Application and implications of Reverse charge mechanism under service tax regime w.e.f. 01-07-2012

1. REVERSE CHARGE MECHANISM
UNDER SERVICE TAX REGIME

2. CONTENTS
Budget Highlights – Service Tax
Payment of Service Tax
Person liable to pay Service Tax
Specified Services
Utilization of CENVAT Credit by
Service Provider
Utilization of CENVAT Credit by
Service Receiver
Half Reverse – Double Workload
Undue Hardship on Service
Receiver
Miscellaneous
Way Forward

3. BUDGET HIGHLIGHTS – SERVICE TAX
Eighteen years old “Service Tax Regime” attains majority vide Finance Act, 2012 and the
Government has cheered this event by enlarging the arms of Services Tax Regime by
introducing Negative List approach for taxing services.
All services would now be taxable except those listed in Negative list and provided in
Exemption Notifications.
First time in the history of this law the term “Service” has been defined u/s 65b(44) of
the Act.
General Rate of Service tax has been increased to 12% with consequential changes in
rates of some individual services.
New provisions/rules, superseding the exiting ones, have been introduced for
determining the chargeability of services and place of provision of services.
Provision of Reverse Charge Mechanism has been widened by inserting more services.
Government, through these amendments, has made a big move towards the most
awaited and contentious tax reform in India “Goods and Service Tax” and intend to
prepare the Industrialists, professionals and the tax authorities for GST.
It is expected that GST may be implemented from April 1, 2013 wherein the similar
negative list approach may be adopted.

4. PAYMENT OF SERVICE TAX
In terms of section 68(1) of the Act, liability to pay service tax falls on the service
provider.
Overriding the aforesaid position, section 68(2) of the Act empowers the Central
Government to notify such services on which such person, as may be prescribed, shall
be liable to pay service tax .
By virtue of this section, a person other than the service provider can be made liable to
pay service tax and he shall be deemed as if he is the person liable for paying the
service tax on such service and all other provisions of this Act shall apply accordingly.
Finance Act, 2012 inserts a proviso to section 68(2) of the Act, wherein it is provided
that the service provider and the service receiver can jointly be made liable to pay
service tax on the same transaction.
Benefit of threshold limit of Rs.10 lakhs is not be available to Service Receiver and thus
the service receiver has to pay service tax on all the specified input services received.

5. PERSON LIABLE TO PAY SERVICE TAX….
Government has notified Notification No. 30/2012 for the purpose of Section 68(2) of
the Act. The said Notification supersedes the erstwhile Notification in this context i.e. N.
No. 36/2004 and thereby widening the scope of “person liable to pay service tax” .
Salient Features
Liability to pay service tax has been shifted, wholly or partly, from service provider to
service receiver.
Business Entities are now made liable to pay service tax, consequently, the burden of
individual service providers to comply with the provisions of Service Tax Regime have
been reduced. In some cases partnership firms have also been relieved from this
burden.
Conversely, burden to comply with the provisions of Service Tax Regime has been
doubled where service provider and service receiver are jointly liable to pay service tax.
Notification No. 30/2012 dated 20th June, 2012 will come in effect
from 01st July, 2012

6. PERSON LIABLE TO PAY SERVICE TAX….
Extent of service tax payable by Service Provider and Service Receiver
Liability on Liability on
S. Services Provided Service Service
No By Description of Service Service Provided To Provider (%) Receiver (%)
1 Person carrying
Insurance Agent Insurance Auxiliary Service Insurance Business Nil 100%
2 Body Corporate or
Any person Sponsorship Service Partnership Firm Nil 100%
3 Any person Any Taxable Service Any person Nil 100%
4 Goods Transport Transport of Goods by Road Consignor or
Agency Service Consignee Nil 100%
5 Director of a
Company Any Taxable Service Company Nil 100%
6 Arbitral Tribunal Legal Service Nil 100%
7 Individual or
Firms of Advocate Legal Service Nil 100%
Business Entity
8 Support service by
Government or Government or local
Local Authority authority Nil 100%

