As you would be aware that normally the service provider is the person liable to pay Service tax, except in certain notified cases where the service receiver is made liable to pay Service tax. This was popularly termed as “Reverse Charge”.
However, in continuation with the Government’s endeavor to tap the service sector’s potential in nation building by introduction of the negative list approach of taxation of services, another concept of ‘partial reverse charge’ was introduced w.e.f. 1st July 2012 vide Notification No. 30/2012-ST dated 20-6-2012 wherein in respect of specified services, part of service tax is to be paid by service provider and balance by the service receiver.
Consequential amendments are made in Rule 2(d) of the Service Tax Rules, 1994 (hereinafter referred to as “the Rules”) which defines the term “person liable for pay tax”.
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The above Notification was further amended by Notification No. 45/2012 dated 07-08-2012, wherein inter alia, services provided by a Director of a Company to the Company are also included in the ambit of reverse charge.
It may also be noted that the person liable to pay Service tax under reverse charge would not be entitled to claim benefit of the threshold exemption of Rs. 10 lakhs. Therefore, even if the service provider is availing the threshold exemption, the service recipient would still be required to pay his part of Service tax, as applicable.
Accordingly, we through this note have tried to elucidate the relevant provisions relating to reverse charge on various services, dealt with the service specific finer aspects or issues which may arise in compliance with these new provisions and our comments thereon. We hope you would find this useful in ensuring compliance with the reverse charge mechanism of Service tax in your organization.
The service-wise details about the reverse charge mechanism are discussed, as under:
1. Remuneration to Directors:
Applicability – Whether services provided by all Directors would be covered?
The Rules and Notifications relating to reverse charge merely state ‘service provided or agreed to be provided by director to the said company’. The provisions do not distinguish between whole- time director or part-time director.
However, Section 65B(44) of the Finance Act, 1994 ( “the Act”) which defines the term ‘service’ specifically excludes services provided by an employee to employer in the course of employment from the purview of Service tax.
Accordingly, on careful reading of the provisions relating to reverse charge in light of the Service tax laws, it can be concluded that if there is an employee-employer relationship, then there is no service tax liability and, hence, no question of reverse charge can arise.
Reverse charge provisions can apply only if a service is otherwise taxable. Therefore, Service tax is not payable in case of a Managing Director or a Whole-time Director or Executive Director, if the Director is in full time employment of the company.
Service tax will be payable on Sitting fees paid to independent (non-employee) Directors for attending meetings of the Board and the Committees of Board, travelling and incidental expenses for attending such meetings, commission or other remuneration paid, if any.
Liability to pay Service Tax
According to Rules 2(1)(d)(EE) of the Rules read with Notification No. 30/2012-ST, dated 20-6-2012 amended w.e.f. 7-8-2012, the Company receiving the services of Directors is liable to pay Service tax under reverse charge mechanism.
Would payment of service tax affect provisions of Company Law relating to managerial remuneration?
The Ministry of Corporate Affairs has clarified vide General Circular No. 24/2012, dated August 9, 2012 that any increase in remuneration of non-whole time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of the Central Government under sections 309 and 310 of the Companies Act, even if it exceeds the limit of 1% or 3% of the profits of the company, as the case may be, in the financial year 2012-13.
This means that such approval will be required after 1-4-2013.
2. Manpower Supply and Security services:
Rule 2(1)(g) of the Rules defines supply of manpower as “supply of manpower temporarily or otherwise to another person under his superintendence or control”
Going by the above definition, we are of the view that, inter alia even manpower recruitment service would be subject to reverse charge, as the definition uses the words ‘temporarily or otherwise’.
Rule 2(1)(fa) of the Rules defines Security Services means “services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity”.
Liability to pay Service Tax
The payment of service tax in respect of Manpower Supply and Security services under different scenarios is explained in below table:
Service provider
|
Service receiver
|
Service tax payable by provider
|
Service tax payable by receiver
|
| Individual, HUF, Proprietary firm, Partnership firm | Business entity registered as body corporate | 25% | 75% |
| Individual, HUF, Proprietary firm, Partnership firm | Person other than business entity registered as body corporate | 100% | - |
| Company, Body Corporate, society, trust, AOP, BOI | Any person | 100% | - |
3. Renting of a Motor Vehicle.
The liability to pay Service tax in respect of service of renting of motor vehicle designed to carry passengers, is to be discharged by the service receiver as well as the provider, where the service receiver is not engaged in similar line of business.
Liability to pay Service Tax
The payment of service tax under different scenarios would be as under:
| Service provider | Service receiver | Service tax payable by provider | Service tax payable by receiver |
| Abatement* claimed by Service provider: | |||
| Individual, HUF, Proprietary firm, Partnership firm | Business entity registered as Body Corporate | - | 100% |
| Individual, HUF, Proprietary firm, Partnership firm | Person other than business entity registered as body corporate | 100% | - |
| Company, Body Corporate, society, trust, AOP, BOI | Any person | 100% | - |
| Abatement* not claimed by Service provider: | |||
| Individual, HUF, Proprietary firm, Partnership firm | Business entity registered as Body Corporate | 60% | 40% |
| Individual, HUF, Proprietary firm, Partnership firm | Person other than business entity registered as body corporate | 100% | - |
| Company, Body Corporate, society, trust, AOP, BOI | Any person | 100% | - |
*Abatement means a lower rate of payment of Service tax opted for, by the service provider subject to satisfying certain conditions. As far as the service recipient is concerned, he would have to look at the invoice raised by the provider which would indicate abatement taken, if any, for discharging his part of Service tax liability.
Note: In view of Section 66D(o)(vi) of the Act, no Service tax is payable on transportation of passengers by metered cabs or radio taxi.
