The Central Government has expanded the scope of payment of service tax under reverse charge mechanism under the negative list based service taxation. The relevant provisions are contained in Notification No. 30/2012 dated 20.06.2012 read with Notification No. 45/2012 dated 07.08.2012. The gist of the same is provided in this communique. It would be applicable in respect of the following services. Complete Reverse Charge: 1. Transportation of goods by road 2. Sponsorship services 3. Services received from an arbitral tribunal 4. Legal services 5. Support services received from the Government or Local Authority 6. Services received from Directors of a Company 7. Service received from persons located outside India or in the State of Jammu and Kashmir Partial Reverse Charge / Joint Charge: 1. Works contract services 2. Renting or hiring of motor vehicles 3. Manpower supply services or Security services Transport of goods by road Service tax would need to be paid by recipient of services @ 25% of the gross amount billed by the transporter - effective rate at 3.09% (25% of 12.36%) The mechanism as applicable prior to 30.06.2012 would be applicable. Would be applicable only if the recipient of services is any of the following: - Factory registered under the Factories Act, 1948 - Society registered under the Societies Registration Act, 1860 - Co-operative Society established under any law 1 P a g e
- Dealer of excisable goods who is registered under Central Excise Act, 1944 - Any body corporate established under any law - Any partnership firm whether registered or not including Association of Persons Sponsorship services Services received from arbitral tribunal Service tax will be payable by Recipient on full amount Effective rate @ 12.36% Sponsorship service, Services received from arbitral tribunal, Services received from an Individual Advocate or firm of advocates and Services from Government or local authority by way of support service - Effective July 01, 2012 Legal services - services received from an Individual Advocate or firm of advocates Services received from Government or local authority by way of support service Service received from Director of Company Service received from Director of Company - Effective August 07, 2012 In respect of support services received from Government or Local Authority, reverse charge would not be applicable in respect of the following: (i) renting of immovable property (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport (iii) transport of goods or passengers 2 P a g e
Works Contract Services 50% of the service tax applicable shall be payable by the provider and 50% by the recipient of services. Effective rate would depend upon the nature of works contract and the method of valuation adopted. Would be applicable only when the service receiver is a business entity registered as a body corporate and the service provider is one of the following: - an individual, - HUF, - proprietary firm, - partnership firm, - association of persons Notes: 1. The expression works contracts 1 would mean 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 movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property. 2. The recipient of services has the option of choosing the valuation method as per his choice, independent of the valuation method adopted by the provider of services. 3. The computation mechanism adopted by the service provider and the proportion of service tax charged in the invoice would determine the computation to be adopted by the recipient of services. The same is detailed in Annexure 1 to this communique. 1 Section 65B(54) of the Service Tax provisions 3 P a g e
Renting or hiring of any motor vehicle designed to carry passengers Option 1: If the service provider charges service tax only on 40% of the total invoice value (viz., abated Value) Recipient would be liable to pay the total service tax directly to the Government. The service provider would have charged service tax at the effective rate of 4.944% Would be applicable only when the service receiver is a business entity registered as a body corporate and the service provider is one of the following: - an individual, - HUF, - proprietary firm, - partnership firm, - association of persons Option 2: If the service provider charges service tax on 100% of the total invoice value (viz., abated Value) Recipient would be liable to pay 40% of the total service tax directly to the Government. The provider would be liable to pay the balance of 60% of the service tax. The service provider would have charged 12.36% - Out of this, 40% should be paid by recipient directly to the Government and 60% would be payable by the service provider. Note: The service provider may also charge in the invoice only 60% of the total service tax (only to the extent the provider is liable to pay) applicable on the transaction. In such circumstances, recipient would have to determine the 40% liability and pay the same directly to the Government. The computation mechanism adopted by the service provider and the proportion of service tax charged in the invoice would determine the computation to be adopted by the recipient of services. The same is detailed in Annexure 2 to this communique. 4 P a g e
