REVERSE CHARGE MECHANISM

Transcription

1 REVERSE CHARGE MECHANISM Contributed by CA. Amit Hariya INTRODUCTION Service tax, being an indirect tax, was conventionally collected and paid to government by only service providers. However there were few sectors of service industry that were either unorganised or ignorant of law, making it inconvenient for the revenue to check the compliances. To overcome such administrative inconveniences, Notification No. 36/2004 ST effective from 01 st January, 2005 laid down few exceptions to such conventional mechanism of collecting and paying taxes by service provider, and thereby taxes on few categories of services were required to be paid by service receiver or any other prescribed person instead of service provider. These exceptions, in common parlance, came to be known as Reverse Charge Mechanism (RCM). Power to collect tax from person other than service provider is vested by sub-section (2) of Section 68 of the Finance Act, 1994 (said act). Notification No. 36/2004 ST (supra) was issued under the realm of this sub-section and was amended from time to time to notify services in respect of which service tax would have to be paid by service recipient. This notification was superseded during the introduction of negative list based levy regime by issuing Notification No. 30/2012 ST dated 20/06/2012 ( said notification ) effective from 01 st July The said notification has increased the number of services under RCM. It has also prescribed the extent to which service tax shall be paid by prescribed person in respect of notified services (Eg:- Security Service, Supply of Manpower, etc). Tax on such few services has to be paid partially by service recipient and balance by service provider which has been commonly came to be known as Partial Reverse Charge. TOTAL REVERSE CHARGE MECHANISM 1. Services of Insurance Agent (Effective from 01/01/2005) Where services are provided by an insurance agent to any person carrying on insurance business, service tax thereon shall be payable by service recipient being a person carrying on insurance business. Meaning of Insurance Agent. Insurance agent has not been defined under the presently applicable provisions of said act. However Section 65(54) of said act, applicable during pre-negative regime, assigned it the definition stated in Insurance Act, Section 2(10) of Insurance Act, 1938 defines it to mean insurance agent licensed u/s 42 of Insurance Act, 1938 who receives or agrees to receive the payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business.

2 Thus RCM will operate only when services provided to person carrying on insurance business by insurance agent are in their capacity as such i.e. services are of soliciting or procuring insurance business. Situations when tax shall be payable by service provider i.e. insurance agent himself. a. Services provided by insurance agents in any capacity other than that of insurance agent. (E.g. Insurance agent rents its premises to insurance company). b. Services provided by insurance agent to person other than that carrying on insurance business. (E.g. consultancy in relation to various schemes to prospective insuree). 2. Services of Goods Transport Agent (GTA) (Effective from 01/01/2005 amended w.e.f 01/07/2012) Where any services in respect of transportation of goods by road are provided or agreed to be provided by GTA, where person liable to pay freight is:- Factory registered or governed under Factories Act, 1938, or Society registered under Societies Registration Act, 1860 or equivalent law, or Co-operative Society established by or under any law, or Dealer of Excisable goods registered under Central Excise Act, 1944, or Body Corporate established by or under any law, or Partnership Firm including AOP, whether registered or not, (hereinafter all referred to as specified persons ) service tax thereon shall be payable by person liable to pay freight located in taxable territory. Meaning of GTA Section 65B(26) of the said act GTA means any person who provides services in relation to transport of goods by road and issues consignment note. Situations when tax shall be payable by service provider i.e. GTA himself. a. When a person liable to pay freight is other than specified person (E.g. individual not being dealer of excise and not being a factory). Important amendment during negative regime Before 01/07/2012 W.e.f. 01/07/2012 Tax had to be paid by person liable to pay freight when either the consignor or consignee was amongst specified persons. Tax has to be paid by person liable to pay freight only when such person itself is amongst specified persons.

3 Henceforth, it is not the status of consignor or consignee but the status of person paying freight, that will determine as to who will be liable to pay tax on services of GTA. E.g.:- Services of GTA have been availed to transport goods from Mr. A (individual not being registered as excise dealer or factory) (consignor) to ABC Ltd. (consignee). Freight is payable by Mr. A. Prior to 01/07/2012, Mr. A was liable to pay tax in this situation since his consignee is amongst specified person. However after 01/07/2012 Mr. A is not liable to pay tax since he does not fall amongst specified persons. Relevant Exemptions from service tax Notification no. 25/2012 ST dated 20/06/2012 a. Services provided by a GTA, by way of transport in a goods carriage of following, shall be exempt:- agricultural produce; goods, where gross amount charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees; goods, where gross amount charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred fifty; foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages; chemical fertilizer and oilcakes; newspaper or magazines registered with the Registrar of Newspapers; relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap; or defence or military equipments; b. Services by way of giving on hire - to a goods transport agency, a means of transportation of goods; Valuation - Abatement Notification No. 26/2012 ST dated 20/06/2012 Sr. No. 7 of said notification provides for discharging tax on 25% of gross amount charged provided no CENVAT credit is taken. Thus abatement of 75% shall be available for discharging tax liability. 3. Services of Sponsorship(Effective from 01/01/2005)

