount Payable by SR to SP | 15,46,350/- | |
| ST payable by SR | 1,39,050/- | |
| ST payable by SP | 46,350/- |
Against ST payable the Cenvat available with respective parties can be utilised subject to Cenvat credit rules, 2004.
D. Raising service invoice
Above mentioned table shall be our reference point to discuss raising a service invoice. In this case the total service payable i.e. Rs 1, 85,400/- needs to be disclosed. In addition to that service tax attributable to service receiver i.e. Rs 1,39,050/- shall be disclosed on invoice so that the SR knows the amount of service tax that is required to be paid by him.
E. Availing and Utilisation of cenvat
The SP shall utilise the the Cenvat of input, input services and capital goods as and when available as per Cenvat credit rules. There exists an issue regarding when the Cenvat for SR is available in regard to Service tax paid under reverse charge.
Say for example, the invoice is dated 29th August while the payment is made by SR to SP on 28th September, 2012 then in this case whether the Cenvat of tax paid under reverse charge shall be available and to utilised in payment of 5th September, 2012 or 5th October, 2012.
In my opinion, the Cenvat in above case shall be utilisable in payment to be made dated 5th October, 2012. The view finds its support in board clarification No. 345/1/2008 TRU – dated 27.6.2008 wherein it is clarified for the purpose of import of service that service tax paid under Section 66A is available as “input credit” under CENVAT Credit Rules, 2004 provided the said services are used as input services by the manufacturer or producer of final products or a provider of output taxable service. The same principle shall apply for cases of reverse charge other than import of services. Though board might come up with clarification soon on this issue.
F. SP eligible for benefit of Rs 10Lacs exemption
In case say that the SP is eligible for benefit of threshold exemption of Rs 10 Lacs then whether the SR is still liable to pay his share of taxes or will he also be not liable to pay any taxes. If the SP is claiming exemption for threshold benefit, fundamentally the service tax is exempt. Reverse charge should be seen as just a collecting mechanism of service tax and not the levying event. In this case SR shall not be liable to pay any taxes and invoice issued by the service provider shall be free from any service tax aspect.
G. SR eligible for benefit of Rs 10Lacs exemption
This will create maximum pain. Even if service receiver is below 10 Lacs or small entity covered incidentally in reverse charge, it needs to get registered under service tax and shall be liable to pay taxes under reverse charge as service receiver. Cenvat cannot be utilised against this payment so it shall be an explicit cash outflow. Further once the tax is paid under reverse charge the same can be utilised as Cenvat subject to Cenvat credit rules.
H. SP / SR defaults in paying taxes – Repercussions
It is clarified by board that the liability of the two persons is for respective amounts and is not influenced by compliance or the lack of it by the other side. Hence if either party defaults, there shall be no repercussion for the other party. Service provider is allowed Cenvat credit of tax paid by him on inputs and input services. The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons. In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules, to this effect.
I. Treatment of Advance received
In Practical case a lot of times SR has to pay advance to SP. In Works contract industry, mobilisation advance is very frequent. As per existing POT rules, this advance is liable to service tax, and the situations that exist become very complicated and tedious. To explain this assume the contract below:
| Particulars | Amount (In Rs) | |
| Total Contract Value (Contract executed on 1st July,2012) | 20,00,000/- | |
| Payment Terms – 20% Advance on 31st July (4,00,000/-) |
– 80% on completion of service i.e. 31st December,2012 Reverse charge ratios applicable25 – 75 (SP : SR)
In this case 4,00,000/- can be including taxes / excluding tax as per the nature of contract. The result shall be such that might create interpersonal liability between SR & SP after adjusting taxes, which can become undesirable to either of parties. The computations of taxes become highly tedious and much beyond the reach of small entities who cannot afford compliance cost.
J. Conclusion
The intention behind such restructuring is that it has been noticed that a number of registrants collect the tax but do not pay the same to the Department. This is a serious loss of the revenue even though the compliant section at the recipient end is often not benefitted. To ensure proper collection, while not inconveniencing small business, a new scheme is proposed to be introduced.
But not expectedly, it creates tedious situation for the assessee specially the service receiver. Moreover, fundamentally to say making SR liable to pay taxes is remedy to beat unjust enrichment by SP is not correct because even there might be cases where SR himself does not pay taxes. Also, board should release a dedicated clarification on this issue to cover all the practical cases so that comfort can be instilled in trade & Commerce.
Read Other Articles from CA Ankit Gulgulia (Jain)
About the Author:
Author is practicing Chartered Accountant in New Delhi and specialising in Indirect taxes , Corporate Laws and Management Advisory. He can be reached at +91-9811653975 or [email protected].
Author Bio
is reverse charge mechanism is applicable for garments exporter
Dear Ankit,
We are a 100%export unit (proprietorship firm), exporting garments. We are not registered under service tax yet, and due to lack of knowledge we were paying the service tax to the GTA agent till now.
Please specify what to do now??
are we under default?
what could be the possible consequences?
In case a private limited company is providing service of supply of manpower, then it wont be covered under not no. 30/2012 dated 20/06/2012
Under Point F above, as per CBEC clarification post the date of this article – Where even the service provider is availing threshold exemption benefit, still the service receiver shall be liable for his part of duty payable. Reference can be taken to guide released by CBEC.
Ankit,
Thanks for the excellent artlicle. Please can you clarify –
If a co-operative housing society (ie not a business entity) is a service receiver (SR) of a works contract – then it does not fall under Not 15/2012-ST ?
A small trader who uses the services of an advocate to file his tax returns will now have to pay service tax on the advocate’s bill and also pay him and service tax, to obtain a service tax registration and file service tax returns. Does this make sense?
My query was wrt what was mentioned by you in C i.e. Against ST payable the Cenvat available with respective parties can be utilised subject to Cenvat credit rules, 2004. Whereas the SR can not use CENVAT, but has to pay his portion in cash only.
Taxed deducted has to be paid before availing Cenvat for it, secondly in case invoice is silent SR always have option to pay taxes after deducting same for invoice value. considering service charges is inclusive of taxes
What is the procedure for claimimg cenvat in case of payment of service tax by service receiver in import of Services. Further, whether import of License of particular Educational course pattern is service and liable under service tax.
At present in case of you have to get your self registered in Service Tax mentioning the services you are providing. If a company is already registered under Service Tax as Service Receiver of GTA services, whether it will have to amend its registration certificate & also add new services like Rent – a – cab, Manpower Recruitment Service & Works Contract Service?
The duty under reverse charge cannot be paid by CENVAT, it is explicit outflow, the view expressed is consistent in article under (G). Further, under heading C since it is subject to CCR,2004, same meaning shall be inferred.
The duty liability on account of reverse charge can not be debited thru CENVAT credit available. In my opinion it has to be paid in cash and can be availed as credit. That is if he debits his share in CENVAT account, then, he can not avail credit of the same as there is no document generated which is specified as document for availing CENVAT credit under CCR. Payment thru cash has been specifically provided for GTA and services received from abroad. Clarification needed on this.
The duty liability on account of reverse charge can not be debited thru CENVAT credit available. In my opinion it has to be paid in cash and can be availed as credit. This is specifically provided for GTA and services received from abroad.