Service Tax Reverse Charge
Service Tax Reverse Charge
    SERVICE TAX UNDER REVERSE CHARGE MECHANISM

    Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of Service Tax and stated that '' There is no sound reason for exempting services from taxation, therefore, I propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers.''

    Today, with the introduction of the negative list, the taxation on services encompasses all the services except those specifically excluded by the negative list and a mega exemption notification. The Finance Act also introduced the concept of reverse charge mechanism on some of the services, not subject to the reverse charge earlier.

    In order to understand the concept of reverse charge, we need to first understand the history and background of the reverse charge mechanism in service tax. 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.

    The Taxmen have obtained the mandate to levy service tax on the recipient from Subsection 2 of Section 68 which authorizes the revenue to levy service tax on any person other than the service provider. Thus as a corollary, except for the services that are notified under Section 68(2), the service tax is levied on the service provider.

    Now the question is whether the reverse service tax concept is sustainable in law. As per Sec 66B of Chapter V of Finance Act, 1994 as amended by the Finance Act 2012, there shall be levied a tax on the value of service other than those specified in the negative list provided or agreed to be provided in the taxable territory from one person to another. Basically therefore when the service tax concept was introduced in 1994, the legislature intended to levy tax on the value of the services. The taxable person is a person who provides the service. The taxable event is on the event of providing the service or delivering the service. This is an indirect tax legislation like tax on sales under Entry 54, list II, Seventh Schedule of the Constitution of India under which a person who makes a sale & who is liable under the sales tax law is under an obligation to discharge the sales tax liability. The buyer is not called upon under the law to discharge the liability.

    The reverse service tax concept antagonises the fundamental principles of service tax. To call upon the recipient to discharge the liability of the service provider amounts to making the recipient liable though in fact an in law is not liable. In a taxation statute, the levy is distinguished from the procedure for recovery. In all circumstances, the law requires that efforts be made to recover the tax from the person who is liable to pay tax, whereas the reverse service tax mechanism brushes aside, the legal requirement of the conditions and circumstances for effecting the recovery. It is understood that in a given situation, especially in regard to non resident rendering service, the procedural aspect of recovery could be enforced from a resident person. It is like a special mode of recovery in taxation statute. Therefore, I believe in the scheme of service tax, making the recipient liable in a given situation may not be in consonance with legality.

    Vide Notification Number 36/2004, the following taxable services were notified for taxability under the reverse charge mechanism:
    (A) the services,-
       (i) in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communication or a leased circuit;
       (ii) in relation to general insurance business;
       (iii) in relation to insurance auxiliary service by an insurance agent; and
       (iv) in relation to transport of goods by road in a goods carriage, where the consignor or consignee of goods is,-
         (a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
        (b) any company established by or under the Companies Act, 1956 (1 of 1956);
        (c) any corporation established by or under any law;
        (d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India;
        (e) any co-operative society established by or under any law;
        (f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder; or
        (g) any body corporate established, or a partnership firm registered, by or under any law;

    (B) any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India.
    In supersession of the aforementioned notification, Notification no. 30/2012 has been issued on 20th June, 2012 and made applicable from 1st July, 2012. The notification reads as follows:

    “GSR.…..(E).—In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), and in supersession of (i) notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 15/2012-Service Tax, dated the 17th March, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i),vide number G.S.R 213(E), dated the 17th March, 2012, and (ii) notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 36/2004-Service Tax, dated the 31st December, 2004, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 849 (E), dated the 31st December, 2004, except as respects things done or omitted to be done before such supersession, the Central Government hereby notifies the following taxable services and the extent of service tax payable thereon by the person liable to pay service tax for the purposes of the said sub-section, namely:—

