REVERSE CHARGE MECHANIS M

REVERSE CHARGE MECHANISMWIRC - Sub Regional ConferenceVadodara

CA Sagar Shah22 June 2013

WIRC, Baroda – Sub-Regional Conference – Reverse Charge Mechanism

WHAT IS MEAN BY ‘REVERSE CHARGE MECHANISM’Background

• Direct Tax: Where the assessee has to pay the tax directly from his pocket. Exp.: Income Tax, Wealth Tax etc.

• Indirect Tax: In Indirect Tax tough the liability to pay the tax is still on asessee however he has to collect it from customer and has to pay. Exp: Service Tax, Excise, VAT etc.

• Now Service Tax being from family of Indirect tax has to be charged by service provider and after recovering the same from service receiver it has to be deposited with government exchequer.

• However, in certain circumstances the obligation to pay the service tax to government exchequer is directly casted on service receiver, this is known as ‘Reverse Charge Mechanism’.

Indian Taxation System

Direct Tax Indirect Tax


WHAT IS MEAN BY ‘REVERSE CHARGE MECHANISM’Relevant Section & NotificationsSource of RCM:• The erstwhile Section 66A was replaced by Section 68(2) for casting the

liability to pay service tax on the receiver. The scope of reverse charge was extended w.e.f. 1 July 2012

• A new concept of partial reverse charge mechanism was introduced.• Notification No. 30/2012-ST dated 20 June 2012 provides the

percentage of liability of the service receiver and the service provider in case of specified services.

• The above provisions are applicable from 01 July 2012.- Services availed and invoiced after 1 July 2012 are only applicable.

Types of RCM:• Services on which 100% liability to pay tax is on service receiver (RCM)• Services on which liability to pay tax is shared between service

provider and service receiver (Partial RCM)

Client name - Event - Presentation title

REVERSE CHARGE MECHANISM


REVERSE CHARGE MECHANISMConcept• The reverse charge mechanism means a mechanism where the 'Service

recipient’ is liable to pay service tax instead of 'Service provider’.

• In this reverse charge mechanism provided under service tax law, the 'Service recipient’ is liable to pay whole of service tax.

• The notification deals with what are the services on which reverse charge mechanism is applicable and the proportion in which the 'Service recipient’ of services is liable to pay the service tax.


REVERSE CHARGE MECHANISMList of Services

Sr. No.

Description of Service Remarks

1 Service provided by any Insurance Agent to any person carrying on Insurance Business

This means any person acting as insurance agent will not be liable to be pay the service tax on activities in relation to Insurance. But the Insurance company who receives such services of Insurance agent will be liable to pay.

2 Service provided by Goods Transport Agency to a service recipient who is either (a) any registered factory (b) Society (C) Co-operative Society (d) dealer under excise act (e) body corporate established under any law (e) partnership firm

The point here to be noted is that, in case the service recipient is an Individual/Proprietor then the GTA service provider will be liable to pay the service tax and reverse charge will not be applicable in that situation.


Sr. No.


3 Payment received by any person from either (a) any body corporate or (b) partnership firm; located in taxable territory towards sponsorship

In general if the sponsorship is given by Body corporate’s (which means companies including foreign companies) or partnership firm then that particular company or partnership firm is liable to pay service.

4 Legal Services including representational services by (a) Arbitral Tribunal (b) Individual Advocate (c) Firm of advocates

In this situation the person receiving such services in relation to his business is required to pay service tax on the fees which are paid to such entities.



Sr. No.


5 Support services by Government or Local Authority except (i) Renting of Immovable Property or (ii) services by the Department of Posts, services in relation to an aircraft or a vessel and transport of goods and passengers

On all the support service provided by the government or local authority the person receiving the services is liable to pay service tax however if such service is of renting of immovable property, postal services, services in relation to aircraft or vessel or in relation to transport of goods or passenger the government will charge and pay the service tax.

