REVERSE CHARGE MECHANIS M

1. REVERSE CHARGE MECHANISM WIRC - Sub Regional Conference Vadodara CA Sagar Shah 22 June 2013

2. WHAT IS MEAN BY ‘REVERSE CHARGE MECHANISM’Background Indian Taxation System • Direct Tax: Where the assessee has to pay the tax directly from his pocket. Exp.: Income Tax, Wealth Tax etc. • Indirect Tax: In Indirect Tax tough the liability to pay the tax is still on asessee however he has to collect it from customer and has to pay.Exp: Service Tax, Excise, VAT etc. • Now Service Tax being from family of Indirect tax has to be charged by service provider and after recovering the same from service receiver it has to be deposited with government exchequer. • However, in certain circumstances the obligation to pay the service tax to government exchequer is directly casted on service receiver, this is known as ‘Reverse Charge Mechanism’. Direct Tax Indirect Tax

3. WHAT IS MEAN BY ‘REVERSE CHARGE MECHANISM’Relevant Section & Notifications • Source of RCM: • The erstwhile Section 66A was replaced by Section 68(2) for casting the liability to pay service tax on the receiver. The scope of reverse charge was extended w.e.f. 1 July 2012 • A new concept of partial reverse charge mechanism was introduced. • Notification No. 30/2012-ST dated 20 June 2012 provides the percentage of liability of the service receiver and the service provider in case of specified services. • The above provisions are applicable from 01 July 2012. • Services availed and invoiced after 1 July 2012 are only applicable. • Types of RCM: • Services on which 100% liability to pay tax is on service receiver (RCM) • Services on which liability to pay tax is shared between service provider and service receiver (Partial RCM)

4. REVERSE CHARGE MECHANISM Client name - Event - Presentation title

5. REVERSE CHARGE MECHANISMConcept • The reverse charge mechanism means a mechanism where the 'Service recipient’ is liable to pay service tax instead of 'Service provider’. • In this reverse charge mechanism provided under service tax law, the 'Service recipient’ is liable to pay whole of service tax. • The notification deals with what are the services on which reverse charge mechanism is applicable and the proportion in which the 'Service recipient’ of services is liable to pay the service tax.

6. REVERSE CHARGE MECHANISMList of Services

7. REVERSE CHARGE MECHANISMList of Services

8. REVERSE CHARGE MECHANISMList of Services

9. REVERSE CHARGE MECHANISMList of Services

10. GOODS TRANSPORT AGENCY SERVICESExplanation • Definition: Clause (26) of Section 65 (B) of Finance Act, 1944 explain ‘Goods Transport Agency’ as “any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called” • Therefore, as per above definition if person is not issuing ‘Consignment Note’ then he is not ‘Goods Transport Agency’ and in that scenario he has to collect service tax and has to pay it to government and RCM will not be applicable in such cases. • Exp.: ABC Ltd. supplying steel and is also charging transport amount in the bills separately, in this case service receiver is not liable to pay service tax.

11. GOODS TRANSPORT AGENCY SERVICESOther relevant provisions • Other Exemptions: (Refer point no. 21 of Notification No. 25/2012-ST) • Transportation of agricultural produce. • No Service Tax is to be paid when Gross Amount charged on all consignments transported in a goods carriage does not exceed Rs. 1500/-. • No Service Tax is to be paid when Gross Amount charged on individual consignment transported in a goods carriage does not exceed Rs. 750/-. • Transportation of foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oils except alcoholic beverages • Other goods like chemicals, fertilizer, oilcakes, relief material for victims of disaster and lastly defense or military equipments. • Abatement: (Refer point no. 7of Notification No. 26/2012-ST) • Taxable value of Goods Transport Agency Service shall be exempt in excess of 25%. In other words, abatement of 75% is available.

12. GOODS TRANSPORT AGENCY SERVICESPractical Issues • Mr. Abdulla Omar a proprietor in J&K appointed M/s. Swift Transporters, Delhi for transporting spices from Baroda to Jammu. The freight is payable by Mr. Abdulla Omar, please guide M/s. Swift Transporters as to who is liable to pay service tax? Does it make a difference if the Abdulla Omar is a partnership? Defn of agriculture produce (65B); PPSR – Rule 10; notif 30/2012. • M/s. Cargo Handling Agent has charged certain amount for services provided. He has also included cost of transportation in the said charge and has collected service tax on whole amount. However transporter has issued consignment note in name of importer. In this case whether the importer is liable to pay service tax again on the said amount of transport charges?

13. LEGAL SERVICESExemption and Practical Issues • Exemptions: • Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the following: • An advocate or partnership firm of advocates providing legal services. • any person other than a business entity. • a business entity with a turnover up to rupees ten lakh in the preceding financial year. • However, in respect of services provided to business entities, with a turnover exceeding rupees ten lakh in the preceding financial year, tax is required to be paid on reverse charge by the business entities. • Practical Issues: • Advocate is full time working with the company and a fixed monthly amount is paid to him. Whether reverse charge mechanism is applicable.(TDS is deducted under 194J) • Advocate services availed by individuals for business use and personal use??

14. PLACE OF PROVISION OF SERVICE RULESIn Nutshell

15. IMPORT OF SERVICESPractical Issues – Double taxation

16. Partial - Reverse Charge Mechanism Client name - Event - Presentation title

17. PARTIAL REVERSE CHARGE MECHANISMConcept • Joint charge mechanism means a mechanism where the 'Service recipient’ is also made liable to pay service tax on a specified percentage of the service along with the ‘Service provider’ instead of the 'Service provider’ being liable for the entire liability payment. • The Notification 30/2012-ST Dated 20 June 2012, specifies the services on which joint charge mechanism is applicable and the proportion in which the 'Service recipient’ of services is liable to pay the service tax. • Joint charge mechanism is applicable when service provided by a non-corporate service providerto a corporate business entity.

