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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. 

With respect to services like supply of manpower, it is extremely relevant to determine what constitutes supply of manpower to decide the liability. Whether or not mere provision of manpower on deputation i.e. supply of manpower or dedicating a person for the work / assignment without supervision and control of the service receiver would also constitute supply of manpower is a matter of debate.  Further, the liability to discharge service tax by provider or receiver depends on legal nature of the entity.  For service providers it creates a burden as they will have to maintain records as to in which cases they are liable to pay Service Tax at 12.36 percent and in which cases they are liable to pay Service Tax at 3.09 percent as the liability is dependent on kind of customers to which it caters.
To add to the burden on service receivers, the payment for such reverse charge liability has to be made in cash and no credit can be utilised for the same. Also, payment of entire tax liability by the service provider does not absolve the receiver from its own obligation to pay to government authority.

Check points for service receiver:

In view of the aforesaid difficulties and complexities, it is desirable to prepare a few check points to comply with the compliance burden. Some such checks are:

• Ascertain the constitution of service provider (whether company, partnership firm, etc)

• Ascertain the nature of service & determine whether the service is covered under Notification no. 30/2012

• If covered, then ascertain the proportion of Service Tax to be paid by service receiver.

• Ensure that only net amount after deducting service receiver’s liability and TDS is paid.

• Ascertain whether payment of invoice is made to the service provider.

• Calculate Service Tax at prescribed rates.

• Before making payment, it should be ensured that category of service is covered under registration certificate and if receiver is not registered, the same is to be obtained.

• Make payment of Service Tax as per accounting codes prescribed and ascertain whether Service Tax paid can be claimed as Cenvat credit as per Cenvat Credit Rules, 2004.


By following the above procedure, a service receiver could keep a track and ensure that it is compliant with the provisions of Service Tax under reverse charge. Also, in order to avoid the hassles of registering under Service Tax and making Service Tax payments, companies are now trying to appoint services providers which are either private / public limited companies so that they would not be liable to Service Tax as service recipients. Adopting such an approach will directly affect the business of small service providers and for them the reverse / joint charge has and will continue to become an obstacle from their growth / expansion perspective.  With respect to liability on account of import of service and payment of directors’ fees in certain specified instances, there are instances where traders in goods are facing problems as the same would be an additional cost to such traders in absence of output liability. It is hoped that the government will look into the hardships of service receivers and provide more simplified mechanism to discharge the service tax liability.


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