6 Services provided by director of company to said company

Here it is pertinent to note that, if the said director is employee of the company then the service tax is not payable (Refer definition of ‘service’ defined in clause 44 of Section 65B)



Sr. No.


5 Rent-a-Cab service provider who is paying service tax under abatement scheme and service receiver is not provided to ‘Rent-a-Cab’ operator.

The impact of this amendment is those companies like IT companies who hire cabs for transport of employees are now required to pay the service tax on motors hired by them. However, if the cars are provided to another person who is also providing Rent-a-Cab service then reverse mechanism is not applicable.

6 Service provided or agreed to be provide by person in non taxable territory and received by any person located in taxable territory (Import of Services)

This rule provides that, when the person imports any services from non taxable territory, he is liable to pay the service tax on the said services.



GOODS TRANSPORT AGENCY SERVICESExplanationDefinition: Clause (26) of Section 65 (B) of Finance Act, 1944 explain ‘Goods Transport Agency’ as “any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called”

Therefore, as per above definition if person is not issuing ‘Consignment Note’ then he is not ‘Goods Transport Agency’ and in that scenario he has to collect service tax and has to pay it to government and RCM will not be applicable in such cases.

Exp.: ABC Ltd. supplying steel and is also charging transport amount in the bills separately, in this case service receiver is not liable to pay service tax.


GOODS TRANSPORT AGENCY SERVICESOther relevant provisionsOther Exemptions: (Refer point no. 21 of Notification No. 25/2012-ST)• Transportation of agricultural produce.• No Service Tax is to be paid when Gross Amount charged on all

consignments transported in a goods carriage does not exceed Rs. 1500/-.

• No Service Tax is to be paid when Gross Amount charged on individual consignment transported in a goods carriage does not exceed Rs. 750/-.

• Transportation of foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oils except alcoholic beverages

• Other goods like chemicals, fertilizer, oilcakes, relief material for victims of disaster and lastly defense or military equipments.

Abatement: (Refer point no. 7 of Notification No. 26/2012-ST)• Taxable value of Goods Transport Agency Service shall be exempt in

excess of 25%. In other words, abatement of 75% is available.


GOODS TRANSPORT AGENCY SERVICESPractical Issues• Mr. Abdulla Omar a proprietor in J&K appointed M/s. Swift Transporters,

Delhi for transporting spices from Baroda to Jammu. The freight is payable by Mr. Abdulla Omar, please guide M/s. Swift Transporters as to who is liable to pay service tax? Does it make a difference if the Abdulla Omar is a partnership?

Defn of agriculture produce (65B); PPSR – Rule 10; notif 30/2012.

• M/s. Cargo Handling Agent has charged certain amount for services provided. He has also included cost of transportation in the said charge and has collected service tax on whole amount. However transporter has issued consignment note in name of importer. In this case whether the importer is liable to pay service tax again on the said amount of transport charges?


LEGAL SERVICESExemption and Practical IssuesExemptions:Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the following:• An advocate or partnership firm of advocates providing legal services.• any person other than a business entity.• a business entity with a turnover up to rupees ten lakh in the preceding financial

year.However, in respect of services provided to business entities, with a turnover exceeding rupees ten lakh in the preceding financial year, tax is required to be paid on reverse charge by the business entities.

Practical Issues:• Advocate is full time working with the company and a fixed monthly amount is

paid to him. Whether reverse charge mechanism is applicable.(TDS is deducted under 194J)

• Advocate services availed by individuals for business use and personal use??


PLACE OF PROVISION OF SERVICE RULESIn Nutshell

Nature of Services Place of SupplyGenerally The location of receiver

Services in respect of goods that are required to be made physically available or are required be performed in the physical presence of an individual.

Performance based - goods related(e.g. Maintenance, Erectioning etc)Performance based – personalized service (e.g. beauty treatment, classroom teaching)

Services in relation to Immoveable property Location of the property (architect, hotel accommodation, construction etc)

Services in relation to events Place where it is held (Exhibition, conference etc)

Banking for account holders, Online database, Intermediary, hiring of transport for upto 1 month.