    I. The taxable services,—
    (A) (i) provided or agreed to be provided by an insurance agent to any person carrying on the insurance business; (ii) provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the person liable to pay freight is,—
    (a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
    (b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India;
    (c) any co-operative society established by or under any law;
    (d) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder;
    (e) any body corporate established, by or under any law; or
    (f) any partnership firm whether registered or not under any law including association of persons;
    (iii) provided or agreed to be provided by way of sponsorship to anybody corporate or partnership firm located in the taxable territory;
    (iv) provided or agreed to be provided by,-
    (A) an arbitral tribunal, or
    (B) an individual advocate or a firm of advocates by way of support services, or
    (C) Government or local authority by way of support services excluding,-
       (1) renting of immovable property, and
       (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory;
    (v) provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers to any person who is not in the similar line of business or supply of manpower for any purpose or service portion in execution of works contract by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory;

    (B) provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory;
    (II) The extent of service tax payable thereon by the person who provides the service and the person who receives the service for the taxable services specified in (I) shall be as specified in the following Table, namely:-

    Sl. No. Description of a service Percentage of service tax payable by the person providing service Percentage of service tax payable by the person receiving the service
    1. in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business Nil 100 %
    2. in respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road Nil 100 %
    3. in respect of services provided or agreed to be provided by way of sponsorship Nil 100 %
    4. in respect of services provided or agreed to be provided by an arbitral tribunal Nil 100 %
    5. in respect of services provided or agreed to be provided by individual advocate or a firm of advocates by way of legal services Nil 100 %
    6. in respect of services provided or agreed to be provided by Government or local authority by way of support services excluding,- (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994 Nil 100 %
    7. (a) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business
    (b) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business
    Nil


    60%
    100 %


    40%
    8. in respect of services provided or agreed to be provided by way of supply of manpower for any purpose 25 % 75 %
    9. in respect of services provided or agreed to be provided in service portion in execution of works contract 50 % 50 %
    10. in respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory Nil 100 %


    Further to the services notified under Reverse Charge Mechanism for payment of Service Tax, by an amendment made vide notification No.46/2012-ST, dated 7.8.2012, the Govt. has added following services under Reverse Charge Mechanism.
    1. Services provided by Director of a Company;
    2. Services provided by Security Agency;

    As per the amended notification, in case of services provided by Director of a Company, 100% of Service Tax amount becomes payable by the Company, as a recipient of the service.
    In case of Security Agency services, when service provider is an Individual, HUF, registered or unregistered Partnership firm, Association of Persons, and the receiver is a business entity registered as body corporate, then 75% of the Service Tax payable on the services rendered by Security Agency will have to be paid by the Service Receiver.

    Thus in a nut shell:
    Sl. No. Description of a service Percentage of service tax payable by the person providing service Percentage of service tax payable by the person receiving the service
    1. Services Provided or agreed to be provided by an insurance agent to any person carrying on insurance business Nil 100 %
    2. Services Provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road Nil 100 %
    3. Services Provided or agreed to be provided by way of sponsorship Nil 100 %
    4. Services Provided or agreed to be provided by anarbitral tribunal Nil 100 %
    5. Services Provided or agreed to be provided by individual advocate Nil 100 %
    6. Services Provided or agreed to be provided by way of support service by Government or local authority Nil 100 %
    7. (a) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on abated value.
    (b) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on non abated value.
    Nil


    60%
    100 %


    40%
    8. services provided or agreed to be provided by way of supply of manpower for any purpose 25 % 100 %
    9. Services Provided or agreed to be provided by way of works contract 50 % 50 %
    10. any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory (IMPORT OF SERVICES) Nil 100 %
    11. Security Service (Notification No 46/2012 dt: 07/08/2012) 25 % 75 %
    12. Service Provided by Directors, if he is employee (payment of Directors remuneration per month) (Notification No 46/2012 dt: 07/08/2012) Nil Nil
    13. Service Provided by Directors, if he is not employee (no monthly payment of remuneration) (Notification No 46/2012 dt: 07/08/2012) Nil 100 %
    a. Insurance Agent Nil 100 %
    b. Goods Transport Service Nil 100 %
    c. Individual Advocate Nil 100 %
    d. Hiring of Motor Vehicle 60 % 40 %
    e. MANPOWER SUPPLY
    Gardening Service
    Housekeeping Service
    Labour Supply
    25 % 75 %
    f. Works Contract 50 % 50 %
    g. Import Service Nil 100 %
    h. Security Service 25 % 75 %


