REVERSE CHARGE MECHANISM

1. REVERSE CHARGE MECHANISM Notification no. 30/2012-ST dated 20th June 2012 as amended by notification no. 45/2012-ST dated 7th August 2012

2. List of services covered under reverse charge mechanism • Sponsorship Services • Services of insurance Agent • Services of Arbitral Tribunal • Legal services of Individual Advocates and Firm of Advocates • Services of Director to the said company • Support services provided by Government • Services provided by a person located in non-Taxable territory • Supply of Manpower Service • Security Services • Transport of Goods by Road Service • Rent a Cab Service • Works contract Service

3. Sponsorship Services • Conditions • Service Provider – Any Person • Service Receiver – Body Corporate or Partnership Firm located in Taxable territory • Amount of Service Tax payable by: • Service provider – NIL • Service Receiver – 100%

4. Example for Sponsorship Service

5. 2. Services of Insurance Agent • Conditions • Service Provider – Insurance Agent • Service Receiver – Person carrying insurance business • Amount of Service Tax payable by: • Service Provider – NIL • Service Receiver – 100%

6. Example : Services provided by insurance Agent

7. 3. Services provided by Arbitral tribunal • Conditions • Service Provider – Arbitral Tribunal • Service Receiver – Any Person • Amount of Service Tax payable by: • Service provider – NIL • Service Receiver – 100%

8. Example: Service provided by Arbitral Tribunal

9. 4. Legal Services provided by advocates • Conditions • Service Provider – Individual Advocate or Firm of Advocates • Service Receiver – Business Entity • Amount of Service Tax payable by: • Service provider – NIL • Service Receiver – 100%

10. Example: Legal services provided by advocates

11. Note: • As per mega exemption notification legal services provided by individual advocate or firm of advocates shall not be liable to tax, if the same is provided to: • An advocate or firm of advocates or • Person other than business entity or • Business entity with a turnover up to Rs. 10,00,000 in the preceding financial year • Accordingly reverse charge mechanism shall not be applicable on these transactions.

12. 5. Services provided by the director of a company to the company • Amount of Service Tax payable by: • Service provider – NIL • Service Receiver – 100% • Note:- • The services provided by employee to its employer in the course of employment are specifically excluded from the definition of service. Therefore service provided by director under the capacity of an employee is not covered under reverse charge mechanism. • In brief remuneration payable to Managing directors, whole time directors and executive directors are not taxable under service tax and the services provided by part-time/ Expert/ Independent/ Nominee directors are liable to service tax and reverse charge mechanism is applicable on the same.

13. Example:

14. 6. Support Services provided by Government • Conditions • Service Provider – Government or Local Authority • Service Receiver – Business Entity • Nature of Service – Support Services, Excluding: • Renting of Immovable property services, • services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services • services in relation to an aircraft or a vessel • transport of goods or passengers.

15. Definition of Support Services: • “support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis. • Amount of Service Tax payable by: • Service Provider – Nil • Service Receiver – 100%

16. Example: Support services provided by Government

17. 7. Services provided by person located in Non-Taxable territory • Conditions • Service Provider – Person located in non-Taxable territory • Service Receiver – Any Person located in Taxable territory • Taxable territory means whole of India except Jammu and Kashmir (Section 65B(52) read with section 64 of Finance Act, 1994) • Amount of Service Tax payable by: • Service Provider – Nil • Service Receiver – 100% of service Tax

18. Note: • As per Mega exemption notification the following transactions are exempt from service tax: • Services provided by person located in non-taxable territory to- • Government, local authorities or an individual in relation to any purpose other than commerce, industry or any other business or profession • An entity registered under 12AA for the purpose of providing charitable activities or • Any person located in non-taxable territory • Accordingly reverse charge mechanism shall not applicable in these transactions.

19. Example: Service provided by person situated in non-Taxable territory

20. 8. Supply of Manpower Service • Conditions: • Service Provider – Individual, HUF, Partnership firm or AOP located in Taxable territory • Service Receiver – Business entity registered as body corporate • Amount of Service Tax payable by: • Service Provider – 25% • Service Receiver – 75% of service Tax • Definition of Supply of manpower • Supply of manpower means supply of manpower to another person to work under his superintendence orcontrol (Rule 2(g) of service tax rules, 1994)

21. Note: To constitute a transaction as supply of manpower following conditions shall be satisfied: • Individual should be employed by the provider of service and not by the recipient of service, • the manpower shall be operationally placed under the superintendence or control of the recipient Further the implication of supply of manpower service in certain specified transactions is clarified by CBEC in draft circular issued by it, which are as under: • If any staff belonging to an organization is placed at subsidiary or associate company, it will be covered under the definition of Man-power supply, • The cases of staff being employed by one or more employers (joint employment) sharing the employment cost are excluded from the definition of service.