4 Where services by way of sponsorship are provided by any person to a body corporate or a partnership firm located in taxable territory, service tax thereon shall be payable by service receiver. Sponsorship V/s Donation Sponsorship has not been defined in presently applicable provisions of service tax law. However prior to 01/07/2012, Section 65(99a) of said act had defined sponsorship. Following differences between Sponsorship and Donation could be drawn from definition. Sponsorship Donation Sponsorer is generally entitled to returns in form Donation does not oblige organizer or donee to of:- provide anything in return to donor Naming event after him Displaying his banner Exclusive or priority booking rights, etc Thus for being called as sponsorship there need to be satisfaction of idiom Quid-Pro-Quo.i.e. something in return. Relevant Exemptions from service tax Notification no. 25/2012 ST dated 20/06/2012 Clause 11 of Notification No. 25/2012 ST dated 20/06/2012 has exempted services by way of sponsorship of sporting events organised by specified persons. Situations when tax shall be payable by service provider i.e. sponsoree. a. Sponsorship services provided to persons other than body corporate or partnership firm. Eg. Where Mr. X, an individual, sponsors any event (service recipient), service tax shall be payable by sponsoree (i.e. service provider who receives consideration). 4. Services of Arbitral Tribunal; and Advocates or a firm of advocates by way of legal service. (Effective from 01/07/2012) Where any services are provided by an arbitral tribunal, or where legal services are provided by advocates or firm of advocates, to business entity located in taxable territory, service tax thereon shall be payable by service recipient being business entity. Meaning of terms Meaning borrowed from Notification No. 25/2012-ST dated 20/06/2012 Advocate has the meaning assigned to it in Section 2(1)(a) of the Advocate Act, 1961.

5 Arbitral tribunal has the meaning assigned to it Section 2(d) of Arbitration and Conciliation Act, Legal service means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority. Section 65B of said act "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession Relevant Exemptions from service tax Notification No. 25/2012 ST dated 20/06/2012:- Services provided a) by arbitral tribunal, or individual advocate or firm of advocates by way of legal services to:- person other than business entity, or business entity with turnover upto Rs 10 Lacs in preceding financial year. b) by individual advocate or firm of advocates by way of legal services to other advocate or firm of advocates providing legal services. c) by member of arbitral tribunal to arbitral tribunal. To summarise, legal services provided by advocates or firm of advocates will be taxable only when recipient of services is business entity:- not being advocate, firm of advocates, or arbitral tribunal, and has turnover exceeding Rs 10 Lacs in preceding financial year. Situations when tax shall be payable by service provider. There is no situation where advocate or firm of advocate or arbitral tribunal will have to pay service tax. 5. Services by way of support services by Government or Local Authority (Effective from 01/07/2012) Where any services by way of support services excluding: - (i) services of renting of immovable property, (ii) services of speed post, express parcel post, life insurance and agency, (iii) services in relation to aircraft inside or outside airport or port, (iv) services of transport of goods or passenger; are provided by government or local authority to any business entity located in taxable territory, service tax thereon shall be payable by service recipient being a business entity. Meaning of term Section 65B(49) of said act "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves

6 but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis Services in nature of statutory function There are some services which are rendered exclusively by government of local authority, E.g. RTO issuing fitness certificate to motor vehicles. Such services are undertaken as mandatory and statutory functions and don t constitute taxable services. Thus there is no leviability to service tax for such services. 6. Services of Director of Company (Effective from 07/08/2012) Where any services are provided by director of company to said company, service tax thereon shall be payable by company receiving such services. For the purpose of levy of service tax, Service does not include provision of services by the employee to his employer in course of or in relation to his employment (Section 65B(44)(b)). Hence services of directors in terms of employment with company), would not attract service tax and thus question of paying tax under RCM does not arise. Services ought to be covered here may be those other than in nature of employment or services of those directors who are not in employment of company e.g. Non-Executive Directors. E.g.:- Sitting fees for attending board meetings paid to non-executive directors Where one company nominates a director on the board of other company, and fees in this regards are paid to former company instead of director, then it shall amount to provision of services by former company and not the director so nominated. Hence in such case RCM shall not operate and service tax shall be paid by company nominating such director. 7. Service provided by person located in non taxable territory Where any taxable services are provided by any person located in non-taxable territory and received by a person located in taxable territory, service tax thereon shall be payable service recipient. Relevant Exemptions from service tax Notification no. 25/2012 ST dated 20/06/2012 Services provided by person located in taxable territory to following persons shall be exempt:- Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession

