In the previous article(see previous article here) some aspects of works
contract service were discussed. In this continuing article an attempt has been
made to discuss the reverse charge mechanism in works contract service.
What is
reverse charge: Before
jumping to the reverse charge mechanism in works contract service, it is
important to understand what is reverse charge. Normally service tax is payable by the service
provider after charging/collecting the same from the service receiver.
Under reverse charge service receiver is made
liable to pay service tax directly to the treasury instead of paying to the
service provider, thus service provider gets exempted from the liability to
collect service tax from service receiver and paying into the Government
treasury.
Partial
reverse charge: Under section
68(2) of Finance act, 1994 already certain services were notified [vide notification
No. 36/2004-ST, dated 31-12-2004, where the receipient is liable to pay tax for
the entire amount of service tax.
By the Finance act, 2012, section 68(2) has been
further amended to empower the Central government to notify the services on
which service tax shall be payable by a person other than service provider by
specifying the extent of the service tax, which shall be payable by such person
and remaining part shall be payable by the service provider.
50% reverse charge in works contract service: Thus section 68(2) empowers Central Government to impose
partial reverse charge in any service. Under the works contract service partial
reverse charge to the extent of 50% has been imposed subject to certain
conditions.
In works contract service 50% of service tax will
be payable by service receiver and 50% by the service provider if the following
conditions are satisfied:
1. Provider
of works contract service is an individual, HUF or partnership firm, whether
registered or not, including Association of persons, located in the taxable
territory and,
2. Such works
contract service is provided to a business entity registered as body corporate,
located in the taxable territory.
Thus both the above conditions must be satisfied
before reverse charge mechanism is to be applicable in works contract service.
It is
important to understand the word Business entity and body corporate for
understanding of application of reverse charge.
Business
entity means any person ordinarily carrying out activity relating
to industry, commerce or any other business or profession. A charitable organization
not carrying any business or profession,
even if is a body corporate would not be liable under reverse charge mechanism
as its not a business entity.
Body
corporate means an organization incorporated under any law
for the time being in force. Company registered under companies Act, 1956, LLP,
cooperative society are body corporate. However trusts or society registered
under Society registration Act, 1860, HUF, partnership firms are not body corporates.
If both the provider and receiver are body
corporate then reverse charge is not applicable. Similarly if Body corporate
provides works contract service to an individual, HUF then no question of
reverse charge mechanism arises.
No SSI
exemption to service receiver but available to service provider: Service receiver who is liable to pay the service
tax cannot avail the exemption of 10 lakh as no SSI exemption is available
under reverse charge.
However service provider has the SSI exemption of
Rs. 10 lakh in reverse charge. Thus there may be cases in one and the same
works contract, where the service provider may not be paying the service tax due
to SSI exemption available to him but service receiver will be paying the
service tax.
Independent
valuation of the works contract service by service receiver: As per
Explanation-II to Notification 30/2012-ST, dated 20.06.2012, in works contract
services, where both service provider and service receipient are the persons
liable to pay tax, the service receipient has the option of choosing the
valuation method as per choice, independent of valuation method adopted by the
provider of service.
Now in this regard it is notable that after
negative list there are two methods of paying service tax under works contract,
one is paying service tax on actual services involved in works contract and
other is under alternate method wherein service tax is payable on 40%, 70% or
60% of the total amount charged for the works contract as the case may be
depending on the nature of contract.
Practical
difficulty: The
receiver of works contract service i.e contractee if wants to pay service tax
on actual value of services and the service provider/contractor chooses to pay under
alternate method then a practical difficulty will arise in the valuation of
service by the service receiver.
In most of the cases contractee would be
depending upon the contractor’s Running account bills or accounting maintained
by contractor for determining the amount of material and service/labour element
involved in the contract.
