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Budget 2014: Simplification Of Reverse Charge

Published on Wed, Jul 09,2014 | 22:04, Updated at Wed, Jul 09 at 22:04Source : 

By: Amit Sarker, Director, Deloitee India

The Central Government increased the ambit of the reverse charge by introducing the concept of partial reverse charge in 2012.  Under the partial reverse charge mechanism, a recipient is responsible to pay service tax on procurement of specified services. At present, the following service categories fall within the scope of partial reverse charge:

•    Rent a cab service
•    Manpower supply service
•    Works contract

A corporate entity receiving the above mentioned services from an individual, HUF, proprietary firm, partnership firm or association of persons is required to pay partial service tax under the reverse charge mechanism. Therefore, irrespective of the fact whether the corporate entity is engaged in provision of taxable services, such an entity is required to obtain service tax registration as a recipient of service and discharge service tax.
This article seeks to highlight the issues faced by the corporate entities to comply with the requirements of partial reverse charge and the expectations from the forthcoming budget for simplification of the compliances entrusted on a recipient of service.

•    While the present statute has a threshold limit for service providers, the same does not apply to a service recipient. Thus, every single transaction encompassing the above mentioned services needs to be identified by the service recipient. Additionally, services which otherwise would not have attracted service tax in the hands of the service provider, becomes taxable. Although, the service tax so paid could be availed as credit, the same will not be possible on the services which are precluded from the definition of input service.

•    The compliance tends to get even more challenging if the service recipient engages small time vendors for the following activities which are required for day to day functioning of an office :
o    Annual maintenance of air conditioner
o    Repair, maintenance of office premises
o    Repair, maintenance of furniture
o    Painting of office premises etc.
o    Pasting Film on glass door and so on

•    The definition of works contract is a very broad one and all the above activities can be normally regarded as works contract. This places the onus on the service recipient to identify all such vendors and services procured from them which may not be necessarily supported by a formal contract. Therefore, the service recipient needs to determine whether such procurements could be regarded as works contract services and then ensure payment of service tax under reverse charge for the relevant ones. Several of these vendors insist on cash payment leading to further compliance challenges.

•    A service recipient also needs to classify a works contract as original, maintenance and other works contract, as the rules prescribe a distinct valuation base for each type of works contract.  In the absence of a formal contract and non-descriptive invoices from the vendors, the service recipient is left struggling to determine the nature of works contract and the applicable taxable value for service tax.

In view of the above, following simplification measures would be highly welcome:
•    A threshold limit for payment of service tax under reverse charge would help simplification of the service recipient’s responsibility for tracking and identifying each and every transaction.

•    It would also ensure to reduce tax cost of the service recipient in those cases where the service provider is below the threshold limit in respect of services such as rent a cab, etc.

•    A simplified valuation methodology for works contracts would help service recipients comply with the reverse charge requirements without being afraid of multiple interpretations regarding the nature of works contract.

•    Refund procedures could be framed in order to grant refund of excess payment of service tax due to interpretation in relation to the nature of contracts.
As India proposes to introduce GST for simplification of the indirect tax regime, steps such as above could help in paving the way for such a major reform. At the same time, it will help in reducing compliance challenges for the service recipients.

(Varun Parmar, Deputy Manager, Deloitte India contributed to this article)


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