Reverse charge Mechanism-Introduction

Under normal circumstances, a service provider is liable to pay Service Tax. However, under ‘Reverse charge mechanism’ both service provider and service receiver are liable to pay Service Tax. Section 68(2) of the Finance Act, 1994 provides for liability to pay service tax by a person other than service provider for certain specified services. The scope of services covered by the reverse charges mechanism as per Notification no 30/2012 has been enhanced by the Finance Act, 2012 read with Notification No. 15/2012- ST. In the erstwhile service tax regime the entire service tax liability was payable by either the service provider or service receiver to the exclusion of other. As per Notification No. 15/2012 in respect of certain specified services the entire service tax liability shall be discharged by service receivers (reverse charge mechanism) and in respect of certain other specified services part of the service tax liability shall be discharged by service provider and the other part of the liability shall be discharged by service receivers (joint charge mechanism)

Some services to which Reverse Charge Mechanism is applicable

Few services covered in the Notification are services provided by advocates, services provided by goods transport agency, services provided by renting of motor vehicle, services provided by supply of manpower or security, services provided by directors, import of service from outside India etc.

A typical issue that may arise when the turnover of the service provider is less than 10 lacs and exemption is claimed by service provider under Notification No. 33/2012, whether service receiver is liable to pay Service Tax in such a situation.

Service provider can avail the threshold limit & are not liable to pay service tax if its turnover/gross receipt is less than Rs 10 lacks subject to certain conditions as per Notification No 33/2012-Service tax. However unlike service provider, service receiver cannot claim the general exemption limit of Rs 10 Lakhs, thus are liable to pay service tax even on single rupee received. It means effectively service provider providing above services may not avail the benefit of small scale exemption for the portion of services on which service receiver is liable to pay service tax.

Further, in such cases, if Service Tax is charged by service provider on the invoice, the service receiver is not liable to make payment to the service provider to this extent and instead, the service receiver has to deposit the amount of Service Tax with the Government since the liability to pay Service Tax is entrusted on service receiver and not on service provider.

For service providers it creates a burden as they will have to maintain records as to in which cases they are liable to pay Service Tax at 12.36 percent and in which cases they are liable to pay Service Tax at a different percent as the liability is dependent on kind of customers to which it caters.

To add to the burden on service receivers, the payment for such reverse charge liability has to be made in cash and no Cenvat credit can be utilized for the same i.e. through GAR 7 challan. Also, payment of entire tax liability by the service provider does not absolve the receiver from its own obligation to pay to government authority.

Check points for service receiver:

In view of the aforesaid difficulties and complexities, it is desirable to prepare a few check points to comply with the compliance burden. Some such checks are:

• Ascertain the constitution of service provider (whether company, partnership firm, etc)
• Ascertain the nature of service & determine whether the service is covered under Notification no. 30/2012
• If covered, then ascertain the proportion of Service Tax to be paid by service receiver
• Ensure that only net amount after deducting service receiver’s liability and TDS is paid
• Ascertain whether payment of invoice is made to the service provider
• Calculate Service Tax at prescribed rates
• Before making payment, it should be ensured that category of service is covered under registration certificate and if receiver is not registered, the same is to be obtained
• Make payment of Service Tax as per accounting codes prescribed and ascertain whether Service Tax paid can be claimed as Cenvat credit as per Cenvat Credit Rules, 2004

Conclusion:

By following the above procedure, a service receiver can ensure that it is complying with the provisions of Service Tax under reverse charge. It is hoped that the government will look into the hardships of service receivers and provide more simplified mechanism to discharge the service tax liability.

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