REVERSE CHARGE MECHANISM
OF SERVICE TAX (RCM)
With effect from 1-7-2012 , the
central government has notified the new partial reverse charge mechanism for
the payment of service tax in respect of certain taxable services. the present
write up tries to make an investigative study of this new scheme.
The Liability To pay
service Tax:
Service
tax is an indirect tax , where the service provider has to collect the tax from
the service receiver and had to pay to deposit in to Government account. As per
Sec68(1) of Finance act 1994, every person providing taxable service to any
person is liable to pay service tax. Hence the liability to pay service tax is
on the service provider . However an exception to the above said rule has been
provided under sub section (2) of 68 of the Act., in terms of which the central
government has the powers to notify services in respect of which even the
service receiver shall be liable to pay service tax wholly or partially .This
is termed as REVERSE CHARGE
MECHANISM. Since in respect of some services both the service provider
and service receiver are liable to pay service tax proportionately, it is
termed as "partial reverse charge mechanism"
Services covered under
partial reverse charge mechanism:
By the virtue of powers conferred
under sub section(2) of Sec 68 of the Act, The Central Govt. has issued
notification dated 1-7-2012 notifying the fillowing services which shall be
covered under the partial reverse charge mechanism. they are:
1.Insurance agent's
Services.
Service Receiver
|
Service Provider
|
Any Person( Here
any person means any entity carrying on activities of business or non
business)
|
Any Person
|
Rates :100%
|
-
|
2.Services Provided by a
goods transport agency in respect of transportation of goods by road, where
person liable to pay freight is:-
Service Receiver
|
Service Provider
|
Any factory
registered under or governed by the Factories Act, 1948
|
GTA( Company,
firm,Individual or AOP)
|
Society
Registered Under Societies Registration Act 1860 or any other law for the
time being in force in any part of India
|
|
Any Co-operative
Society established by or under any law
|
|
Any dealer of
Excisable goods, who is registered under Central Excise Act 1944or the rules
made thereunder.
|
|
Any Body
corporate established , by or under any law.
|
|
Any Partnership
Firm whether registered or not under any law including association of Persons
(AOP)
|
|
Rates:100%
|
-
|
3.Sponsorship services
Provided to any body Corporate or Partnership Firm located in Taxable Territory
Service Receiver
|
Service Provider
|
Body Corporate
|
Any Person
|
Parnership Firm
|
|
4.Services of Arbitral
Tribunal provided to any business entity located in India.
Here The term Business Entity
has been defined Under Clause 17 of Sec 65B , which means any person carrying
out any activity relating to Industry , Commerce or any other business or
profession. Hence , even an Individual , a proprietary firm or partnership Firm
shall be construed as a business entity if such person carries out any
activities relating to Industry , Commerce or Profession.
Service Receiver
|
Service Provider
|
Any Business
Entity carrying on Business related activities., includes: Individuals,
Proprietary firms, partnership Firms
|
Arbitral Tribunal
|
Rates:100%
|
-
|
5.Legal Services provided by Individual
advocates or by a firm of Advocates to any business entity located In Indian
Territory.
Service Receiver
|
Service Provider
|
Any Business
Entity carrying on Business related activities., includes: Individuals,
Proprietary firms, partnership Firms
|
Individual or a
firm Of Advocates
|
Rate: 100%
|
-
|
6.Support services
Provided by Government or local authority to any business entity located in
taxable territory , excluding the following:
1. Renting Of Immovable Property
2. Services of Department of Post, Express
Post, Life Insurance and agency Services Provided to person other than
Government.
3. Services in relation to an aircraft or
a vessel.
Service Receiver
|
Service Provider
|
Any Business
Entity carrying on Business related activities., includes: Individuals,
Proprietary firms, partnership Firms
|
Government or
local authorities
|
Rates:100%
|
-
|
7.Renting of a motor
vehicles designed to carry passengers, to any person who is not in the similar
line of business.
Service Receiver
|
Service Provider
|
Business entity
registered as Body Corporate, located In taxable Territory
|
Individual
|
|
Hindu Undivided
Family
|
|
Partnership Firm
(registered or not)
|
|
Association of
Person (AOP)
|
Rate:
|
|
On Abated
Value:100%
|
-
|
On Non Abated
Value:40%
|
60%
|
Excluding: Renting of motor vehicles
to any person carrying similar line of business.
8.Supply of Man power for
any purpose or Security Services.