If the contractor is paying service tax under
alternate method then he may not bother to find out the actual services/labour element
in the works contract as he has to calculate service portion at a fixed
percentage of total amount under alternate method. In such case contractee if
wanting to pay service tax on actual value of services it would be very
difficult for him to find out the actual value of labour/service element
involved in works contract in the absence of proper accounting by contractor.
Similarly small contractors who are covered under
SSI exemption i.e having turnover less than 10 lakh may not be making regular books of accounts under any law i.e under Income Tax (Due to being covered u/s 44AD)
or VAT laws(due to opting composite scheme), in such case again it would be
difficult for the service receiver to pay service tax under actual scheme, so
the above explanation-II would become redundant.
Some
important clarification by Government:
10.1.2
What does a service provider need to indicate on the invoice when he is liable
to pay only a part of the liability under the partial reverse charge mechanism?
The service provider shall issue an invoice complying with Rule 4A of the Service Tax Rules 1994. Thus the
invoice shall indicate the name, address and the registration number of the
service provider; the name and address of the person receiving taxable service;
the description and value of taxable service provided or agreed to be provided;
and the service tax payable thereon. As per clause
(iv) of sub-rule (1) of the said rule 4A "the
service tax payable thereon' has to be indicated. The service tax payable would
include service tax payable by the service provider.
10.1.3 If the service provider is exempted being a SSI (turnover
less than Rs. 10
lakhs), how will the reverse charge mechanism work?
The liability of the service provider and service recipient are different
and independent of each other. Thus in case the service provider is availing
exemption owing to turnover being less than Rs. 10 lakhs, 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 charge mechanism.
10.1.4 Will the credit of such tax paid be available to the
service recipient?
Normally, the credit of the entire tax paid on the service
received by the service receiver would be available to the service recipient
subject to the provisions of the CENVAT
Credit Rules 2004. The credit of tax paid by the service provider would be
available on the basis of the invoice subject to the conditions specified in
the CENVAT Credit Rules 2004. The
credit of tax paid by the service recipient under partial reverse charge would
be available on the basis on the tax payment challan, again subject to
conditions specified in the said Rules.
10.1.5 What shall be the point of taxation for the service
recipient? When will he need to pay the service tax in respect of his
liability?
Both the service provider and service recipient are governed by
the Point of Taxation Rules 2011 in respect of the 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 of the service. Thus in the case where the invoice is issued in say July
2012 and the service recipient pays for the same in August 2012 the point of
taxation for the service provider will be the date of issue of invoice in July
2012. The point of taxation for the service recipient shall be the date of payment
in August 2012. The service provider would be required to pay tax (to the
extent liability is affixed on him) by 5th/6th August, 2012 or 5th/6th October
2012 depending upon the admissibility of benefit under the proviso to Rule 6 of the Service Tax Rules 1994. The service
recipient would need to pay tax (to the extent liability is affixed on him) by
5th/6th September 2012.
10.1.6 How is the service recipient required to calculate his tax
liability under partial reverse charge mechanism? How will the service
recipient know which abatement or valuation option has been exercised by the
service provider?
The service recipient would need to discharge liability only on
the payments made by him. Thus the assessable value would be calculated on such
payments done. (Free of Cost material supplied and out of pocket expenses
reimbursed or incurred on behalf of the service provider need to be included in
the assessable value in terms of Valuation Rules) The invoice raised by the
service provider would normally indicate the abatement taken or method of
valuation used for arriving at the taxable value. However since the liability
of the service provider and service recipient are different and independent of
each other, the service recipient can independently avail or forgo an abatement
or choose a valuation option depending upon the ease, data available and
economics.
10.1.7
Is the reverse charge applicable on services provided and complete before
1.7.2012 though payments were made after 1.7.2012?
For any service whose point of taxation has been determined and
whole liability affixed before 1.7.2012 the new provisions will not apply.
Merely because payments are being made after 1.7.2012 will not add any
additional liability on the service receiver in respect of such services.
Share |
Posts
0 comments :
Post a Comment