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Budget 2013: Service Tax Reverse Charge Mechanism

Published on Sat, Feb 23,2013 | 12:29, Updated at Sat, Feb 23 at 12:34Source : 

By: Pratik Shah, Head-Indirect Tax, SKP Group

The Finance Act, 2012 introduced 'Negative list based taxation' w.e.f 1st July, 2012 shifting the taxability based on positive list of services to negative list. Along with this move to taxation based on negative list, several amendments were made to the provisions governing Service Tax.

Under normal circumstances, a service provider is liable to pay Service Tax. However, in certain cases, the liability is shifted to service recipient and an amendment is made through Finance Bill 2012 by introducing more services on which tax is to be paid by service recipient. This is commonly known as ‘Reverse charge mechanism’ or ‘Joint charge mechanism’ as in certain cases, both service provider and service receiver are liable to pay Service Tax.

To specify services on which tax is to be paid under reverse charge, Notification No. 30/2012 has been issued which specifies the nature of service, persons providing service, service receiver and the percentage of Service Tax payable by service provider and service receiver. Few services covered in the Notification are services provided by advocates, services provided by goods transport agency, services provided by renting of motor vehicle, services provided by supply of manpower or security, services provided by directors, import of service from outside India etc.

A typical issue that may arise when the turnover of the service provider is less than 10 lacs and small scale exemption is claimed as per Notification No. 33/2012 is whether service receiver is liable to pay Service Tax in such a situation. In such cases, as the liability to pay Service Tax is on service recipient, irrespective of whether service provider charges Service Tax or not, Service Tax would be payable by the service recipient. By casting liability on service receiver irrespective of the fact that turnover of the service provider has not exceeded the exemption limit would defeat the very purpose of exemption granted under the statute. Further, in such cases, even if Service Tax is charged by service provider on the invoice, the service receiver is not liable to make payment to the service provider to this extent and instead, the service receiver has to deposit the amount of Service Tax with the Government since the liability to pay Service Tax is entrusted on service receiver and not on service provider. 

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