Service Tax Updates

Reverse Charge under Service Tax

(A) Background: Section 68(2) of the Finance Act, 1994 provides for liability to pay service tax by a person other than service provider for certain specified services. This is generally known as reverse Charge. The scope of services covered by the reverse charges mech anism has been enhanced by the Finance Act, 2012 read with Notification No. 15/2012- ST. Many services which were hitherto not covered by reverse charge shall now come within its purview. We shall examine the services covered by the reverse charge mechanism and any possible implications arising out of them with special focus on new services added by the Notification No. 15/2012-ST. (B) Nature of Services: Notification No. 15/2012 covers following kind of services under reverse charge along with the percentage of tax liability payable by service provider and service receiver respectively. We have divided the services covered by the Notification under three categories for ease of reference. a) Services already covered under reverse charge: Description of a service Percentage of service tax payable by the person providing service Nil Percentage of service tax payable by the person receiving the service 100%

S.No.

in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business in respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road in respect of services provided or agreed to be provided by way of sponsorship

Nil

100%

Nil

100%

b)

Services earlier covered under reverse charge but now exempted from applicability of service tax: Services by a mutual fund agent or distributor to mutual fund or Asset Management Company for distribution or marketing of mutual fund. Services covered under Reverse Charge for the first time vide Notification No. 15/2012Description of a service Percentage of service tax payable by the person providing service Nil Percentage of service tax payable by the person receiving the service 100%

c)

S.No.

1.

in respect of services provided or agreed to be

2. 3.

4.

5.

6. 7.

provided by an arbitral tribunal in respect of services provided or agreed to be provided by individual advocate in respect of services provided or agreed to be provided by way of support service by Government or local authority (a) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on abated value. (b) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on non abated value. in respect of services provided or agreed to be provided by way of supply of manpower for any purpose in respect of services provided or agreed to be provided by way of works contract In respect of 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

Nil Nil

100% 100%

Nil

100 %

60%

40%

25%

75 %

50% Nil

50% 100%

We will discuss the provisions relating to few of the above services below. Support services by Government or local authorities: 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. Support services are defined by clause 49 of Section 65B which reads as follows: "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 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. The services covered by the support services are mainly those which can be carried out by the business entities but instead of doing by themselves, these are outsourced to third parties due to some commercial, economical, operational or other similar benefits/convenience. The intention to tax these services when provided by government is to provide level playing field to private players who are engaged in providing similar kind of services. It would be important for service receiver to examine whether services availed from government is covered by the support services because liability shall be on the service receiver to pay services tax under reverse charge. Any omission or failure to pay service tax may lead to unnecessary payment

of interest and penalty by service receiver. Following checklist may act as guideline for determining liability of business entities under reverse charge. (i) Identify whether service receiver is business entity : liability to pay service tax under this category arises only when services are availed by the business entities. As per section 65B (17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business. If person receiving services is not a business entity, there shall be no liability to pay service tax. (ii) Identify if any payment has been made to government : Once it is established that service receiver is business entity is, it become relevant to examine if any payment has been made to government during the relevant period. It should be noted that the Government does not include government companies, PSU, autonomous institutions etc. Any payment made to these organizations would not be considered as payment to government. It may be relevant to examine the constitution of service provider to ascertain whether it is a government organization or not. (iii) Examine the nature of payment: Next step is to examine the nature of payment made. If payment is made as duty, tax, fine, penalty etc. it will not come within preview of support services as these activities performed by government are in the nature of performance of sovereign functions or statutory obligation. If payment is not of above nature, then check the following. (iv) Whether services performed by the government could have been done by business entity in-house: It should be examined whether the services availed from the government could have been done or are ordinarily done by business entity in house. If answer is yes, it is in the nature of support services on which service tax payment should be made by business entity under reverse charge. If no, then examine the next point. (v) Whether similar kind of services are performed by other business entities by themselves in the ordinary course of business: If the nature of services are such that they are generally performed by other business entities by themselves in the ordinary course of business, it may be covered by the support services requiring payment by service receiver under reverse charge. If not, examine the next point. (vi) Whether payment is covered by second limb i.e. inclusive part of the definition of support service: It may be possible that the services availed are not in the nature of outsourced services yet it is covered by the second limb i.e. inclusive part of the definition of support service. If it is covered, business entity is required to make payment on reverse charge notwithstanding that the service availed are not in the nature of outsourced services. Manpower Supply Services: Any service provided as supply of manpower for carrying out work of any nature will be taxable under reverse charge. It is interesting to note that the

