Service tax under Reverse Mechanism & SSI Exemption Benefit

CA LALIT MUNOYAT

a) Service tax is an indirect tax based on the ultimate consumption of the service and the liability is generally discharged by the Service Provider by collecting it from the Receiver of the service. The taxability is attracted –in general- when the services are provided and consumed within the taxable territory.

b) Taxable Territory does not include the state of J&K and therefore services provided within the State of J & K will not be liable to tax. The Place of Supply Rules, 2012 will determine whether a service is being provided in J&K.

c) Moreover wherever the service provider is located in J&K but the service is being provided in taxable territory the tax will be collected from the service receiver. (Reverse Charge)

d) The government had the bad experience of noting 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, Service tax on Reverse Charge basis has been introduced.

e) To give effect to this new reverse charge mechanism, some changes have been made in section 68(2). It has been provided that 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.

The salient features of the Reverse Charge Mechanism are as under:

1) With effect from 01-07-2012 section 66B of  Chapter V of Finance Act, 1994 shall govern the CHARGE of service tax . Accordingly  there shall be levied a service  at the rate of 12% on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

2)      Section 68 of  Chapter V of Finance Act, 1994 governs the mechanism of  Payment of service tax. It is provided as under:

(1) Direct Charge: Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.

(2) Reverse Charge: Notwithstanding anything contained in sub-section (1), 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 66 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.

3)      In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 the Government of India has issued a Notification No.15/2012-Service Tax w.e.f. 01-07-2012 which has notified the following taxable services and the extent of service tax payable thereon by the person liable to pay service tax for the purposes of this sub-section, (i.e. sub-section (2) of section 68) namely:—

A: Taxable Services : Local Territory Jurisdiction
	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	Provided or agreed to be provided by an insurance agent to any person carrying on the insurance business		Nil		100%
2	Provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the consignor or the consignee is,—		Nil		100%
	(a)	any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
	(b)	any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;
	(c)	any co-operative society established by or under any law;
	(d)	any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder;
	(e)	any body corporate established, by or under any law; or
	(f)	any partnership firm whether registered or not under any law including association of persons;
Note: A Person who pays or is liable to pay freight either himself or through his agent for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.
3	Provided or agreed to be provided by way of sponsorship, to anybody corporate or partnership firm located in the taxable territory;		Nil		100%
4	Provided or agreed to be provided by an arbitral tribunal to any business entity located in the taxable territory;		Nil		100%
5	Provided or agreed to be provided by an individual advocate to any business entity located in the taxable territory;		Nil		100%
6	The support service provided or agreed to be provided by Government or local authority, to any business entity located in the taxable territory;		Nil		100%
7	(a) 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%
	(b) 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%
8	Services provided or agreed to be provided by supply of manpower for any purpose		25%		75%
9	Services provided or agreed to be provided by way works contract.		50%		50%
	In respect of services mentioned at Sr. No. 7, 8 and  9 the following conditions must be satisfied:1)      The service provider must be individual, Hindu Undivided Family or proprietary firm or partnership firm, whether registered or not, including association of persons; 2)      The service provider must be located in the taxable territory 3)      The service Receiver must be any company formed or registered under the Companies Act, 1956 or a business entity registered as body corporate located in the taxable territory;
B: Taxable Services : Intra Territory Jurisdiction
10	In relation to any taxable service 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%

 Simultaneously Rule 9(1)(e) has been amended to allow availment of credit on the tax payment challan in case of payment of service tax by all service receivers on reverse charge.

The department has clarified 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. 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.

4)      One unintended problem may arise in applying the provisions of SSI Notification No. 6/2005- Dated 1st March, 2005 which exempts taxable services of aggregate value not exceeding 10 lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66 of the said Finance Act:

But this notification does not apply in the following case

(i)    Taxable services provided under a Brand Name

(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.

5)      The problem is expected in respected of services mentioned at serial no. 7(b), 8 and 9 where part of the service tax is paid by both the parties.

a)      One may argue that to the extent service tax is payable on the above 3 services by the Service Provider, he may not face any problem because he is making payment under Direct Charge Mechanism only as provided u/s 68(1) and that and that it is only a portion of the service tax which is being paid by the Receiver. As such , in so far as the providers are concerned, they may argue that they are still eligible to SSI exemption upto Rs. 10 lakhs.

b)      However, the other argument that is being advanced is that as the Notification has been issued pursuant to the provisions of section 68(2), it shall be subject to the restrictions as provided (supra) of the SSI notification No. 6/2005 and therefore NO SSI exemption may be available.

c)        Still more, Section 68(2) has a Proviso which provides as under:

As is legally provided a proviso clause in a statute excepts something from statutory requirements, qualifies the statute, or excludes some potential area of misinterpretation.

A proviso differs from an exception. An exception exempts, absolutely, from the operation of an engagement or an enactment; a proviso defeats their operation, conditionally. An exception takes out of an engagement or enactment, something which would otherwise be part of the subject-matter of it; a proviso avoids them by way of defeasance or excuse.

Further a proviso clause is  inserted in an act of the legislature, a deed, a written agreement, or other instrument, which generally contains a condition that a certain thing shall or shall not be done, in order that an agreement contained in another clause shall take effect.

From the above discussion, one may conclude that the application of the provision of section 68(2) has been excepted by the proviso particularly when the substantive part of the notification governing its application has been promulgated pursuant to the proviso.

6)      Fearing the worst that clause (b) may apply, all the Receivers of the 3 specified Services may have to obtain Registration and discharged liability right from the first transaction.

7)      In respect of the exempted services (Mega Exemption) and Abatement from the service tax payable, the readers are advised to refer Notification No. 12 and 13 which would further clarify the issue.

8)      Researched views and differing opinions are invited to enlarge the utility of this write up.

Also Read– Service Tax under Reverse Mechanism & SSI Exemption Benefit- Part II

The above write up is the absolute personal opinion of the writer and does not amount to an expert legal opinion. Readers are cautioned to weigh the actual legal position before acting on this write up. Further, this write up is only for an academic interest.

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Compiled by:

CA LALIT MUNOYAT

B.Com.(Hons.), CS, FCA, DISA

munoyat@gmail.com

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