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Understanding Reverse Charge Mechanism in Service Tax and its applicability

Service tax is an indirect tax levied by service provider on the service recipient. The service provider collects service tax on bills raised on the service recipient and deposits it into the Government account. Hence the liability to pay service tax falls on service provider u/s 68(1). However there is an exception provided to this rule by Sec. 68(2) wherein the Central Government can specify services where the service recipient is also liable to pay service tax to Government wholly or partially.

As per Notification No. 30/2012-Service Tax released on 20.06.2012 and later updated by Notification No. 45/2012- Service Tax released on 07-08-2012, w.e.f. 1st July, 2012, modifications have been made on certain taxable services with respect to their rate of tax liability arising on the person providing the service and the person receiving the service.

In other words, in respect of certain taxable services, the current service tax rate of 12.36% will be distributed between the service provider and the service receiver, and both shall be liable for their portion of service tax calculated. They both will pay their respective percentage of service tax to the Government and file ST3 returns. This is called Reverse Charge Mechanism. The Reverse Charge Mechanism is complete where for some services, only the service recipient is taxable and it is Partial where both service provider and the service receiver are taxable.

Previously, during preparation of invoice or bill, the service provider would charge service tax @ current rate i.e. 12.36% presently on the gross value of service provided, and present an aggregate amount as final bill to the service receiver.

For example, previously a bill was prepared as….

M/S ABC Security Agencies
Bill No. 12345

Bill for period of April-May 2012 for supply of manpower to XYZ Co. 30000

Add. S.T. @ 12.36% (12.36% of 30000) 3708

Total Bill Value 33708

Now, taking into account the above Notification, where Security Agencies in business of supplying manpower are liable for only 25% of Service Tax rate, the bill prepared by M/S ABC Security Agnecies will be as follows…

M/S ABC Security Agencies Bill No. 12345

Bill for period of April-May 2012 for supply of manpower to XYZ Co. 30000

Add. S.T. @ 3.09% ((25% of 12.36%) * 30000) 927

Total Bill Value 30927

The service receiver or XYZ Co. in this case will be liable for 75% of 12.36%, i.e. 9.27% of gross value of service provided which is Rs. 30,000 in this case. The amount so calculated comes to Rs. 2,781. He will deposit this amount directly to Government, obtain challan and efile ST3 return.

Hence it is important to know which services come under the purview of this said Notification.




S.No.


Description of services PROVIDED/ AGREED TO BE PROVIDED


Percentage of service tax payable by Service Provider


Percentage of service tax payable by Service Receiver




1


Insurance services



Nil - where S.P. is an insurance agent


100% - where S.R. is any entity carrying on insurance business/non-business




2


Transportation of goods by road


Nil - where S.P. is goods transport agency as Company OR Firm OR Individual OR AOP


100% - where S.R. is Registered factory OR Registered Society OR Co-operative society OR Dealer of excisable goods OR Corporate Body OR Partnership firm




3


Sponsorship


Nil - where S.P. is any person


100% - where S.R. is Body Corporate OR Partnership firm




4


Arbitral tribunal


Nil - where S.P. is arbitral tribunal


100% - where S.R. is any business entity carrying on business. It includes Proprietorship OR Individual OR Partnership firm




5










Legal services


Nil - where S.P. is individual advocate or a firm of advocates


100% - where S.R. is any business entity carrying on business. It includes Proprietorship OR Individual OR Partnership firm




6


Support services excluding,- (1) renting of immovable property, and (2) services of department of Post, Express Post, Life Insurance and agency services provided to person other than Government (3) Services in relation to aircraft or vessel


Nil - where S.P. is Govt or local authority


100% - where S.R. is any business entity located in taxable territory. It includes Proprietorship OR Individual OR Partnership firm




7


(a) Renting of a motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business
(b) Renting of a motor vehicle designed to carry passengers on NON - abated value to any person who is not engaged in the similar line of business


Nil - where S.P. is Individual OR HUF OR Regd. / Unregd. Partnership firm OR AOP

60% - where S.P. is Individual OR HUF OR Regd. / Unregd. Partnership firm OR AOP



100% - where S.R. is Corporate Body in taxable territory



40% - where S.R. is Corporate Body in taxable territory




8


Supply of manpower for any purpose or security services


25% - where S.P. is Individual OR HUF OR Regd. / Unregd. Partnership firm OR AOP


75% - where S.R. is Corporate Body in taxable territory




9


Service portion in execution of works contract


50% - where S.P. is Individual OR HUF OR Regd. / Unregd. Partnership firm OR AOP


50% - where S.R. is Corporate Body in taxable territory




10


Taxable services by any person in non-taxable territory to any person in taxable territory


Nil - where S.P. is Individual OR HUF OR Regd. / Unregd. Partnership firm OR AOP OR Corporate Body OR Trusts


100% - where S.R. is Individual OR HUF OR Regd. / Unregd. Partnership firm OR AOP OR Corporate Body OR Trusts




11


Services by Director of a company to said company


Nil - where S.P. is Director of company


100% - where S.R. is said company




Important Notes to the above mentioned table:

Explanation-I. - The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.

Explanation-II. - In works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

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