Reverse charge and joint charge mechanism under service tax

By | November 11, 2013

Reverse charge and joint charge mechanism under service tax

The provider of taxable service has generally been made responsible for making the payment of service tax to the government. However, in certain exceptional cases, the responsibility has been shifted to the service recipient alone, and this is called reverse charge mechanism and in some cases both service recipient and service provider have been made liable for payment of service tax for their respective share on the same transaction and this is called joint charge mechanism.

Recipient of taxable services liable to make payment of service tax on the basis of reverse charge mechanism.

In case of specified services, the responsibility of payment of service tax has been vested upon the service recipient in contrast with to the generally accepted practice of payment  by service provider. The central government vide Notification No. 45/2012 dated 07/08/2012 has certain specified services in which the liability to pay service tax is discharged by service recipient alone and in some cases both service recipient and service provider have been made liable for payment of service tax for their respective share on the same transaction

The new partial reverse charge mechanism is applicable to service provided or agreed to be provided by way of :

  • Renting of a motor vehicle designed to carry passengers on non abated value to any parson who is not engaged in similar business or,
  • Supply of manpower for any purpose, or
  • Service portion in execution of a work contract

By any individual, HUF or partnership firm, whether registered or not including AOP, located in the taxable territory to a business entity registered as a body corporate located in taxable territory. Thus the nature of service and status of service provider and service receiver is very important to determine the applicability of partial reverse charge mechanism.  

The service provider shall issue an invoice complying rule 4A of the service tax rules 1994. Thus the invoice shall indicate the name, address and the registration no. of the service provider, the name and address of the person receiving taxable services, the description and value of taxable services provided or agreed to be provided and the service tax is payable thereon.

If service provider is availing exemption of small service service provider -The liability of the service provider and service recipient are different and independent of each other. So in case service provider is availing exemption owing to turnover being less then rs. 10 lac, he shall not be obliged to pay any tax. However, the service recipient shall have to pay service tax which he is required to pay under the partial reverse mechanism charge.

The credit of the entire tax paid on the service received by the service receiver would be available to service recipient subject to the provisions of CENVAT credit rules 2004.

Point of taxation for service provider and service recipient – Both the service provider and service receiver are governed by the point of taxation rules 2011 in respect of service provided or received by him. Usually, it is the invoice or date of receipt of payment which is the point of taxation for the service provider, however, for the service recipient, in terms of rule 7 of the said rules, point of taxation is when he pays for services.

Works contract means a contract wherein transfer of property in goods take place along with provision of some specified services along with it. Thus, a work contract contain two parts

a)      Contract for transfer of property in goods

b)      Contract for services

Partial reverse charge mechanism is applicable in case of works contracts. Hence, if separate contracts are entered for provision of services and transfer of property in goods , partial reverse charge mechanism shall not be applicable.

When service provider is located in Jammu & Kashmir In respect of taxable services provided or agreed to be provided by any person located in non taxable territory and service recipient is located in taxable territory, the person liable for payment of service tax will be service recipient. thus, as Jammu & Kashmir  is in non taxable territory , hence person liable for payment of service tax in respect of service provided by service provider located in Jammu & Kashmir shall be the service recipient.

The extent of service tax payable under reverse charge and joint charge mechanism for foiiowing specified services.

S. No. Description of service % of service tax payable by service provider % of service tax payable by service recipient
1 Providing services by an insurance agent to any person carrying on insurance business Nil 100%
2 Services provided by GTA in respect of transportation of goods by road Nil 100%
3 Sponsorship services Nil 100%
4 Providing services by an arbitral tribunal Nil 100%
5 Legal services by individual advocate or firm of advocate Nil 100%
6 Support services by government or local authority excluding  i) renting of immovable property ii) services specified in sub-clauses (i),(ii)&(iii) of clause (a) of section 66D of the finance act, 1994 Nil 100%
7 Services provided by way of renting of motor vehicle designed to carry passengers on non abated value Nil 100%
  Services provided by way of renting of motor vehicle designed to carry passengers on  abated value 60% 40%
8 Services provided by way of supply of manpower for any purpose or security services 25% 75%
9 In respect of service portion in execution of works contract 50% 50%
10 Services provided by a person located in non taxable territory and received by person located in taxable territory Nil 100%

 

 

by C.A. deepika pamecha

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