Reverse charge mechanism-Reversing the hopes of the assessee

Reverse charge mechanism – Reversing the hopes of the assessees

Prepared By:
CA Pradeep Jain
CA Preeti Parihar

George Santayana once said “Chaos** is a name for any order that produces confusion in our minds”.

** For the purpose of this article the word “Chaos” should be read as “Reverse Charge Mechanism”.

Introduction :-

‘Reverse charge mechanism’ - the part of service tax law that has been on ignition since it was implemented. The recent budget has also made a no. of amendments in it that are apparent to be cause of further litigation. These amendments are the foundation on which this article is laid upon.

The history :-

The concept of service tax by reverse charge was introduced in the Finance Act, 1994 under Service Tax Rules in 2002. In these rules, it was provided that where a taxable service is provided by a non-resident not having an office in India, service tax would be payable by the service recipient. Later on, an explanation to Section 65(105) was added wherein concept of import of services was launched. The import of service was defined as the taxable services provided by a person based outside India and received by a person based in India. Afterwards, this explanation was removed in year 2006 and Section 66A was inserted. This section specifically provided that in case of import of taxable services, the recipient will be deemed as service provider for the purpose of paying the service tax. Rule 2(1)(d) of the Service tax rules, 1994 prescribed the cases of deemed service providers.

Amendment by budget, 2012 :-

The recent budget has widened the scope of reverse charge mechanism. The key amendments are as follows –

1.                  The taxable territory has been defined and the service provided in that territory only will be liable to service tax. Thus, the services provided in the state of Jammu & Kashmir will not be liable to service tax subject to the provisions of The Place of Supply Rules, 2012.

2.                  Notification no. 15/2012-ST dated 17.3.2012 has been issued wherein the taxable services/ cases are prescribed on which reverse charge method will be applicable. The following services are prescribed in respect of which the recipient will be liable to pay the service tax –

●        services provided by an insurance agent to any person carrying on insurance business
●        services provided by a goods transport agency in respect of transportation of goods by road
●        services provided by way of sponsorship
●        services provided or by an arbitral tribunal
●        services provided by individual advocate
●        services provided by way of support service by Government or local authority
●        taxable services provided by any person located in a non-taxable territory and received by any person located in the taxable territory

The above will also include the services agreed to be provided. The above notification will be applicable as on the date the service tax by way of negative list comes into effect.

3.                  Three services are being prescribed under notification no. 15/2012-ST in respect of which both service provider and service recipient will be considered as person liable to pay the service tax on the basis of a fixed percentage. This amendment will be applicable only where the service provider is an individual/firm/LLP and the recipient is the body corporate. The services and portion of service tax payable by provider and recipient of services are as follows:-

S. no.	Description of Service	Service Recipient	Service Provider
1	Hiring of motor vehicle for passengers – ● with abatement ● without abatement	100% 40%	NIL 60%
2	Supply of man power	75%	25%
3	Works contract	50%	50%

4.                  Service recipient is allowed to take the credit of the service tax paid by him under reverse charge method on the basis of challan. For this purpose, rule 9(1)(e) is being amended.

5.                  Point of Taxation Rules, 2011 have been amended vide notification no. 4/2012-ST dated 17.3.2012 so as to specifically provide for the cases covered under reverse charge method. These amendments will be applicable as from 1.4.2012 and are listed as follows –

i.                     Rule 7 of the said rules has been substituted. The new rule 7 says that in the cases where recipient is the person liable to pay the service tax, the point of taxation will be the DATE of payment.
ii.                   However, where the payment is not made within 6 months of date of invoice, this rule will not be applicable. Thus, in such cases, the point of taxation will be determined as per general rule.
iii.                  In case of associate enterprises where the provider of service is located outside, the Point of taxation will be EARLIER of following events –
●                    Date of debit in books of service recipient; or
●                    Date of making payment.

Analysis of amendments :-

The amendments in respect of the reverse charge method are being done to remove the existing ambiguities as well as to line it up with the new concept of service tax by negative list. However, the above amendments are somewhere lacking the clarity. These amendments are analyzed as follows:-

1.                  Notification no. 15/2012-ST dated 17.3.2012 supersedes notification no. 36/2004-ST dated 31.12.2004. Under the old notification no. 36/2004-ST, the following services/cases were listed on which the reverse charge method was applicable – telecommunication service, general insurance business, insurance auxiliary services, services provided from abroad, goods transport agency services, sponsorship services. However, under new notification, telecommunication service, services provided from abroad and insurance auxiliary services have not found place. Rest of the services have been included alongwith certain other services. However, for the purpose of import of services, separate rules namely “Place of Provision of Services Rules, 2012” have been framed.

