Reverse Charge in service tax
8.1 Reverse Charge (Tax Shift)
¨ Normally, service tax is payable by person providing the service.
¨ Section 68(2) makes provision for making person other than service provider liable to pay tax.
¨ Provision can be made that part of tax will be paid by service receiver and part by service provider.
¨ Provisions relating to reverse charge are contained in Notification No. 30/2012-ST dated 20-6-2012.
8.2 Issues relating to reverse charge
¨ The small service provider exemption of Rs 10 lakhs not available when tax is payable under reverse charge.
¨ Cenvat credit cannot be used to pay tax by service receiver. Service tax as to be paid by cash only i.e. GAR-7 challan.
¨ Once paid, Cenvat credit can be taken if otherwise it is his eligible ‘input service’.
¨ Tax should be paid under service tax registration number of service receiver and included in his return as he is liable to pay service tax.
¨ Service tax is payable by service receiver when actual payment is made to service provider and not on receipt of Invoice from service provider. However, if payment is not made to service provider within 6 months, service tax is anyway payable. Interest is also payable.
¨ Exception is that when service provider is outside India is Associated Enterprise (group company with at least 25% common interest), the service receiver is liable to pay service tax as soon as the account of service provider is credited in books of account of service receiver.
8.3 Billing by service provider
¨ Service provider should charge only his part of service tax
¨ Service receiver to pay service tax of his part by GAR-7 challan
¨ Service receiver liable for only his part and not entire amount, even if service provider does not charge his portion of service tax.
¨ A statutory liability cannot be shifted by mutual agreement. If statutory liability is of service receiver, he alone is liable..
8.4 Reverse charge with condition of non-availability of Cenvat
¨ In some services (e.g. GTA, renting or hire of motor vehicle designed to carry passengers), the abatement is subject to condition of non-availment of Cenvat credit by service provider (not by service receiver). The service receiver paying service tax does not have to prove that service provider has not availed any Cenvat credit.
¨ In case of renting of motor vehicle, in most of the case, Cenvat credit is not available. Hence, it is cost to company.
8.5 Business Entity and Body Corporate
¨ In some cases, reverse charge is applicable only when service receiver is business entity registered as ‘body corporate’.
¨ “Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, Government, charitable organisation is not ‘business entity’.
¨ Body Corporate – Company, LLP, Cooperative Society is Body Corporate – Firm, HUF, Trust is not ‘Body Corporate’ [Society registered under Societies Act is legally not ‘body corporate’].
8.6 Reverse charge in works contract service
¨ 50% tax by service receiver if service provider of works contract service is individual, HUF, proprietary or partnership firm or AOP
¨ AND service receiver is business entity incorporated as body corporate.
¨ 50% service tax is payable by service provider and 50% by service receiver. The service receiver liable for 50% even if service provider does not charge service tax.
¨ Construction, Job work with material, AMC covered under works contract.
8.7 Reverse charge in case of manpower supply
¨ 75% tax by service receiver if service provider of manpower supply is individual, HUF, proprietary or partnership firm or AOP
¨ AND service receiver is company or business entity incorporated as body corporate. Balance 25% by service provider.
8.8 Issues relating to manpower supply service
¨ Service should be manpower supply i.e. under command of Principal Employer.
“Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.’ [Rule 2(g) of Service Tax Rules, inserted w.e.f. 1-7-2012].
¨ Security service, cleaning service, piece basis or job basis contract can be ‘manpower supply service’ only if the labour work under superintendence or control of Principal Employer.
¨ Service tax payable on salary plus PF, ESI plus commission of labour contractor.
¨ Persons sent on deputation is manpower supply service.
¨ Person approaching himself and company appointing him on contract basis is not manpower supply service.
8.9 Reverse charge in renting or hire of Motor vehicle designed to carry passengers
¨ Reverse charge when renting to a person who is not in similar line of business.
¨ Service Provider should be HUF, Individual, firm
¨ Service receiver – Business entity registered as body corporate
¨ Tax on 40%, if Cenvat credit is not availed by the service provider – No Cenvat credit in most of the cases – hence cost to company.
¨ If motor vehicle is taken on hire (operating lease) without driver, it is ‘transfer of right to goods’. Then it is deemed sale of goods and Vat will apply – not service tax.
8.10 Goods Transport Agency
¨ Tax when consignment note issued. Simple transport of goods service (without issue of consignment note) is not a GTA service.
¨ Person liable to freight is liable to pay service tax on GTA if he is body corporate, factory, registered dealer under Central excise, society, cooperative society, partnership firm (registered or not).
