Monday, November 5, 2012

Service Tax Reverse Charge: Basics


The Reverse Charge Mechanism of Service Tax was introduced vide Notifications No. 30/2012 issued by the Service Tax Department dated 20th June, 2012. The following is a summary of all relevant provisions of Service Tax related to the Reverse Charge Mechanism.

Service Tax Liability to be Discharged by Service Recipient
For the list of services given below, the Service Recipient is required to discharge the service tax liability in full, or both the service recipient and service provider have to discharge the tax liability as per the prescribed ratio.
S.No.
Description of a Service
% of Service tax payable by Service Provider
% of Service tax payable by Service Recipient
1
Insurance agent to insurance agent Not Applicable to Business Development Expenses
NIL
100%
2
Transport of goods by road
NIL
100%
3
Sponsorship service
NIL
100%
4
Arbitral services
NIL
100%
5
Legal services by Individual advocate or a firm of advocates
NIL
100%
6
Support services by Government or local authority (excluding renting of immovable property and certain other specified services)
NIL
100%
7
Renting of passenger motor vehicles*-          With abatement-
          Without abatement
Nil
60%
100%
40%
8
Supply of manpower for any service*
25%
75%
9
Works Contract service*
50%
50%
10
Any taxable service where the Service provider is located in a non taxable territory and service recipient located in a taxable territory
NIL
100%

*in case where the service provider is a non corporate entity and the service recipient is a corporate entity.
“Renting of immovable property” to extend to include any other service in relation to such renting also.
“Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.

Point of Taxation
Point of taxation is the date of payment to the service provider.
·         Provided payment is made within 6 months from the date of invoice, otherwise point of taxation will be the date of invoice. 
·         Invoice needs to be issued by the service provider within 30 days of completion of each event/service.
·         If the invoice is not issued within the specified time, point of taxation will be the date of completion of provision of service.
·         In case of “associated enterprises”, where the person providing the service is located outside India, point of taxation will be the earlier of:
Ø  Date of debit in the books of accounts of the person receiving the service, or
Ø  Date of making the payment.

For any service whose point of taxation has been determined and whole liability affixed before 01.07.2012/07.08.2012, the new provisions will not apply. Merely because payments are being made on or after 01.07.2012/07.08.2012 will not add any additional liability on the service receiver in respect of such services.

What shall be the point of taxation for the service recipient? When will he need to pay the service tax in respect of his liability?
Usually, it is the invoice or date of receipt of payment which is the point of taxation for the service provider. However for the service recipient, in terms of Rule 7 of the said rules, point of taxation is when he pays of the service. Thus in the case where the invoice is issued in July 2012 and the service recipient pays for the same in August 2012, the point of taxation for the service provider will be the date of issue of invoice in July 2012. The point of taxation for the service recipient shall be the date of payment in August 2012. The service provider would be required to pay tax (to the extent liability is affixed on him) by 5th/6th August, 2012 or 5th/6th October, 2012.. The service recipient would need to pay tax (to the extent liability is affixed on him) by 5th/6th September, 2012.

No Threshold Limit of Exemption from Service Tax in Case of Applicability of Reverse Charge
·         Service tax on reverse charge is applicable even if the service provider is exempt from service tax up to the taxable value of Rs. 10 lakh.
·         There is no threshold limit of exemption for the service receiver under reverse charge mechanism.
·        If the service provider is exempted, being a SSI (turnover less than Rs. 10 lakhs), how will the reverse charge mechanism work?
The liability of the service provider and service recipient are different and independent of each other. Thus, in case the service provider is availing exemption owing to turnover being less than Rs. 10 lakhs, he shall not be obliged to pay any tax. However, the service recipient shall have to pay service tax which he is required to pay under the partial reverse charge mechanism.

Input Credit of Service Tax paid by Recipient under Reverse Charge Mechanism
·         Input Credit can be availed on the basis of tax payment challan.
·         In case of Banks and NBFCs, Rule 6(3B) of CENVAT rules will also apply to input credit of service tax paid under reverse charge mechanism.

100% Service Tax Liability with Service Provider when it is Corporate Entity
In the following cases only, 100% service tax liability will be with the service provider, if it is a corporate entity. The service recipient will pay nothing under reverse charge mechanism in these cases.
a)      Renting of motor vehicle
b)      Manpower & Security Services
c)       Works contract