7 an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961)for the purposes of providing charitable activities; or a person located in a non-taxable territory. Notification no. 42/2012 ST dated 29/06/ Services of foreign agents in case of exports Services provided by commission agent located outside India and received by exporter in India for use in export are exempt subject to certain conditions prescribed therein. PARTIAL REVERSE CHARGE MECHANISM 8. Services of Motor Vehicle designed to carry passenger (Effective from 01/07/2012) Where services by way of renting of motor vehicle designed to carry passenger are provided by any person to other person who is not engaged in similar lines of business, service tax thereon shall be payable to the extent of:- a) 100% by person receiving services, if payable on value after claiming abatement, or b) 40% by person receiving services and 60% by person providing services, if payable on whole value without claiming abatement. Notification No. 26/ ST has allowed abatement of 60% value of services for discharging service tax liability. Renting V/s. Hiring Tribunals have envisaged the term renting as different from hiring in various cases, e.g.: Shree Gayatri Tourist Bus Services V/s. CCE, Vadodara, [ 2013 (29) STR 499 (Tri. Ahmedabad)] Imperia Motar Transport V/s. CCE, Meerut [ STT 585 (New Delhi CESTAT)] Following are illustrative differences that may be drawn between the two terms:- Renting Vehicle may remain under disposal and control of customer Responsibility for repair or maintenance of vehicle may be of customer. Hiring Vehicle may be given to customer for specific distance or for going from one place to another. Responsibility for repair or maintenance of vehicle is not of customer. His interest is limited to completing its journey.

8 9. Services of Supply of Manpower (Effective from 01/07/2012) and Security Services (Effective from 07/08/2012) Where any services by way of supply of manpower or security services are provided by any individual, HUF, partnership firm or AOP located in taxable territory to a business entity being a body corporate located in taxable territory, service tax thereon is payable to the extent of 75% by service recipient being body corporate and 25% by service provider being individual, HUF, partnership firm or AOP. Supply of manpower means supply of manpower, temporarily or otherwise, to another person to work under his superintendence and control. Where services are provided for executing specific work by way of labour contract, it will not amount to supply of manpower. Incidence of liability of service tax on recipient and provider of services:- Service provider Service Recipient Extent of Tax Extent of Tax payable by service provider payable by service recipient Individual, HUF, Business Entity being 25% 75% Firm or AOP Body Corporate Individual, HUF, Business Entity other 100% NIL Firm or AOP than Body Corporate Business Entity Business Entity being 100% NIL being Body Body Corporate Corporate Business Entity Individual, HUF, Firm 100% NIL being Body or AOP Corporate 10. Services of execution of Works Contract Where any services by way of execution of works contract are provided by any individual, HUF, partnership firm or AOP located in taxable territory to a business entity being a body corporate located in taxable territory, service tax thereon is payable to the extent of 50% by service recipient being body corporate and 50% by service provider being individual, HUF, partnership firm or AOP. Incidence of liability of service tax on recipient and provider of services:- Service provider Service Recipient Extent of Tax payable by service Extent of Tax payable by service

9 provider recipient Individual, HUF, Business Entity being 50% 50% Firm or AOP Body Corporate Individual, HUF, Business Entity other 100% NIL Firm or AOP than Body Corporate Business Entity Business Entity being 100% NIL being Body Body Corporate Corporate Business Entity Individual, HUF, Firm 100% NIL being Body or AOP Corporate Valuation of service portion in execution of works contract shall be governed by Rule 2A of Service Tax (Determination of Value) Rules, Service provider and service recipient have the option of choosing valuation method as per their own choice and independent of valuation adopted by other. FREQUENTLY ASKED QUESTIONS 1. Whether benefit of threshold exemption of Rs 10 Lacs is available to services on which tax is to paid under RCM? Notification 33/2012-ST dated 20 th June, 2012 provides exemption from service tax on the value upto Rs 10 Lacs to small scale service provider. It does not accommodate within itself such services and such persons as are dealt with under RCM. Thus service tax under reverse charge, whether complete reverse charge or partial reverse charge, shall be paid by service recipient or service provider, as the case may be, irrespective of value of his turnover. However where legal services are availed by a business entity having turnover less than Rs 10 Lacs in preceding financial year, such services are specifically exempt in terms of mega exemption notification and thus no service tax is payable by service recipient in such case. 2. Whether registration is required to be obtained for payment of service tax under RCM? Section 68(2) of the said act has made applicable, all the provisions of the chapter, to person liable to pay tax under RCM. Section 69 read with Rule 4 of Service Tax Rules, 1994 requires every person liable

