Few points on Service Tax- Reverse Charge Mechanism.

Ø  Service tax payable by service receiver directly to government in place of paying to service provider.

Ø  Hence Service receiver require to register under service tax for kind of services he received.

Ø  There is no exemption limit of Rs. 10 Lakh.  Thus,  services received under small amount required to be paid.

Ø  Point of Taxation – date of payment to service provider (rule 7). However, in case invoice not paid till 6 months, then date of completion of service (rule 3)

Ø  Cenvat credit available except for rent a cab service.

Ø  Cenvat credit cannot be use for payment of tax under reverse mechanism – hence tax must be require to pay in cash.

Ø  Under Partial Reverse Charge (Proportional / Joint)§ Renting of motor vehicles§ Manpower supply & security services§ Works contracts

Ø  Under Full Reverse Charge (100%)— Insurance related services by agents— goods transportation by road— sponsorship— arbitral tribunals— legal services— company director's services— services provided by Government / local authority excluding specified services— services provided by persons located in non-taxable territory to persons located in taxable territory.

Ø  Reverse charge not applicable when service receiver is located at non taxable territory.

Ø  In respect of manpower supply and security services, works contract services and renting of motor vehicles to carry passenger, reverse charge shall be applicable only when following two conditions are satisfied –— service receiver is a business entity registered as a body corporate, and— service provider is any one of the following entities –— — — —Individual Hindu undivided family (HUF) Firm (including limited liability partnerships) Association of persons.  If both the above conditions are not satisfied in respect of these three services, Service Tax shall be payable by the service provider in ordinary course.  In Summary, when company receiving services from Individual or firm then partial reverse mechanism to be applied.

Ø  Cleaning services or job basis services are not Manpower supply services.

Ø   Services provided by the government are covered by section 66D i.e. Negative list of services and accordingly not liable to service tax. However, support services by Government to business entities are not part of negative list and accordingly liable to service tax.

Ø   Renting or leasing of motor vehicle designed to carry passengers is also covered by the reverse charge mechanism. Notification No.13/2012 provides abatement of 40% on renting of motor vehicle provided no Cenvat credit is availed on input, input services and capital goods. Where abatement is claimed by the service provider, entire service tax thereon shall be payable by the service receiver on reverse charge. Alternatively, if the no abatement is claimed, service provider and service receiver shall be liable to service tax on 60% and 40% respectively

FAQ

v  We are liable to pay service tax under reverse charge. Our service provider has agreed to pay entire payment of service tax liability. He is willing to give an undertaking in that regard. In that case, are we liable to pay service tax?   

Please do not enter into such short cuts. Only person who is liable to pay service tax should pay the same.  

v   We have received works contract service from a firm. The service provider has charged entire amount of service tax and we have paid the same. Are we still liable to pay service tax?

Legal liability is of service receiver. That liability does not disappear even assuming that the service provider has paid the service tax. The department can insist on payment of service tax from you [In respect of past, may be you can get away by claiming that it is only procedural mistake and no revenue loss. However, for future, please do not do it].

 

v  We are a company. Our employees engage motor vehicle on hire when they go on tour for official purposes. On return, they claim reimbursement of the bill. Is the company liable to pay service tax under reverse charge?

Though company is reimbursing the Bill, the service receiver is the employee, if the Bill of the service provider is in name of employee [In fact, the motor vehicle operator is not likely to know that the service receiver is company and will have to charge service tax in normal course, if he is otherwise liable]. In such cases, the company will not be liable under reverse charge. However, if the bill is in name of the company, reverse charge will apply, if the service provider is individual, HUF etc. 

Analysis in Tabular Format.

Sr. No.	Description of service	Service Provider	Service Receiver	Liability of service tax
1	Services of Goods Transport Agency (GTA) of goods transport	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, AOP and (b) who pays or is liable to pay freight either himself or through his agent for transportation of such goods in goods carriage	Tax payable on 25% of value if Cenvat credit has not been availed by service provider. Hence, it is necessary to obtain certificate from the service provider (GTA) that he has not availed any Cenvat credit. Otherwise, service tax will be payable on 100% of the value. Entire tax is payable by service receiver. Person liable to pay freight for transportation of goods, located in taxable territory, shall be the person who receives the service. If such person is located in non-taxable territory, the provider of service shall be liable to pay service tax.
2	Sponsorship service	Any person	Any body corporate or partnership firm located in the taxable territory	Entire tax payable by service receiver. If the receiver of service is not body corporate or partnership firm or if such body corporate or partnership firm is not located in taxable territory, the service provider (i.e. person receiving the sponsorship money) will be liable to pay the service tax.
3	Services of Arbitral Tribunal	Arbitral Tribunal	Business Entity	Entire tax payable by service receiver
4	Legal Services of Advocate or Advocate Firms	Individual Advocate or Advocate Firms	Business Entity having turnover exceeding ` ten lakhs per annum, located in taxable territory	Entire tax payable by service receiver
5	Support Services by Government or Local Authority excluding renting of immovable property and services specified in clauses (i), (ii) and (iii) of Section 66D(a) of Finance Act, 1994 (These cover postal, port, airport and railway services)	Government or Local Authority	Business Entity located in taxable territory	Entire tax payable by service receiver
6	Services received from non-taxable territory (Import of Service)	Located in non-taxable territory	Located in taxable territory	Entire tax payable by service receiver.
	PROVISIONS APPICABLE TO A COMPANY & TO BUSSINESS ENTITY REGISTERED AS BODY CORPORATE
7	Services of director to company (entry added w.e.f. 7-8-2012)	Director	Company	Entire tax payable by service receiver
8	Renting or hiring of motor vehicle designed to carry passengers to any person who is not in the similar line of business	Individual, HUF, proprietary or partnership firm, AOP located in taxable territory	Business entity registered as body corporate located in the taxable territory	Tax on 40% of value by service receiver and Nil by service provider. If the service provider intends to avail Cenvat credit, he can pay service tax on balance 60%. Thus, service receiver is liable to pay service tax only on 40% value.
9	Supply of Manpower for any purpose or security service (The words ‘or security service’ were added w.e.f. 7-8-2012	Individual, HUF, proprietary or partnership firm, AOP located in taxable territory	Business entity registered as body corporate located in the taxable territory	Tax on 25% of value by service provider and 75% by service receiver
10	Service portion in execution of Works Contract	Individual, HUF, proprietary or partnership firm, AOP located in taxable territory	Business entity registered as body corporate located in the taxable territory	Tax on 50% of value by service provider and 50% by service receiver
	PROVISIONS FOR INSURANCE COMPANIES
11	Services of insurance agent [Rule 2(d)(i)]	Insurance Agent	Insurance Company	100% by insurance company