7. ….PERSON LIABLE TO PAY SERVICE TAX
Extent of service tax payable by Service Provider and Service Receiver
Liability on Liability on
S. Services Service Service Service
No Provided By Description of Service Provided To Provider (%) Receiver (%)
9 Renting or hiring of motor vehicle to carry
passenger on abated value i.e. 40% Nil 100%
10 Renting or hiring of motor vehicle to carry
Individual, passenger on non abated value Body 60% 40%
11 HUF, Firm, Corporate
AOP Supply of Manpower Service or Company 25% 75%
12
Security Services 25% 75%
13
Works Contract Service 50% 50%
In terms of Point of Taxation Rules, service receiver shall pay service tax by 5th or 6th day of the month
following the month/quarter in which value of service has been paid to service provider.
However, if payment is not made to service provider within six months from the date of invoice then
the service tax would have to be paid by 5th or 6th day of the month following the month/quarter in
which such invoice was issued. Interest on delay in payment, if any, will be applicable.

8. SPECIFIED SERVICES….
Service tax payable on the services provided by
INSURANCE AUXILIARY an Insurance Agent to a person carrying on
SERVICES Insurance Business shall be discharged by the
person receiving such services.
Service tax payable on the services provided by
SPONSORSHIP SERVICES Any Person receiving sponsorships shall be
discharged by the Body Corporate or
Partnership Firm receiving such services.
Service tax payable on the services provided by
SPONSORSHIP SERVICES Government in relation to Support Services*
shall be discharged by the Business Entity
receiving such services.
Service tax payable on the services provided by
SERVICES BY A DIRECTOR a Director of a Company shall be discharged by
that Company. (applicable w.e.f 07-08-2012)
*Support Services means infrastructural, operational, administrative, logistic, marketing or any
other support of any kind comprising functions of an entity which may be outsourced to others
including advertisement, promotion, security, construction, testing & analysis etc.

9. SPECIFIED SERVICES….
Service tax payable on the services provided by a
Goods Transport Agency in relation to transport of
goods by road shall be discharged in following
TRANSPORT OF GOODS BY manner:
ROAD SERVICE o Where consignor or consignee of the goods falls
under organized sector* then by the consignor or
consignee whoever pays or liable to pay freight;
o In all other cases, by Goods Transport Agency .
Service tax payable on the services provided
by Individual Advocates or Firms of
LEGAL SERVICES Advocates or Arbitral Tribunal shall be
discharged by the Business Entity** receiving
such services.
Service tax payable on the services provided by
any person located in Non-taxable territory***
ANY TAXABLE SERVICE to any person located in Taxable territory shall
be discharged by the person receiving such
services in taxable territory.
*Organized Sector means a Body Corporate, Partnership Firm, Society, Factory etc.
**Business Entity includes a company, firm, AOP, BOI but does not include an individual.
***Non-Taxable territory means the territory to which service tax provisions shall not apply.

10. SPECIFIED SERVICES….
Services provided by a Individual, HUF, Firm or AOP to a Company or Body Corporate
other than those engaged in similar line of business
In relation to
Hiring/Renting of
Motor Vehicle for
carrying passengers
Service provider claims Service provider does
abatement of 60% not claims abatement
without availing CENVAT and avails CENVAT
Credit Credit
100% Service tax to 40% of Service 60% of Service
be paid by Service tax to be paid by tax to be paid by
Receiver Service Receiver Service Provider
It is noted that hiring/renting of metered cabs or radio taxis is not a taxable service.

11. ….SPECIFIED SERVICES
Services provided by a Individual, HUF, Firm or AOP to a Company or Body Corporate
other than those engaged in similar line of business
In relation to In relation to Supply
execution of Works of Manpower or
Contract Security Services*
50% of Service tax 50% of Service 75% of Service 25% of Service
to be paid by tax to be paid by tax to be paid by tax to be paid by
Service Receiver Service Provider Service Receiver Service Provider
*Security Services means services in relation to the security of any property, movable or immovable,
or of any person, in any manner and includes the services of investigation, detection or verification,
of any fact or activity. Reverse Charge Applicable on Security Services w.e.f. 07-08-2012.