Place of service provider

Goods transportation (not covering mail or courier) Place of destination. For GTA it would be location of person liable to pay tax

Passenger transportation services Place where passenger embarks

Multiple location services Place where greatest proportion of services is provided


IMPORT OF SERVICESPractical Issues – Double taxation


Partial - Reverse Charge Mechanism


PARTIAL REVERSE CHARGE MECHANISMConceptJoint charge mechanism means a mechanism where the 'Service recipient’ is also made liable to pay service tax on a specified percentage of the service along with the ‘Service provider’ instead of the 'Service provider’ being liable for the entire liability payment.

• The Notification 30/2012-ST Dated 20 June 2012, specifies the services on which joint charge mechanism is applicable and the proportion in which the 'Service recipient’ of services is liable to pay the service tax.

• Joint charge mechanism is applicable when service provided by a non-corporate service provider to a corporate business entity.


CENVAT Credit:• Cenvat credit of the tax paid can be availed on the part of service tax

paid even by the service recipient. (If other rules are satisfied)• However, liability under Reverse Charge cannot be paid through

CENVATValuation:• Service recipient can opt for separate method of valuation than service

provider. Liability:• Service recipient has to pay his liability in all circumstances, without

concern to Service provider is SSI, Service provider has charged total service tax etc.

PARTIAL REVERSE CHARGE MECHANISMPoints to be Remembered


PARTIAL - REVERSE CHARGE MECHANISMList of Services

Sr. No.

Description of Service Percentage of service tax payable by the recipient of services

Remarks

1 Rent-a-Cab service when not under abatement scheme and service receiver is not provided to ‘Rent-a-Cab’ operator.

40% The said body corporate is only liable to the extent of 40% and on balance 60% Rent-a-Cab operator will collect and pay the said liability.

However, if the service receiver and provider are both in the business of providing ‘Rent-a-Cab’ service then the reverse mechanism wouldn’t apply.


PARTIAL - REVERSE CHARGE MECHANISMList of Services

Sr. No.

Description of Service Percentage of service tax payable by the recipient of services

Remarks

2 • Manpower supply service provided or agreed to be provided for any purpose

• Security Service

75%

75%

Any person receiving such manpower or security service is required to pay service tax to the extent of 75% and balance 25% will be required to be paid by person providing such manpower.

3 Service portion in Works Contract Service which is provided by (a) Individual (b) HUF (c) Partnership Firm (d) AOP located in taxable territory to a business entity registered as body corporate located in taxable category

50% Any person receiving such services being a body corporate would have to pay tax @ 50% of the taxable tax.


RENT-A-CAB SERVICEIn Nutshell

Renting of Motor Vehicle

If abatement of 60% claimed

S.P. is not liable to pay

any tax

S.R. is liable to pay @ 4.944%

If abatement not claimed

S.P. is not liable to pay

@ 7.416%

S.R. is liable to pay @ 4.944%


WORKS CONTRACT SERVICEIn Nutshell

Original Works

Taxable Amount 40% =

4.944% effective rate

ST = 40% x 12.36% X 50%

= 2.472%

Works Contract of Movables


8.652% effective rate

ST = 70% x 12.36% X 50%

= 4.326%

Any other WC for Immovables


7.416%

ST = 60% x 12.36% X 50%

= 3.708%


REVERSE CHARGE MECHANISMAccounting TreatmentCase 1: Partial Reverse Charge Debit Credit Expense A/c Dr. 100.00 - Service Tax Input Credit A/c Dr. 7.42 -Service Tax Deferred Input A/c Dr. 4.94 -

To Vendor A/c - 105.42To TDS Payable A/c - 2.00To Service Tax Payable A/c - Reverse Charge - 4.94

112.36 112.36

Case 2: Full Reverse ChargeExpense A/c Dr. 100.00 - Service Tax Deferred Input A/c Dr. 12.36 -

To Vendor A/c - 97.75To TDS Payable A/c - 2.25To Service Tax Payable A/c - Reverse Charge - 12.36

112.36 112.36


REVERSE CHARGE MECHANISMPractical Issues

• Reimbursement to employees towards rent-a-cab, whether service tax is payable by such employees or by company?