Service Receiver
|
Service Provider
|
Business entity
registered as Body Corporate, located In taxable Territory
|
Individual
|
|
Hindu Undivided
Family
|
|
Partnership Firm
(registered or not)
|
|
Association of
Person (AOP)
|
Rate:75%
|
25%
|
9. Service Portion In the
Execution Of Works Contract:
Service Receiver
|
Service Provider
|
Business entity
registered as Body Corporate, located In taxable Territory
|
Individual
|
|
Hindu Undivided
Family
|
|
Partnership Firm
(registered or not)
|
|
Association of
Person (AOP)
|
Rate:50%
|
50%
|
10.Services Provided By a
person who is located In a non taxable Territory To any person located in the
Taxable Territory.
Service Receiver
|
Service Provider
|
Any Person Located
In taxable Territory
|
Any Person
Located in Non Taxable Territory
|
Individual
|
Individual
|
Hindu Undivided
Family
|
Hindu Undivided
Family
|
Parnership Firms
|
Parnership Firms
|
AOP
|
AOP
|
Body Corporates
|
Body Corporates
|
Trusts
|
Trusts
|
Rate:100%
|
-
|
Here there is no provision of whether
service provided for Business purposes or not, Hence it is applicable to Trusts
Registered U/sec 12 A Of Income Tax Act.
11.Services Provided By a Director of
a company to the said Company:
Service Receiver
|
Service Provider
|
Company
|
Director of the
Said Company
|
Rates:100%
|
-
|
Payment
Of Tax Under Reverse Charge Mechanism:
Where Service tax is payable under
reverse charge mechanism, it is required to be paid in cash only. In other
words benefit of Cenvat cannot be availed for discharging the service tax
liability on reverse charge mechanism.
Cenvat
Credit on Service Tax paid on reverse Charge Mechanism:
Any service recipient paying the
service tax under reverse charge mechanism may take the Cenvat credit of
Service Tax paid by him and utilize the same towards the discharge of Central
Excise Duty payable on Manufacture of Final Products or Towards payment of
Service Tax on Other Output Services., on the basis of Copy of GAR-7 Challan.
Threshold
exemption of Upto Rs.10 Lac is not applicable:
By Virtue Of notification 33/2012 ,
the aggregate value of taxable services upto Rs. 10lacs has been exempted from service Tax., However, it has
been provided that the benefit of the threshold exemption is not applicable to
those cases where the service tax is payable under reverse charge mechanism. As
Per the Proviso to the said Notification, the benefit of threshold exemption
does not apply to such value of Taxable services in respect of which service
tax shall be paid by such person and in such manner as specified under sub
section (2) of Section 68 of the Act. A plain reading of the abovesaid
provision suggests that the benefit of threshold exemption is not applicable in
respect of services specified under notification No.33/2012,irrespective of
whether the service tax is payable, wholly or partially by the service provider
or service receiver .
Refund
of Unutilised Cenvat Credit to Service Recipients:
The Central Government has inserted a
new rule 5B under Cenvat Credit Rules, 2004, providing for the refund of the
Service tax paid under reverse mechanism. According to this rule, if the
Service provider is unable to utilize the Cenvat credit availed of Inputs and
Input services, he shall be allowed refund of such un utilized Cenvat credit
subject to safeguards , conditions and limitaions.,
It
may be noted that the refunf under the above rule is available for the Provider
of service who pays service tax on reverse charge mechanism . In other words ,
the refund shall not be allowed to service recipients who pay service tax under
reverse charge wholly or Fully.
Some
Instances:
1.It may be noted that in respect of
renting of motor vehicles, supply of man power or security services or works
contract service provided by an Individual, or HUF, or Proprietary or
partnership Firm, the reverse charge mechanism shall apply only if the service
recipient is a business entity
registered as body corporate . If the Service recipient is not a body
corporate , the reverse charge shall not apply.
2.In case of legal services provided
by an individual advocate or a partnership of Advocated, reverse charge
provisions shall apply even if the receiver of such service is an Individual ,
HUF, Proprietary firm or partnership firm. However, such service tax shall be
liable only when the gross turnover of Service receiver exceeded Rs.10lac in the preceeding Financial
Year.
Summing
Up:
Liability
to pay service tax on the reverse charge mechanism is a unique feature of the
service tax regime. The service recipient is liable to pay service tax without
availing the Cenvat credit of the Inputs and Input services. However, He can
claim the Cenvat credit paid as service receiver towards the payment of service
tax on other Output services and Payment of Central Excise duty on manufacture
and clearance of excisable goods.