12. UTILIZATION OF CENVAT CREDIT BY SERVICE PROVIDER
Cases where Service Provider is engaged in rendering
specified services only
Under Full Reverse Under Half Reverse
CENVAT Credit available with the Service provider can utilize 100%
service provider will remain of CENVAT Credit available, as per
unutilized since the liability to pay rules, despite the fact that liability
service tax has been shifted to to pay service tax has been
service receiver. reduced.
CENVAT Credit will form part of the
cost of the service provider which
may be pass on to service receiver
by way of price increase.
In case of Full Reverse, Service provider should carry forward the unutilized amount of
CENVAT Credit so that it can be adjusted against any liability of service tax that may arise in
future.

13. UTILIZATION OF CENVAT CREDIT BY SERVICE RECEIVER
Cases where Service Receiver is engaged in rendering
taxable services or manufacturing excisable goods
Service Receiver cannot utilize CENVAT Credit available for discharging the liability of
service tax arise by virtue of section 68(2) of the Act.
Under Full Reverse Under Half Reverse
Service tax on input services Part amount of Service tax on
can be availed/utilized only input services can be
after making the payment of availed/utilized after making
value of service & service the payment of value of
tax. service & service tax.
Part amount of Service tax on
input services can be
availed/utilized as and when
the invoice is received.

14. HALF REVERSE – DOUBLE WORKLOAD
Extra workload where
Service provider and
receiver are jointly liable
to pay service tax.
Cases where service provider has availed benefit of any Abatement, service receiver
has to make sure that service provider has not availed CENVAT Credit. Any irregularity
found may attracts interest & penalty on both service provider and service receiver.

15. UNDUE HARDSHIP ON SERVICE RECEIVER
EVERY PERSON LIABLE TO PAY SERVICE TAX
In terms of Section 69(1) of the Act, shall get itself registered under Service tax
Provisions.
In terms of Section 70(1) of the Act, shall furnish periodic return of service tax.
In terms of Rule 5 of Service tax rules, shall maintain such records for a period of five
years.
Interest or penal provisions under this Act shall accordingly apply on the service receiver.
All the above provisions will be applicable even if the service receiver is not engaged
in rendering any taxable service.
Service Tax needs to be paid by service receiver even if specified services are availed
from a small service provider since threshold limit does not apply on service recipient.

16. MISCELLANEOUS
No Service tax is chargeable on the services where service provider is located in Non-
taxable territory and received, in taxable territory, by Government, Local Authority,
Entity registered u/s 12AA of Income Tax Act, 1961 and Individuals for non-business
purpose. Thus, Reverse Charge Mechanism shall not apply in such cases and Service
receiver shall not be liable to pay service tax on such input services.
Where Service receiver has make an advance payment to Service provider before
availing any of the Specified service then the Service receiver shall have to pay Service
tax chargeable on the amount paid to Service provider.
Cases where services are provided from Jammu & Kashmir, being a non-taxable
territory, and received in any other part of India, a taxable territory, then such services
shall be taxable in the hands of service recipient.
Service provider shall issue an Invoice with in 30 days from the date of completion of
service or receipt of any payment whichever is earlier. The amount of service tax to be
paid by the service receiver should be reflected on the Invoice for better compliance.
Service provider cannot be made liable to pay tax even if service receiver has failed to
discharge its service tax liability on recipient basis.

17. WAY FORWARD
• All the persons receiving specified services must get itself
registered or amend their existing registration so as to include the
Service specified service as recipient of service.
Receiver • Timely compliance of the provisions under Services Tax Regime by
way of paying taxes and furnish service tax returns for avoiding
interest and penalties.
• All the persons providing specified services, where whole of the
service tax is payable by service receiver, need not to file service tax
Service returns.
Provider • A return of CENVAT Credit may be filed in order to carry forward and
utilize the CENVAT credit against any service tax liability that may
arise in future.
A relief may be expected to the service receiver who has purchased its input services
from the small service providers whose threshold limit has not been exhausted.

18. PREPARED BY:-
CA ASHISH GUPTA
B-116, Ist Floor, Amar Colony,
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Disclaimer: This presentation is provided purely for your
information and knowledge. Information provided in this
presentation do not purport or should not be treated as
legal opinion in the fact specific situations that may effect
you and your business.