10 to pay tax to make an application for registration. Thus all persons liable to pay tax under RCM have to obtain registration. Where any service provider already registered becomes liable to pay tax as recipient of services, it is imperative to seek necessary amendments in service tax registration. 3. What is point of taxation in case of liability under RCM? Rule 7 of Point of Taxation Rules, 2011 states that point of taxation in respect of persons required to pay tax as recipient of services shall be date on which payment is made to service provider for said services. It is further provided in said rule that where the payment is not made within 6 months of date of invoice then point of taxation shall be determined as if Rule 7 does not exist. Thus service recipient liable to pay service tax, may pay it as a liability for the month in which payment for the services is made by him to service provider. However, if payment towards invoice is not made within 6 months of date of invoice then the point of taxation shall fall back on date of invoice instead of date of its payment and interest for delayed payment of service tax shall be leviable under Section 75 of the said Act. 4. Can CENVAT Credit be utilised for discharging service tax liability under RCM?? In terms of Rule 3 of CENVAT Credit Rules, 2004, CENVAT credit could be availed and utilised by service provider for payment, inter-alia, of service tax on output services. Thus a person liable to pay tax as recipient of service, being input services for him, cannot utilise CENVAT credit for discharging said liability. Also Explanation to Rule 3(4) of CENVAT Credit Rules, 2004 prohibits utilisation of CENVAT credit for payment of tax as service recipient. Service recipient liable to pay service tax needs to discharge such liability by cash only. However service provider liable to pay service under partial reverse charge can very well utilise CENVAT credit for discharging said liability, subject to provisions of CENVAT Credit Rules, Whether CENVAT credit can be availed of service tax paid by service recipient under RCM?

11 Service tax paid under RCM by service recipient on services, being his input services, can be availed as CENVAT credit subject to provisions of CENVAT Credit Rules, Such credit shall be available on the basis of GAR7 challan evidencing the payment of service tax. 6. Where service tax is charged and collected by service provider in case where the liability was casted upon service recipient, whether service recipient can avoid payment of tax? In case of Navyug Alloys Pvt. Ltd. V/s CCE & C, Vadodara-II [ STT 362 (Ahd CESTAT) ], it was observed that once tax already paid on the services, it was not open to the Department to confirm the same against the appellant, in respect of the same services. Similar view was also held in Invincible security services V/s CCE., Noida [2009 (13) S.T.R. 185 (Tri. - Del.)]. It has also been observed incase of Umasons Auto Compo Pvt Ltd V/s CCE [2014 (2) 100 CESTAT Mumbai] that once the amount of service tax is accepted by the Revenue from the provider of GTA service, it cannot be again demanded from the recipient of the GTA service However, a view may also be taken that liability of service provider and service recipient is totally independent and different from each other. It is statutory duty of a person to discharge service tax liability when same is casted upon him by law. Thus it may be advisable for service recipient to pay service tax on services where liability to pay such tax is statutorily casted upon him ignoring the payment of same by service provider.

12 Liability to pay service tax under RCM at glance Sr Taxable Service Service Provider Service Recipient Payable By No. Service provider Service Recipient 1. Insurance Agency Insurance Agent Any person NIL 100% carrying on Insurance Business 2. Services of Goods Transport Person Liable to NIL 100% Transportation by Agency pay freight (Abatement Road available of 75% value) 3. Sponsorship Any Person Body Corporate NIL 100% Services Partnership Firm (Located in Taxable Terittory) 4. Arbitral Tribunal Arbitral Tribunal Business Entity NIL 100% Services (Located in Taxable Terittory) 5. Legal Services Individual Advocate Business Entity NIL 100% Firm of Advocates (Located in Taxable Terittory) 6. Support Services Government or excluding specified Local Authority services 7. Renting of Motor Any Person Vehicles designed to carry passenger Business Entity NIL 100% (Located in Taxable Terittory) Any person other NIL 100% than that in similar (if abatement is lines of business claimed of 60% value) (If no abatement is claimed) 60% 40% 8. Manpower Supply Individual, or Business Entity 25% 75% Service HUF, or being body Security Services Partnership Firm, corporate or AOP (Located in taxable Territory) (Located in Taxable Territory)

13 9. Works Contract Services 10 Services of director of company 11. Any Taxable services ----do do % 50% Director of Said Company NIL 100% Company Person Located in Person Located in NIL 100% Non taxable taxable Territory Territory