service tax in such situation shall be payable partially by service provider i.e. 25% any partially by service receiver i.e. 75%. Works Contract Services: This is another entry where liability to pay service tax shall be partially on the service provider and partially on the service receiver. The definition of works contract as passed by the Finance Act is as follows: "works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land; out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or part thereof in relation to such property.
[Strike out part was originally proposed by the Finance Act, 2012 but subsequently substituted by the later part marked as bold in the definition. The impact of the said amendment is that above activities pertaining to movable property has also been covered by the definition and thereby the scope of coverage under works contract has been widened]

Notification No. 15/2012 for introducing partial reverse charge on works contract was introduced when the definition of works contract included activities pertaining to immovable property only. But now after widening the scope of works contract by including the activities related to movable property also in the definition, it needs to be seen whether government brings any amendment in the reverse charge provision for works contract. If no amendment is made, it will be necessary that the service receiver pay 50% service tax under reverse charge on all the transactions of works contract whether movable or immovable property. It is expected to have widespread implication in practical life as large numbers of transactions are in the nature of works contract. Service receiver has to be cautious to make sure that no transaction of work contract is escaped from payment of service tax under reverse charge. Renting of Motor Vehicle designed to carry passengers: 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. (C) Applicability: Above provisions as to reverse charge in respect of manpower supply, works contract and renting of motor vehicle services will be applicable only when the parties providing and receiving the services are covered by the following:

Status of service provider Individual Hindu Undivided Family Proprietary firm Partnership firm, whether registered or not Limited Liability Partnership firm Association of Persons

Status of service receiver Company registered under the Companies Act business entity registered as body corporate

(D) Services provided by a person located in the non taxable territory and received by a person located in the non taxable territory: These services were earlier also covered in the reverse charge and popularly known as import of services. Now the scope is widened as any services provided by a person located in J&K to a person located in the rest of India shall also be liable under reverse charge. Location of service provider and service receiver shall be determined as per Place of Provision of Services Rules, 2012 which have not been notified yet. (E) Rationale of partial reverse charge mechanism: With negative list based service tax system, government has introduced the concept of partial reverse charge when services are provided by the small service provider i.e. individual, HUF, partnership firm etc. Main object behind introducing the concept may be to widen tax base as these small service provider may not take the registration and thereby may escape from the eyes of the department. Now, as the companies or body corporate have been made responsible to pay service tax under reverse charge, these service providers may be chased by the department. Above provisions are likely to have adverse impact on the small service provider who may not be able to face the competitions of big service providers. (F) Small scale exemption: Small scale exemption is not available when the service receiver is liable to pay service tax under reverse charge. It may be possible that total turnover of service provider is less than 10 lacs. However, service receiver shall be liable to pay service tax on above services. It means effectively service provider providing above services may not avail the benefit of small scale exemption for the portion of services on which service receiver is liable to pay service tax. (G) Availment of Cenvat Credit by service receiver: Service receiver may claim the credit of service tax paid based on the invoice issued by the service provider. For service tax paid on reverse charge, credit may be claimed based on the TR-6 challan by which payment is made. In nutshell, the proposal of government to increase the gamut of services covered by reverse charge is expected to have widespread implications. Many service providers which were hitherto escaping from the eyes of the department may now be chased by them. How much additional revenue will government raise from these small service providers need to be seen in future.

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