    Also, we need to bear in mind that not all remuneration payable to directors can be classified as a Service provided by directors taxable under the reverse charge mechanism of the Service Tax. The word Service as defined under Sec 65B(44) excludes a “provision of service by an employee to the employer in the course of or in relation to his employment”. Thus remuneration payable to a director as a consideration for services provided as an employee would not be taxable. However director sitting fees, professional fees for professional and technical services provided by the director is purported to be taxable by virtue of the notification.
    Manpower Supply Service as has been explained above, is taxable in the hands of both service provider and the service receiver. However, the definition of what constitutes a ‘supply of manpower’ has not been explained in the notification. For answers, we need to refer the Service Tax Rules, 1994. Rule 2(g) of the Service Tax Rules, 1994 defines supply of manpower to mean: “supply of manpower temporarily or otherwise to another person under his superintendence or control”. The essence of the above definition is that the service provider shall only be responsible for supply of manpower. The manpower will work under the supervision and control of the service receiver. Thus in case, a contractor is hired only for supplying labour, he has no control over the labour supplied by him, the labourers work under the direction of the service receiver and not the labour contractor, such an arrangement would qualify as “supply of manpower”. Contract for lump sum work or for any work would not be considered as supply of manpower.

    The Government has issued a notification no. 33/2012- Service Tax, which reads as follows:
    “In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the said Finance Act), and in supersession of the Government of India in the Ministry of Finance (Department of Revenue) notification No. 6/2005-Service Tax, dated the 1st March, 2005, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide G.S.R. number 140(E), dated the 1st March, 2005, except as respects things done or omitted to be done before such supersession, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:
    Provided that nothing contained in this notification shall apply to,-
    (i) taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or
    (ii) 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 said Finance Act read with Service Tax Rules,1994.”

    The above notification has unequivocally laid down that, the benefit of the exemption of Rs. 10 Lakhs available to small scale service providers is not available to the service recipient i.e. to whom Sec 68(2) is applicable. We now have a unique situation wherein the service provider would continue to avail the benefit of the exemption of Rs. 10 Lakhs, but the service recipient shall have to pay service tax in the aforementioned cases in which service recipient is taxable.

    Moreover Cenvat Credit balance cannot be used for discharging the liability under reverse charge in terms of Rule 3(4) of the Cenvat Credit Rules, 2004. Cenvat credit in terms of this rule can be utilized for payment of excise duty or amount payable on removal of inputs or capital goods or amount payable under Rule 16(2) of the Central Excise Rules and for payment of service tax on any output service. When a person pays service tax as a receiver of service, the payment is neither towards output service nor towards any excise duty payment or towards an amount payable, as has been stated above. Further, with effect from 01st July 2012, an explanation is also inserted below the said Rule 3(4), providing that CENVAT Credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is a service recipient.

    The aforesaid epoch making amendments have completely altered the way service tax is taxed in India. The purpose behind the new scheme of taxation seems to be large scale tax evasion by taking advantage of the benefit of taxable limit of Rs. 10 Lakhs available to Small Scale Service Providers. Nevertheless, many issues still remain unanswered. In a hypothetical situation, in case a service provider has paid the entire amount of service tax, question arises as to whether service tax would also be required to be paid by the service recipient? So now in case the service recipient makes the payment of service tax, would the excess service tax paid by the service provider, refunded back? All these issues need to be addressed by way of clarifications/circulars as soon as possible, since these issues have already cropped up in case of many corporate taxpayers. A practical approach by the Government on this matter can be handy. Nevertheless such situations should spur the revenue to take corrective measures so as to meet the possible challenges to the law on constitutional validity.