Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Monday, November 5, 2012

Service Tax Illustrations: Reverse Charge


Computation of Service Tax
·         X is a Service Provider and Y is a Service Receiver such that they fall within the scope of reverse charge mechanism.
·         The ratio applicable is 25% and 75% for the Service Provider & Receiver, respectively.
·         An invoice of Rs. 15 lakhs (excluding tax) has been raised on 1st October, 2012.
For the given facts the computation of service tax shall be as under:
Particulars
Amount (in Rs.)
Invoice Value (excluding tax)
15,00,000/-
Service Tax @ 12.36% (A)
1,85,400/-
Total Value
16,85,400/-
Less: Tax attributable to Service Receiver and to be borne by him [75% of (A)]
1,39,050/-
Amount Payable by Service Receiver to Service Provider
15,46,350/-
Service Tax payable by Service Receiver
1,39,050/-
Service Tax payable by Service Provider
46,350/-
Raising service invoice
With reference to the example given above, while raising a service invoice, the total service tax payable of Rs. 1,85,400/- needs to be disclosed.
In addition to that, service tax attributable to the Service Receiver of Rs. 1,39,050/- shall be disclosed on the invoice so that the receiver knows the amount of service tax that is required to be paid by him. 
Illustrations
1.       Hiring or Renting of Motor Vehicles
-          Case 1 (Abated value): X (an individual) provides services to PQR Pvt. Ltd. in relation to renting of motor vehicles, designed to carry passengers, and charges Rs. 100
Service tax liability on abated value: Rs. (100 x 40% x 12.36%) = Rs. 4.944 i.e. Rs. 5 (Rounded off as per Section 37D of the Central Excise Act)
-          Case 2 (Total value): X (an individual) provides services to PQR Pvt. Ltd. in relation to renting of motor vehicles, designed to carry passengers, and charges Rs. 100. Further, the service provider charges Rs. 7.416 (i.e. Rs. 100 x 60% x 12.36%) as service tax on the face of the invoice.
In this case, the Service Receiver (PQR Pvt. Ltd.) will have to discharge Rs. 4.944 (Rs. 100 x 40% x 12.36%) as Service Recipient.
-          The Director of a Company avails services in relation to renting of motor vehicles to travel from one city to another on a business tour. He obtains the bill from the service provider in the name of the company and passes it on to the company to obtain reimbursement of expenses. In such a case, the company WILL be required to pay Service Tax as applicable on it under the reverse charge mechanism because the bill has been raised in the company’s name.
-          The Director of a Company avails services in relation to renting of motor vehicles to travel from one city to another on a business tour. He obtains the bill from the service provider in his own personal name and passes it on to the company to obtain reimbursement of expenses. In such a case, the company WILL NOT be required to pay Service Tax as applicable on it under the reverse charge mechanism.

2.       Supply of Manpower Services
X (an individual) provides services to PQR Pvt. Ltd. in relation to supply of manpower and charges Rs. 100.
-          Liability to be discharged by the Service Provider: Rs. (100 x 25% x 12.36%) = Rs. 3.09 i.e. Rs. 3 (Rounded off as per Section 37D of the Central Excise Act)
-          Liability to be discharged by the Service Receiver: Rs. (100 x 75% x 12.36%) = Rs. 9.27 i.e. Rs. 9 (Rounded off as per Section 37D of the Central Excise Act)

3.       Works Contract Services
X (an individual) provides services to PQR Pvt. Ltd. in relation to works contract (original) and charges Rs. 200.
-          Service tax liability: Rs. (200 x 40% x 12.36%) = Rs. 9.888 (Alternate Rule)
-          Liability to be discharged by the Service Provider = 50% x Rs. 9.888 = Rs. 4.944
-          Liability to be discharged by the Service Receiver = 50% x Rs. 9.888 = Rs. 4.944

