Negative Blues - V: A Brief Note on Reverse Charge Mechanism
JUNE 19, 2012
By G Natarajan, Advocate, Swamy Associates
THE general principle in service tax is that the service provider is liable for payment of service tax. But, in certain cases, the liability is shifted from the service provider to the service receiver and the same is referred to as reverse charge. As per Notification 15/2012, the following cases will attract service tax in the hands of service recipients, with effect from 01.07.2012.
Sl. No. | Provider of Service | Recipient of Service | Service provider's liability | Service recipient's liability |
1. | Services provided by insurance agents to persons carrying on insurance business | Persons carrying on insurance business (Insurance Companies) | Nil | The entire service tax liability shall be discharged by the service recipient, i.e. the Insurance company |
2. | Services provided by Goods Transport Agency | If the Consignee or Consignor is:- a) Factory; b) Any registered society; c) Any co-operative society; d) Any dealer registered under CE; e) Any body corporate; f) Any partnership firm.
| Nil | The entire service tax liability shall be discharged by the person paying the freight. It is clarified that as per Notification 13/2012, ST is payable only on 25 % of freight. Such liability on 25 % of freight amount shall be discharged in full by the service recipient. |
3. | Services provided by Sponsors of events etc. to those sponsoring. | 1. Body Corporate; 2. Partnership firm | Nil | The entire service tax liability shall be paid by the service recipient. |
4. | Services provided by Arbitral Tribunal | Business entity | Nil | The entire service tax liability shall be discharged by the service recipient |
5. | Services provided by Individual Advocate | Business entity | Nil | The entire service tax liability shall be discharged by the service recipient |
6. | Support services provided by Government or Local Authority | Business entity | Nil | The entire service tax liability shall be discharged by the service recipient. |
7. | Services by way of renting or hiring of passenger vehicles, provided by - Individual; or
- HUF; or
- Proprietary firm; or
- Partnership Firm (whether registered or not including the association of persons);
| 1. Any company formed or registered under Companies Act; or 2. Business entity registered as a body corporate. | Nil | As per Notification 13/2012, ST is payable on 40 % of value. Hence, the entire service tax on 40 % of the value shall be discharged by the service recipient. |
Suppose if the bill value is Rs.10,000, the service recipient will pay the entire service tax liability on abated value. i.e. on Rs.4,000 (40 % of Rs.10,000), the ST liability of 12 %, i.e. Rs.480 shall be paid by the service recipient. The service provider is not liable to pay any service tax. |
8. | Services by way of renting or hiring of passenger vehicles, provided by 1. Individual; or 2. HUF; or 3. Proprietary firm; or 4. Partnership Firm (whether registered or not including the association of persons);
| 1.Any company formed or registered under Companies Act; or Business entity registered as a body corporate. | If the service provided does not intend to claim abatement, he has to pay 60% of the total service tax liability. In the above given example, the ST liability on Rs.10,000 @ 12 % is Rs.1,200, out of which the service provider has to pay 60 % of Rs.1,200, i.e. Rs.720 | The service recipient shall pay 40 % of the total liability, i.e. Rs.480. It may be noted that in both the cases, the service recipient's liability is same. |
9. | Manpower supply services provided by 1. Individual; or 2. HUF; or 3. Proprietary firm; or 4. Partnership Firm (whether registered or not including the association of persons);
| 1. Any company formed or registered under Companies Act; or 2. Business entity registered as a body corporate. | 25% of the Service tax liability shall be paid by the service provider. | 75 % of the ST liability shall be paid by the service recipient. |
10. | Works Contract services provided by 1. Individual; or 2. HUF; or 3. Proprietary firm; or 4. Partnership Firm (whether registered or not including the association of persons);
| 1. Any company formed or registered under Companies Act; or 2. Business entity registered as a body corporate. | 50 % of the service tax liability shall be paid by the service provider. | 50 % of the Service tax liability shall be paid by the service recipient. |
Both service provider and service recipient can independently opt for any method, viz., Composition scheme or Rule 2 A of ST Valuation Rules. |
11. | Any service provided by a person located outside the taxable territory (non taxable territory). | Any person located in the taxable territory | Nil | The entire service tax liability shall be paid by the service recipient. |
The following definitions are relevant to apply the above provisions.
Section 65 B (17) : "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.
Section 65 B (31) "local authority" means-
(a) a Panchayat as referred to in clause (d) of article 243 of the Constitution;
(b) a Municipality as referred to in clause (e) of article 243P of the Constitution;
(c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund;
(d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006;
(e) a regional council or a district council constituted under the Sixth Schedule to the Constitution;
(f) a development board constituted under article 371 of the Constitution; or
(g) a regional council constituted under article 371A of the Constitution.
Section 65 B (49) : "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.
Section 65 B (54) : "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, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
Before parting…
It may be noted that in certain cases (receiving services of individual advocates, support services provided by Government, etc), the service recipient's category is mentioned as "business entity" which has to be understood as defined above. This definition may also include an individual or partnership firm, who are engaged in industry, or commerce or business or profession. But in certain other cases (receiving services of manpower supply, rent a cab and works contract), the service recipient's category is mentioned as "business entity registered as body corporate" which would not include individual businessmen and partnership firms.
