REVERSE CHARGE MECHANISM
WIRC - Sub Regional Conference
Vadodara
CA Sagar Shah
22 June 2013
WHAT IS MEAN BY ‘REVERSE CHARGE MECHANISM’
Background
Indian Taxation System
Direct Tax
Indirect Tax
• 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’.
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WHAT IS MEAN BY ‘REVERSE CHARGE MECHANISM’
Relevant Section & Notifications
Source 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)
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REVERSE CHARGE MECHANISM
Client name - Event - Presentation title
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REVERSE CHARGE MECHANISM
Concept
• 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.
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REVERSE CHARGE MECHANISM
List 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.
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REVERSE CHARGE MECHANISM
List of Services
Sr. No.
Description of Service
Remarks
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.
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REVERSE CHARGE MECHANISM
List of Services
Sr. No.
Description of Service
Remarks
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)
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REVERSE CHARGE MECHANISM
List of Services
Sr. No.
Description of Service
Remarks
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.
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GOODS TRANSPORT AGENCY SERVICES
Explanation
Definition: 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.
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GOODS TRANSPORT AGENCY SERVICES
Other relevant provisions
Other 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.
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GOODS TRANSPORT AGENCY SERVICES
Practical 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?
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LEGAL SERVICES
Exemption and Practical Issues
Exemptions:
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??
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PLACE OF PROVISION OF SERVICE RULES
In Nutshell
Nature of Services
Place of Supply
Generally
The location of receiver
Services in respect of goods that are required to be made
Performance based - goods related(e.g. Maintenance,
physically available or are required be performed in the
Erectioning etc)
physical presence of an individual.
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,
Place of service provider
hiring of transport for upto 1 month.
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
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IMPORT OF SERVICES
Practical Issues – Double taxation
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Partial - Reverse Charge Mechanism
Client name - Event - Presentation title
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PARTIAL REVERSE CHARGE MECHANISM
Concept
Joint 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 noncorporate service provider to a corporate business entity.
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PARTIAL REVERSE CHARGE MECHANISM
Points to be Remembered
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 CENVAT
Valuation:
• 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.
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PARTIAL - REVERSE CHARGE MECHANISM
List 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-aCab’ 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.
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PARTIAL - REVERSE CHARGE MECHANISM
List of Services
Sr.
No.
Description of Service
2
•
•
3
Percentage of service tax
payable by the recipient of
services
Remarks
Manpower
supply
service
provided or agreed to be
provided for any purpose
75%
Security Service
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.
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%
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Any person receiving such
services
being
a
body
corporate would have to pay
tax @ 50% of the taxable tax.
RENT-A-CAB SERVICE
In Nutshell
Renting of Motor Vehicle
If abatement of 60%
claimed
S.R. is liable to
pay @ 4.944%
S.P. is not liable
to pay any tax
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If abatement not claimed
S.R. is liable to
pay @ 4.944%
S.P. is not liable
to pay @
7.416%
WORKS CONTRACT SERVICE
In Nutshell
Original Works
Works Contract of
Movables
Any other WC for
Immovables
Taxable Amount
40% = 4.944%
effective rate
Taxable Amount
70% = 8.652%
effective rate
Taxable Amount
60% = 7.416%
ST = 40% x 12.36%
X 50% = 2.472%
ST = 70% x 12.36%
X 50% = 4.326%
ST = 60% x 12.36%
X 50% = 3.708%
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REVERSE CHARGE MECHANISM
Accounting Treatment
Case 1: Partial Reverse Charge
Expense A/c
Service Tax Input Credit A/c
Service Tax Deferred Input A/c
To Vendor A/c
To TDS Payable A/c
To Service Tax Payable A/c - Reverse Charge
Case 2: Full Reverse Charge
Expense A/c
Service Tax Deferred Input A/c
To Vendor A/c
To TDS Payable A/c
To Service Tax Payable A/c - Reverse Charge
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Dr.
Dr.
Dr.
Dr.
Dr.
Debit
100.00
7.42
4.94
112.36
Credit
105.42
2.00
4.94
112.36
100.00
12.36
112.36
97.75
2.25
12.36
112.36
REVERSE CHARGE MECHANISM
Practical 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?
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REVERSE CHARGE MECHANISM
Practical 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?
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REVERSE CHARGE MECHANISM
Practical Issues
During 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?
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REVERSE CHARGE MECHANISM
Practical Issues
G & 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)?
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REVERSE CHARGE MECHANISM
Practical Issues
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:
Particulars
Amount (In Rs)
Total Contract Cost
10,00,000
Add: VAT @ 5%
50,000
Add: Service Tax @ 4.944%
24,720
(50% as per Notification 30/2012 )
Grand Total
10,74,720
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..
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REVERSE CHARGE MECHANISM
Practical Issues
• 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?
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Questions???
Client name - Event - Presentation title
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THANK YOU
PHONE 020 26225500
www.bdo.in
PUNE
MUMBAI
DELHI
AURANGABAD
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