¨ Tax on 30% if GTA does not avail Cenvat Credit w.e.f. 1-4-2015 (earlier it was 25%)
¨ GTA is liable to pay service tax if (a) person liable to pay freight is individual or HUF (b) Person liable to ay freight is outside taxable territory (like J&K, Nepal, Bhutan, Bangla Desh, Pakistan etc.).
8.11 Support Services of Government or Local Authority
¨ Sovereign and statutory activities not subject to service tax
¨ Support services like testing, police protection, Advertisement, construction, Outsourcing type services provided by Government to business entity
¨ Business Entity liable for entire service tax
8.12 Import of Service
¨ Service tax is payable only if Place of Provision of Service is in taxable territory (i.e. India plus 200 nautical miles inside the sea minus J&K)
¨ Service provider should be outside taxable territory and service receiver should be located in taxable territory
¨ Service tax is payable on gross amount including TDS
8.13 Other services under reverse charge
¨ Insurance Agent and Mutual Fund
¨ Services of Advocate or Advocate Firms or Arbitral Tribunal to Business Entity having turnover over ` 10 lakhs. Then Business Entity is liable to pay entire service tax.
¨ Sponsorship by Body corporate or Partnership Firm
8.14 Reverse charge provisions at a glance
The provisions as applicable w.e.f. 1-4-2015 are summarised below.
|Sr. No.||Description of service||Service Provider||Service Receiver||Liability of service tax|
|1||Services of insurance agent
|Insurance Agent||Insurance Company||100% by insurance company|
|1A||Services of recovery agent [inserted w.e.f. 11-7-2014]||Recovery Agent||Banking company, financial institution or NBFC||100% by banking company, financial institution or NBFC|
|1B||Services of mutual fund agent [inserted w.e.f. 1-4-2015]||Mutual fund agent or distributor||Mutual Fund or Asset Management Company (AMC)||100% tax payable by Mutual fund or AMC|
|1C||Services of lottery selling or marketing agent [inserted w.e.f. 1-4-2015]||Selling or marketing agent of lottery||Lottery distributor or selling agent||100% tax payable by lottery distributor|
|2||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 is payable on 30% of value w.e.f. 1-4-2015 if Cenvat credit has not been availed by service provider. [Till 1-4-2015, the tax payable was on 25% of value)]
Entire tax i.e. on 30% s 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 (i.e. GTA) shall be liable to pay service tax.
|3||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.|
|4||Services of Arbitral Tribunal||Arbitral Tribunal||Business Entity||Entire tax payable by service receiver|
|5||Legal Services of Advocate or Advocate Firms||Individual Advocate or Advocate Firms||Business Entity having turnover exceeding Rs ten lakhs per annum, located in taxable territory||Entire tax payable by service receiver|
|5A||Services of director to company or body corporate (entry added w.e.f. 7-8-2012. The words ‘body corporate’ are added w.e.f. 11-7-2014)||Director||Company or body corporate||Entire tax payable by service receiver|
|6||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) [Note – It is proposed to bring all Government services provided to business entity under reverse charge. However, this provision has not been made effective when other provisions of Finance Act, 2015 were made effective on 1-6-2015]||Government or Local Authority||Business Entity located in taxable territory||Entire tax payable by service receiver|
|7||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||If service provider has not charged service tax, service receiver is required to pay service tax on 40% of value only.
If service provider has charged service tax on 50% of value, the service receiver is required to pay service tax on balance 50%. [amendment w.e.f. 1-10-2014]
Note that if service provider is individual, HUF or firm and has not charged service tax in his invoice, the service receiver is liable to pay service tax only on 40% of value (and not on 50%).
|8||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||100% service tax payable by service receiver w.e.f. 1-4-2015 [Till 1-4-2015, tax on 25% of value was payable by service provider and 75% by service receiver]|
|9||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|
|10||Services received from non-taxable territory (Import of Service)||Located in non-taxable territory||Located in taxable territory||Entire tax payable by service receiver.|
|11||Services involving an aggregator (inserted w.e.f. 1-3-2015) In case of services ‘involving’ an aggregator, the ‘aggregator’ is liable to pay service tax under rule 2(d)(i)(AAA) of Service Tax Rules. The rule does not say that he is ‘receiver of a taxable service’. The rule also does not say that aggregator is a ‘service provider’. Thus, he is only ‘person liable to pay service tax’. Thus, this is not ‘reverse charge’.||Any person||Aggregator||Entire service tax payable by service receiver i.e. Aggregator w.e.f. 1-3-2015|