• M/s Raj Hotels Ltd is engaged in providing services of accommodation

to various guests in the hotel owned by them. Many guests requests for car for visiting various places. M/s Raj Hotels Ltd hires the cars from Mr Taxiwala who is the proprietor and provide the car on hire basis to guest Mr. Traveller. Mr. Taxiwala is paid Rs.1000/- whereas an amount of Rs.1200/- is recovered by M/s Raj Hotels Ltd from Mr Traveller. Now who is liable to pay service tax on amount paid by M/s. Raj Hotels Ltd to Mr Taxiwala?


REVERSE CHARGE MECHANISMPractical Issues• M/s ABC Ltd. has employed house-keeping agency M/s TIP-TOP

(Proprietor) for cleaning office premise. As per the terms of contract, M/s TIP-TOP is required to clean all furniture and office premises daily. During discussion between M/s ABC Ltd. and M/s TIP-TOP it was agreed that 7 persons will be deployed for carrying out the above job. Each of the person would be paid Rs.10,000/- per month. Thus the total consideration for carrying out the above work is Rs.70,000/- per month. Further it is also decided that, Mr Y will supervise the work of M/S TIP-TOP. M/s ABC Ltd has approached you for advise whether service tax is payable under reverse charge by them and if yes under which category?


REVERSE CHARGE MECHANISMPractical IssuesDuring the year Bol Bachchan Corporation Limited (“BBCL”) have made following payments to Adv. Bol Bachchan who is a director:• Rs. 25,00,000 as professional fees. • Rs. 50,00,000 as commission fees towards various revenue received to

BBCL as a result of brand endorsement.• Rs. 5,00,000 as sitting fees• Rs. 1.5 cr towards remuneration Does it make a difference if he is a non-executive director?


REVERSE CHARGE MECHANISMPractical IssuesG & P as a part of its advertisement project have started a Door to Door advertisement of its new product. The cost of the manpower required for the door to door advertisement will be incurred by the dealer which will be reimbursed by the G & P on submission of claims by the respective dealer

One such dealer M/s. Rocket Singh & Sons (a partnership firm) has approached to understand the impact of service tax on the above activity. He seeks answer to following questions:• Will the above activity of reimbursement be liable to service tax?• M/s. Rocket Singh & Sons is further interested to know whether the said

activity will attract service tax under reverse charges. (i.e. whether taxable under Business Support Services or Supply of Manpower Services)?



New Construction Company Pvt Ltd (NCCPL) has awarded plastering work to one of its contractor M/s Hamal & Co. which is a partnership firm(contractor). The contractor has submitted the following invoice:

In respect of above invoice NCCPL has following queries:• NCCPL is aware that the rate of service tax charged by the contractor is

incorrect. NCCPL wants to confirm whether discharging the balance service tax of Rs. 24,720/- will be enough compliance of Service Tax.

… Cotd..

Particulars Amount (In Rs)Total Contract Cost 10,00,000

Add: VAT @ 5% 50,000

Add: Service Tax @ 4.944%(50% as per Notification 30/2012 )

24,720

Grand Total 10,74,720



• Can NCCPL opt for different taxable value to discharge the service tax under reverse charge method i.e.at the rate of 60% and not 40% as charged by the contractor.

• NCCPL is further willing to obtain two separate invoices in order to avoid the service tax under reverse charge mechanism, is it justified in doing so?


Questions???


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REVERSE CHARGE MECHANIS M

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