4. Legal Services provided by Advocates or Arbitral Tribunal:
Rule 2(cca) of the Rules define “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 an authority”.
Applicability
Services provided by an individual advocate or a firm of advocates or Arbitral Tribunal to non-business entities (like individuals, charity organizations, etc.), or to a business entity with turnover of less than Rs. 10 lakhs per annum, are exempt.
In case of services provided by an individual advocate or an advocate firm or Arbitral Tribunal to business entity with turnover exceeding Rs. 10 lakhs per annum, the business entity is liable to pay service tax under reverse charge mechanism.
Liability to pay Service Tax
Entire Service tax is payable by person receiving the service.
5. Goods Transport Agency service (GTA):
Section 65B(26) of the Act defines “Goods transport agency means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called”.
Applicability
The essential requirements are:
(a) Service must be in relation to transport of goods by road,
(b) the service provider must have issued consignment note, by whatever name called.
Liability to pay Service Tax
Entire tax is payable by the service receiver.
For this purpose, the person who pays or is liable to pay freight and is located in the taxable territory shall be treated as service receiver.
6. Insurance Services:
Applicability
The essential requirements are that the service shall be provided:
(a) By an insurance agent;
(b) to a person carrying on insurance business.
Liability to pay Service Tax
Entire service tax shall be payable by person receiving the service i.e. the person carrying on insurance business.
7. Sponsorship Service :
Applicability
The term ‘sponsorship’ has not been defined. However, prior to 1st July, 2012 the term ‘sponsorship’ was defined with the following ingredients:
(a) Naming the event after the sponsor;
(b) Displaying the sponsor company’s logo or trading name;
(c) Giving the sponsor exclusive or priority booking rights;
(d) Sponsoring prizes or trophies for competition;
and it does not include any financial or other support in the form of donation or gift wherein the service provider has no obligation to provide anything in return to the donor.
Liability to pay Service Tax
In case the service receiver is a body corporate or a partnership firm located in the taxable territory, then Service tax is payable by the service receiver.
In all other cases, Service tax is payable by the provider of service.
8. Works Contract service
Liability to pay Service Tax
The payment of service tax in respect of service portion in execution of works contract, under different scenarios is explained in below table:
Service provider
|
Service receiver
|
Service tax payable by provider
|
Service tax payable by receiver
|
| Individual, HUF, Proprietary firm, Partnership firm | Business entity registered as body corporate | 50% | 50% |
| Individual, HUF, Proprietary firm, Partnership firm | Person other than business entity registered as body corporate | 100% | - |
| Company, Body Corporate, society, trust, AOP, BOI | Any person | 100% | - |
9. Services provided by Government or local authority by way of support services:
Applicability
In respect of the services provided or agreed to be provided by Government or local authority by way of support services, excluding-
(1) renting of immovable property,
(2) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government,
(3) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport,
(4) transport of goods or passengers,
to any business entity located in the taxable territory.
Liability to pay Service Tax
Entire Service tax is to be paid by person receiving the service.
10. Import of Service
Applicability
Any taxable services 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.
Liability to pay Service Tax
Entire Service tax is to be paid by person receiving the service.
Way Forward
In case you are covered by any of the above provisions of reverse charge by which you may be person liable to pay Service tax, then you would have to take the following actions:
1. Amend the existing Registration Certificate in Form ST-2, by including therein categories of service(s) for which liability to pay Service tax arises as a receiver of service.
2. Pay Service tax as receiver of service, under the respective accounting codes, monthly or quarterly as applicable.
3. Incorporate in half- yearly returns, the details of services in respect of which Service tax is payable as receiver of service apart from including therein, details as provider of service or as input service distributor.
Reverse Charge mechanism at a glance
Description of
service
|
Service
provider
|
Service
receiver
|
Liability of Service tax
|
| Services of an insurance agent (refer point 6) | Insurance agent | Insurance company | 100% by insurance company |
| Services of Goods Transport Agency (refer point 5) | Goods Transport Agency (one who issues Consignment note) | Consignor or consignee who is: (a) factory society, registered dealer of excisable goods, body corporate, partnership firm, an AOP and (b) who pays or is liable to pay freight either himself or through his agent for transportation of such goods in a goods carriage | 100% by service receiver |
| Sponsorship Service (refer point 7) | Any person | Any Body Corporate or a Partnership firm located in the taxable territory | 100% by service receiver |
| Services of Arbitral Tribunal (refer point 4) | Arbitral Tribunal | Business Entity | 100% by service receiver |
| Legal Services (refer point 4) | Individual Advocate or Advocate’s Firm | Business Entity having Turnover exceeding Rs.10 lakhs per annum, located in a taxable territory | 100% by service receiver |
| Services of a Director to company (refer point 1) | Director | Company | 100% by service receiver |
| Support Services by Government or Local Authority (refer point 9) | Government or Local Authority | Business Entity located in a taxable territory | 100% by service receiver |
| Renting or hiring of motor vehicle (refer point 3) | Individual, HUF, Proprietary or Partnership firm, AOP located in a taxable territory | Business entity registered as a Body Corporate, located in the taxable territory | Refer point 3 |
| Supply of manpower or security service (refer point 2) | Individual, HUF, Proprietary or Partnership firm, AOP located in a Taxable territory | Business entity registered as a body corporate located in the taxable territory | 75% by service receiver 25% by service provider |
| Service portion in execution of a Works Contract (refer point 8) | Individual, HUF, proprietary or partnership firm, AOP located in the taxable territory | Business entity registered as a Body Corporate, located in the taxable territory | 50% by service receiver 50% by service provider |
| Import of Service (refer point 10) | Located in a non-taxable territory | Located in taxable territory | 100% by service receiver |
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