The provisions of Section 68(2) of the Finance Act, 1994 read with rule 2(i)(iv)(d) of Service Tax Rules and Notification No. 30/2012-ST dated 20.06.2012 provide for service receiver to be one of the persons liable to pay Service Tax. The liability of payment of Service Tax could, therefore be discharged by any one of the following –
- Service providers in ordinary course
- Service receivers under reverse charge
- Jointly by service providers and service receivers (proportional reverse charge)
Thus, for specified services as per Notification No. 30/2012-ST dated 20.06.2012 and conditions stipulated therein, payment of Service Tax shall be under reverse charge basis or mechanism.
Liability to pay under Reverse Charge by Service Receiver
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Under Partial Reverse Charge (Proportional)
- Renting of motor vehicles
- Manpower supply & security services
- Works contracts
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Under full reverse charge (100%)
- insurance business services by agents
- goods transportation by road
- sponsorship
- arbitral tribunals
- legal services
- company director's services
- services provided by Government / local authority excluding specified services
- services provided by persons located in non-taxable territory to persons located in taxable in territory
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Important Points in Reverse Charge Mechanism
- Governed by Notification No. 30/2012-ST dated 20.06.2012 w.e.f. 1.7.2012
- Liabilities of both the service provider and service receiver are independent of each other
- Reverse charge will not apply where the service receiver is located in non-taxable territory
- For three specified services provided by business entities being company, society, cooperative society, trust etc, reverse charge will not apply.
- Reverse charge will also not apply where the service recipient is any person or business entity not being a body corporate in case of three specified services
- Small scale benefit is available only to service provider (not to service receiver), if entitled
- Service receiver under reverse charge cannot avail exemption of Rs. 10 lakh under Notification No. 33/2012-ST dated 20.06.2012
- Valuation of services by services provider and service receiver can be on different principles, if permitted by law (e.g. works contract - + Refer Notification No. 30/2012-ST, explanation II)
- Liability to pay Service Tax for ongoing contracts will be as per Point of Taxation Rules, 2011
- Reverse charge shall not be applicable if provider of service was liable before 1.7.2012
- Service Tax will not be payable by service receiver under reverse charge, if service was provided prior to 1.7.2012, even if payment is made after 30.06.2012
- In case of proportional reverse charge (manpower supply, works contract and motor vehicle hire), service provider should charge Service Tax only on his portion of Service Tax in the invoice and mention that Service Tax on balance amount is payable by service receiver.
- It is the statutory obligation on the service recipient to pay Service Tax, whether under full or proportional reverse charge
- Service Tax under reverse charge has to be paid by cash vide GAR Challan No. 7 and it cannot be paid by way of utilization of Cenvat Credit.
- In case of renting of motor vehicles where abatement is also available, reverse charge basis is proportional depending upon the abatement on the condition that no Cenvat Credit has been availed. The service provider should provide a certificate, either in the invoice itself or separately. taxmanagementindia.com
- In case of renting of motor vehicle, reverse charge applies only where the motor vehicle is provided with driver.
- In case of director's services, the service provider should not be employed (whole time) director. Employees are not covered under the scope of Service Tax.
- In respect of manpower supply and security services, works contract services and renting of motor vehicles to carry passenger, reverse charge shall be applicable only when following two conditions are satisfied –
(i) service receiver is a business entity registered as a body corporate, and
(ii) service provider is any one of the following entities –
- Individual
- Hindu undivided family (HUF)
- Firm (including limited liability partnerships)
- Association of persons
If both the above conditions are not satisfied in respect of these three services, Service Tax shall be payable by the service provider in ordinary course.
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