18. PARTIAL REVERSE CHARGE MECHANISMPoints to be Remembered • CENVAT Credit: • Cenvat credit of the tax paid can be availed on the part of service tax paid even by the service recipient. (If other rules are satisfied) • However, liability under Reverse Charge cannot be paid through CENVAT • Valuation: • Service recipient can opt for separate method of valuation than service provider. • Liability: • Service recipient has to pay his liability in all circumstances, without concern to Service provider is SSI, Service provider has charged total service tax etc.

19. PARTIAL - REVERSE CHARGE MECHANISMList of Services

20. PARTIAL - REVERSE CHARGE MECHANISMList of Services

21. RENT-A-CAB SERVICEIn Nutshell Renting of Motor Vehicle If abatement not claimed If abatement of 60% claimed S.P. is not liable to pay any tax S.R. is liable to pay @ 4.944% S.P. is not liable to pay @ 7.416% S.R. is liable to pay @ 4.944%

22. WORKS CONTRACT SERVICEIn Nutshell

23. REVERSE CHARGE MECHANISMAccounting Treatment • Case 1: Partial Reverse Charge • DebitCredit • Expense A/c Dr. 100.00 - • Service Tax Input Credit A/c Dr. 7.42 - • Service Tax Deferred Input A/c Dr. 4.94 - • To Vendor A/c - 105.42 • To TDS Payable A/c - 2.00 • To Service Tax Payable A/c - Reverse Charge - 4.94 • 112.36 112.36 • Case 2: Full Reverse Charge • Expense A/c Dr. 100.00 - • Service Tax Deferred Input A/c Dr. 12.36 - • To Vendor A/c - 97.75 • To TDS Payable A/c - 2.25 • To Service Tax Payable A/c - Reverse Charge - 12.36 • 112.36 112.36

24. REVERSE CHARGE MECHANISMPractical Issues • Reimbursement to employees towards rent-a-cab, whether service tax is payable by such employees or by company? • M/s Raj Hotels Ltd is engaged in providing services of accommodation to various guests in the hotel owned by them. Many guests requests for car for visiting various places. M/s Raj Hotels Ltd hires the cars from Mr Taxiwala who is the proprietor and provide the car on hire basis to guest Mr.Traveller. Mr.Taxiwala is paid Rs.1000/- whereas an amount of Rs.1200/- is recovered by M/s Raj Hotels Ltd from Mr Traveller. Now who is liable to pay service tax on amount paid by M/s. Raj Hotels Ltd to Mr Taxiwala?

25. REVERSE CHARGE MECHANISMPractical Issues • M/s ABC Ltd. has employed house-keeping agency M/s TIP-TOP (Proprietor) for cleaning office premise. As per the terms of contract, M/s TIP-TOP is required to clean all furniture and office premises daily. During discussion between M/s ABC Ltd. and M/s TIP-TOPit was agreed that 7 persons will be deployed for carrying out the above job. Each of the person would be paid Rs.10,000/- per month. Thus the total consideration for carrying out the above work is Rs.70,000/- per month. Further it is also decided that, Mr Y will supervise the work of M/S TIP-TOP. M/s ABC Ltd has approached you for advise whether service tax is payable under reverse charge by them and if yes under which category?

26. REVERSE CHARGE MECHANISMPractical Issues • During the year BolBachchan Corporation Limited (“BBCL”) have made following payments to Adv. BolBachchan who is a director: • Rs. 25,00,000 as professional fees. • Rs. 50,00,000 as commission fees towards various revenue received to BBCL as a result of brand endorsement. • Rs. 5,00,000 as sitting fees • Rs. 1.5 cr towards remuneration • Does it make a difference if he is a non-executive director?

27. REVERSE CHARGE MECHANISMPractical Issues • G & P as a part of its advertisement project have started a Door to Door advertisement of its new product. The cost of the manpower required for the door to door advertisement will be incurred by the dealer which will be reimbursed by the G & P on submission of claims by the respective dealer • One such dealer M/s. Rocket Singh & Sons (a partnership firm) has approached to understand the impact of service tax on the above activity. He seeks answer to following questions: • Will the above activity of reimbursement be liable to service tax? • M/s. Rocket Singh & Sons is further interested to know whether the said activity will attract service tax under reverse charges. (i.e. whether taxable under Business Support Services or Supply of Manpower Services)?

28. REVERSE CHARGE MECHANISMPractical Issues • New Construction Company Pvt Ltd (NCCPL) has awarded plastering work to one of its contractor M/s Hamal & Co. which is a partnership firm(contractor). The contractor has submitted the following invoice: • In respect of above invoice NCCPL has following queries: • NCCPL is aware that the rate of service tax charged by the contractor is incorrect. NCCPL wants to confirm whether discharging the balance service tax of Rs. 24,720/- will be enough compliance of Service Tax. … Cotd..

29. REVERSE CHARGE MECHANISMPractical Issues • CanNCCPL opt for different taxable value to discharge the service tax under reverse charge method i.e.at the rate of 60% and not 40% as charged by the contractor. • NCCPL is further willing to obtain two separate invoices in order to avoid the service tax under reverse charge mechanism, is it justified in doing so?

30. Questions??? Client name - Event - Presentation title

31. THANK YOUPHONE 020 26225500www.bdo.inPUNEMUMBAIDELHIAURANGABAD Client name - Event - Presentation title