SMALL SERVICE RECEIVERS UNDER REVERSE CHARGE METHOD – CLEAR EXEMPTION IS DESIRABLE – the exemption should be qua sum total of value of taxable services rendered and taxable service received under RCM.

[C.A. DEV KUMAR KOTHARI]

Increased scope of tax payable by service receivers:

Under the reverse charge method (RCM) scope of services liable to tax in hands of service receivers has increased and as per thinking going on, the scope is likely to be increased further. Furthermore, due to expanded scope of taxable services under new methodology of inclusive definitions and negative list, the scope of service tax payable by service receivers will be increased.

Small service receivers:

There will be many service receivers who are liable to pay service tax as service receivers but total amount of value of such services and tax payable thereon will be very low. It is not desirable from effective administrative point of view that very small service receivers who have to pay service tax on low amount should also be made liable to pay. In such case cost of compliance in hands of service receiver and cost of administration including surveillance in hands of revenue authorities will be very high. Therefore, small service receivers should also get exemption if the value of taxable services received does not exceed prescribed limit.

For example many small companies who are holder of properties or are small business entities will become liable to service tax as service receiver in relation to services rendered by directors of company. The amount of taxable services will be very low, but companies will require to get registered and to pay service tax.

Exemption to small service providers- substantial increase is required:

Readers are aware that exemption to small service providers was started with threshold limit of Rs. five lakh and it got increased to Rs. ten lakh w.e.f. 01.04.2008. The same limit is still continuing. In view of high inflation since 01.04.2008, it is desirable that the limit of exemption should be increased to Rs. twenty lakh.

Exemption on services rendered and received is desirable:

In many cases situation will be that the same person is liable to pay service tax on services rendered by him as well as on services received by him. Therefore, exemption should be allowed if the sum total of value of taxable services rendered and taxable services received under RCM method, does not exceed prescribed limit.

Present and past notifications for exempting services:

From reading of first paragraph of notifications an impression is gathered that the exemption is to be allowed to service provider and service receiver both. This we get from the following wordings:

“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”.

From this we notice that exemption is granted on being satisfied that it is necessary in the public interest.

The public interest is same and similar whether the person liable to pay service tax is service provider or service receiver or both. Therefore it is desirable to clarify that the exemption will be read in relation to total sum of value of services rendered and received.

However, from subsequent paragraph of notification we find that conditions prescribed are only in relation to service providers. Therefore, general understanding of people is that the exemption notification was and is applicable only to service providers and not to service receivers under reverse charge method.

Purpose suggest exemption to both:

Considering the purpose of allowing exemption to small taxable entities, it is clear that intention is to allow exemption where total value of taxable services and  tax is less than prescribed limit. There is no difference between a small service provider and small service receiver who is liable to pay tax on small sums. When we find that a person  may be rendering taxable services liable to tax in hands of service provider and  the same person may be also  liable to pay service tax on some of services availed by him (say GTA and directors services). In such situation if we conclude that the person is not liable to pay service tax on services rendered valued at Rs.8.50 lakh because of exemption but he is liable to pay service tax on some of taxable services received under RCM of say Rs.50000/-, then we find that there is no logic in making the same person liable to compliance and payment of service tax on services valued at Rs.50000/- under RCM. taxmanagementindia.com

Analysis of notifications:

The relevant notification is reproduced below with highlights for easy analysis of the point expressed in this article.    

Notification No. 33/2012 - Service Tax, Dated 20/06/2012

Notification No. 6/2005-Service Tax, Dated 01/03/2005