2.                  Three services have been notified for which both service recipient and service provider, have been made liable for paying the service tax. These services are –

i.                     Hiring of motor vehicle meant for passengers– Notification no. 15/2012-ST dated 17.3.2012 prescribes that if abatement is availed, 100% service tax is to be paid by the service recipient. Otherwise, 40% service tax is payable by the service recipient and 60% by the service provider.

For these services, abatement has been prescribed @ 60% of taxable value on the condition that no Cenvat credit has been taken under the provisions of Cenvat Credit Rules, 2004.

Now, suppose, the rate of service tax is 12.36%

Amount charged is Rs. 100/-

Particulars	If abatement is claimed	If abatement is not claimed
Gross value	100	100
Less: Abatement	60	0
Taxable value	40	100
Service tax @ 12.36%	4.95	12.36
Service tax payable –
By provider	0	7.42
By recipient	4.95	4.94

Thus, in the above case, it is beneficial to claim the abatement as in both the cases, the liability on the service recipient is the same, however, there is additional liability on the service provider of 7.42% where the abatement is not claimed. This is because the Cenvat credit is not allowed alongwith abatement in the case of above service.

ii. Supply of man power services - Notification no. 15/2012-ST dated 17.3.2012 says that 25% service tax is to be paid by the service provider and 75% by the service recipient. The net liability on the service provider is calculated as follows:-

Particulars	Amount
Gross value	100
Service tax payable @ 12.36%	12.36
Service tax paid by service provider (12.36 * 25%)	3.09
Service tax paid by service recipient (12.36 * 75%)	9.27

In the above case, the service tax paid by the service recipient is 9.27 and payable by the service provider is 3.09. In the TRU letter F. no. 334/1/2012-TRU dated 16.3.2012, it is mentioned at para no. 15 that the service provider is allowed to take the Cenvat Credit of the inputs and input services. Thus, the service provider will take credit of those inputs and input services which are availed by him in course of providing these taxable services. However, the service recipient can take credit of Rs. 3.09 as charged by service provider on his invoice. Further, credit of Rs. 9.27 paid by him under reverse charge method on the basis of challan in the light of rule 9(1)(e) of the Cenvat Credit Rules, 2004 provided these services fall in the definition of input services and are used in course of providing their taxable services or used in relation to manufacture of their final products.

Thus, the effect of entire process is the same – the service recipient is able to take the credit of entire service tax – whether paid by him or by the service provider. So, what’s the need of complicating the things which are going fine?

iii.                  Works Contract service- Notification no. 15/2012-ST dated 17.3.2012 further provides that in respect of the works contract, 50% service tax will be paid by the service provider and 50% by the service recipient. The government has already complicated the works contract by amending the valuation rules pertaining to this service. Further, the fixing liability of two persons in respect of one service and a single amount has added fuel to fire. The analogy stated above in the case of man power services is equally applicable here. In this case also, the Cenvat credit available to the service recipient will be the same as before implementation of reverse charged method on it. What will be new then? The confusion, litigation and increasing cost will be additions because of this scheme.

3.                  Point of Taxation Rules, 2011; have been amended for clarifying the point of taxation in the case of reverse charge method. Rule 7 has been substituted which says that in case of reverse charge method the point of taxation will be the DATE of payment. However as per proviso to this rule, if the payment is not made within 6 months of date of invoice, this rule will not be applicable. As such, under reverse charge method, where the payment is not made within 6 months of date of invoice, point of taxation will be determined in the light of rule 3 of these rules which says that it will be earlier of three events -
●        Raising of invoice,
●        Providing of service, or
●        Receipt of payment.

Thus, where payment is not made within 6 months, the point of taxation will go back to the date of invoice/ provision of service. Since normally date of raising of invoice and service provision are nearby, it is ample clear that this date will be any date before 5-6 months. The department will come forward with a show cause notice demanding the interest thereupon. Prior to this amendment also, the situation was the same. This was due to Board Circular no. F. No. 354/45/2011-TRU dated 12.5.2011 which was issued regarding prosecution provisions in Finance Act, 1994. In this circular it was clarified at para no. 5 that “In the case of persons liable to pay tax on reverse charge basis, the date of provision of service shall be the date of payment except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment.” Thus, this amendment specifically clarifies the things covered by the above referred circular.

Before winding up :-

Insertion of provisions, making amendments and then amending those amendments is the inheritance of any typical law. Service tax is not the exception. The reverse charge method under service tax has been in dispute since implementation. Every time a new amendment is brought therein, a new era of litigation begins. This time is also there is no difference. The amendments made in the reverse charge method by budget, 2012 are also going to bring tsunami in the service tax law. Just wait and watch...

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Reverse charge mechanism-Reversing the hopes of the assessee

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