Valuation of Works Contract [Notification No. 24/2012-ST dated 6th June, 2012] (Alternate Rule)
Description of Service
% of ST payable on total amount charged
Original Works
40%
Maintenance or repair or reconditioning or servicing of any goods
70%
Other works contract – Completion & Finishing Services
60%
4.       Services of Directors in a Company
There are 3 Directors in a Company, out of whom 2 Directors are whole-time Executive Directors getting salary and other benefits from the company. The Non-Executive Director is getting sitting fees for attending the meetings of the Board.
(i)                 How will the service tax liability be calculated in this case and who will bear it?
In this case, reverse charge is applicable only on the payments made to the Non-Executive Director in the form of sitting fees and reimbursements. This Service Tax will be deposited by the Company on behalf of the Director under the reverse charge mechanism @12.36%.
(ii)               Will the Company be eligible to avail Cenvat credit on such payment of service tax?
Yes, the Company is entitled to avail the input of the Service Tax paid on the Directors’ remuneration on reverse charge basis. The service tax paid by the Company on Directors’ remuneration will be considered as common services and will be eligible under rule 6(3) of the Cenvat Credit Rules, 2004 as per the ratio of taxable and exempted services.
(iii)             Will the Service Tax be payable even if the Director is below the threshold limit of Rs. 10 lakhs and his income from such services to all service receivers is below such amount?
It is immaterial whether the Director falls within the threshold limit or not. Service Tax will have to be deposited by the Service Receiving Company.

5.       Security Services to a Business Entity
ABC Distributors (partnership firm) and PQR Distributors Pvt. Ltd. are two business entities receiving services of security guards from Shine Star Security Agency (Proprietorship).
(i)                 Will Reverse Charge be applicable in this case?
In case of security agency services, for reverse charge provisions of service tax to apply, the service recipient should be a business entity registered as a body corporate. A partnership firm is not a body corporate. Therefore, PQR Distributors Pvt. Ltd. will have to deposit 75% of the Service Tax under the partial reverse charge mechanism. However, ABC Distributors, being a partnership firm, will not be required to deposit the Service Tax as a Service Receiver. The whole of the service tax liability will be collected and deposited by Shine Star Security Agency.
(ii)               Will the treatment be different in case the Service Provider is a Company instead of a proprietorship/ partnership/ HUF?
In case the business providing such security guards is a company (say, Shine Star Security Agency Pvt. Ltd.) the whole of the service tax liability will be of the Service Provider irrespective of the status of the Service Receiver. In such a case, reverse charge will not apply and neither ABC Distributors nor PQR Distributors Pvt. Ltd. will be liable to deposit the Service Tax.
(iii)             Security Services were brought under the Reverse Charge Mechanism vide Notification No. 46/2012 ST dated 07.08.12. What about the service tax liability on such services from 1st Jul to 7th Aug, 2012?
-           If the security agency has already raised their invoice for the services provided by them during July 2012, before 7th August 2012, the service recipient’s liability to make the payment is recognized on the date of invoice and hence the point of taxation shall be the date of such invoice. Hence, if invoice has been raised by the security agency before 7th August 2012, reverse charge will not apply, even if the payment is made by the service recipient after 7th August 2012. But, if the invoice for the services provided from 1st August to 31st August 2012 is raised on 31st August 2012, the date of invoice, i.e. 31st August 2012 would be the point of taxation and hence the service recipient would be liable to make the payment of his portion of service tax liability under reverse charge, though part of the service has been provided before 7th August 2012.
-           Similar would be the case in respect of services provided by Non-Executive Directors to the Companies as such services were brought under the reverse charge mechanism vide Notification No. 45/2012 ST dated 07.08.12. If the liability to make the payment to the Director is recognized after 7th August 2012, reverse charge will apply and if such liability is recognized by the company before 7th August 2012, reverse charge will not apply.

Repercussions in Case of Default in Payment of Service Tax Liability by Either Party and Availability of CENVAT Credit under Reverse Charge
It is clarified by CBEC that the liability of the Service Provider and the Service Receiver is for the respective amounts payable by them and is not influenced by compliance or the lack of it by the other side. Hence, if either party defaults, there shall be no repercussion for the other party.
Service Provider is allowed Cenvat credit of tax paid by him on inputs and input services. The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons. In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules to this effect.
Cenvat Credit cannot be used to pay tax by a Service Receiver. He will have to make such payment through the GAR 7 challan. However, the service receiver may claim the credit of service tax paid based on the invoice issued by the service provider. For service tax paid on reverse charge, credit may be claimed based on the TR-6 challan by which payment is made.

2 comments:

  1. (Five Star) for way the RCM is described in this page.

    ReplyDelete
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