22. Example: Supply of Man-Power Service

23. Example: Case 1: Mr. A receives a contract to construct a Commercial building. As per the terms of the agreement Mr. A employs 10 persons for the execution of the contract. Further the consideration for the manpower Rs. 200 per day, which is in addition to other charges for construction. The persons employed at construction work are working under the superintendence and control of Mr. A. Whether this transaction is covered under manpower supply service? Answer: Since both superintendence and control over the 10 persons employed lies with Mr. A and the same does not transferred to the service receiver, therefore the transaction covered in the instant case shall not amount to supply of manpower. Accordingly reverse charge mechanism shall not applicable on the same.

24. 9. Security Services Conditions: • Service Provider – Individual, HUF, Partnership firm or AOP located in Taxable territory • Service Receiver – Business entity registered as body corporate Amount of Service Tax payable by: • Service Provider – 25% • Service Receiver – 75% of service Tax

25. Example- Security Service

26. 10. Transport of Goods By Road Service Conditions • Person liable to pay freight is any one of the following: • Any factory • Any Society • Any Co-operative Society • Any Registered Dealer of Excisable Goods • Any Body Corporate • Partnership Firm • A.O.P. • Person liable to pay service tax is the person paying freight to Goods transport Agency • In other cases reverse charge mechanism shall not applicable and service tax is to be paid by goods transport agency only.

27. Example : Transportation of Goods by Road Service

28. 11. Rent a Cab Service Description of service Services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers. Conditions: • Service Provider – Individual, HUF, Partnership firm or AOP located in Taxable territory • Service Receiver – Business entity registered as body corporate Note- As per notification 26/2012 abetment of 60% of the value service is allowed on Rent a Cab service subject to the condition that service provider shall not claim CENVAT credit on inputs, input services and capital goods.

29. Person liable to pay service tax shall be as under 1. Service provider is claiming abetment under notification 26/2012-ST • Service tax is required to be paid on 40% of the value of service • Person liable to pay service tax are • Service provider – NIL • Service receiver – 100% 2. Service provider is not claiming abetment under notification 28/2012-ST • Service tax is payable on 100% of value of service • Person liable to pay tax are • Service provider – 60% • Service Receiver -40%

30. Example for Taxi /Travels Vehicle Hire (Where abatement is availed)

31. Example for Taxi /Travels Vehicle Hire (Where abatement is not availed)

32. 12. Works contract Service Definition "works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property; Valuation For valuation purpose works contract is divided in 3 parts: • Original Works • Contract for Maintenance or repairs or reconditioning and • Other works contract

33. Original Works Meaning • All New Constructions, • Additions and alterations to damaged structures to make them workable and • Erection, commissioning or installation of plant, machinery, equipments or structures Valuation • 40% of the total amount charged (excluding MVAT amount) B. Works contract for maintenance, repairs, reconditioning, restoration or servicing of any goods Valuation • 70% of total amount charged (excluding MVAT amount)

34. C. Other Works including completion and finishing services Valuation 60% of total amount charged (excluding MVAT amount) Conditions for applicability of reverse charge mechanism • Service Provider – Individual, HUF, Partnership Firm or AOP located in taxable territory • Service receiver – Business entity registered as body corporate Amount of service tax payable by • Service provider- 50% • Service Receiver 50%

35. Example for Original Works Contract

36. Example for Other Works – Completion and finishing activity

37. Example for Other Works –Servicing of activity and goods

38. Point of Taxation in case of Reverse charge Mechanism The point of taxation in case of Reverse charge mechanism shall be governed by Rule 7 of Point of Taxation Rules, 2011. As per Rule 7 of POT rules the point of taxation in case of reverse charge mechanism shall be the date on which payment is made by the service receiver to the service provider. Therefore liability to pay service charge is the month in which payment to service provider is made. However if payment to the service provider is not made within six months from the date of invoice than point of taxation shall be determined as per general rules of Point of Taxation rules, 2011.

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