Supply of manpower or Security services Service received from persons located outside India or in Jammu and Kashmir 25% of the service tax applicable shall be payable by the provider and 75% by the recipient of services. Effective dates: Supply of manpower July 01, 2012 Security services August 7, 2012 Recipient shall be liable to pay service tax @ 12.36% directly to the Government 12.36% Of which 9.27% would be payable by the recipient @ 12.36%(or any other applicable rate based on the nature of service) Would be applicable only when the service receiver is a business entity registered as a body corporate and the service provider is one of the following: - an individual, - HUF, - proprietary firm, - partnership firm, - association of persons Accordingly, the computation mechanism adopted by the service provider and the proportion of service tax charged in the invoice would determine the computation to be adopted by recipient of services. The same is detailed in Annexure 3 to this communique. Insofar as it relates to services received from persons located outside India, this was applicable even under the erstwhile service tax provision i.e. before the introduction of taxation based on negative list of services and the mechanism remains the same. Typically, all payments in foreign exchange made to persons located outside India would need to be reviewed for implications under these provisions. The expansion of scope is with respect to services received from providers located in the State of Jammu & Kashmir which will be liable to service tax under reverse charge with effect from 01.07.2012. 5 P a g e
Annexure 1 WORKS CONTRACT SERVICES Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Method of computation Partial Partial Partial Regular Regular Regular Exemption Exemption Exemption Statute reference other works contract Rule 2A (ii)- C Rule 2A (ii)- C Rule 2A (ii)- C Rule 2A (i) Rule 2A (i) Rule 2A (i) Remarks computation of service tax Deemed Deemed Deemed To be To be To be deduction of deduction of deduction of computed as computedas computed as 40% of the total 40% of the total 40% of the total prescribed prescribed prescribed contract value contract value contract value Total Contract price 100,000 100,000 100,000 100,000 100,000 100,000 Taxable value 60,000 60,000 60,000 65,000 65,000 65,000 Add: Service Tax (effective rate on total contract value) 7.42% 7.42% 7.42% 8.03% 8.03% 8.03% Service Tax amount Where the service provider has charged full service tax 7,416 8,034 8,034 Where the service provider has charged only portion of 3,708 4,017 tax that is payable by him Where the service provider has not charged service tax - Total Invoice Value (of the service provider) 107,416 103,708 100,000 108,034 108,034 104,017 Service Tax payable By Service Provider (50%) 3,708 3,708-4,017 4,017 4,017 By Recipient of Services (50%) Where the recipient has opted for the same 3,708 3,708 3,708 4,017 method of valuation as adopted by the provider Where the recipient has opted for a different method of valuation 3,708 3,708 Amount payable by recipient to the service provider Total invoice value 107,416 103,708 100,000 108,034 108,034 104,017 Less: TDS - Income Tax (assumed at 2% for the limited 2,148 2,074 2,000 2,161 2,161 2,080 purposes of this illustration) Service Tax payable by recipient but charged in invoice 3,708 - - 4,017 4,017 - Net payment 101,560 101,634 98,000 101,856 101,856 101,937 6 P a g e
Annexure 2 RENTING OR HIRING OF MOTOR VEHICLES Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4 Method of computation Abated Value Regular Regular Regular Statute reference Sl. No. 9 of Notification 26/2012 Remarks Deduction @ 60% of the None None None total invoice value Total value of invoice of service provider 10,000 10,000 10,000 10,000 Taxable value 4,000 10,000 10,000 10,000 Add: Service Tax (effective rate on total invoice value) 4.94% 12.36% 12.36% 12.36% Service Tax amount Where the service provider has charged full service tax 494 1,236 Where the service provider has charged only portion of 742 tax that is payable by him Where the service provider has not charged service tax Total Invoice Value (of the service provider) 10,494 11,236 10,742 10,000 Service Tax payable By Service Provider 742 742 By Recipient of Services 494 494 494 494 Amount payable by recipient to the service provider Total invoice value 10,494 11,236 10,742 10,000 Less: TDS - Income Tax (assumed at 2% for the limited 210 225 215 200 purposes of this illustration) Service Tax payable by recipient but charged in 494 494 invoice Net payment 9,790 10,517 10,527 9,800 7 P a g e
Annexure 3 MANPOWER SUPPLY SERVICES Particulars Scenario 1 Scenario 2 Scenario 3 Method of computation Regular Regular Regular Total value of invoice of service provider 100,000 100,000 100,000 Taxable value 100,000 100,000 10,000 Add: Service Tax on total invoice value 12.36% 12.36% 12.36% Service Tax amount Where the service provider has charged full service tax 12,360 Where the service provider has charged only portion of tax that is payable by him 3,090 Where the service provider has not charged service tax Total Invoice Value (of the service provider) 112,360 103,090 100,000 Service Tax payable By Service Provider (25%) 3,090 3,090 By Recipient of Services (75%) 9,270 9,270 9,270 Amount payable by recipient to the service provider Total invoice value 112,360 103,090 100,000 Less: TDS - Income Tax (assumed at 2% for the limited purposes of this illustration) 2,247 2,062 2,000 Service Tax payable by recipient but charged in invoice 9,270 Net payment 100,843 101,028 98,000 CONSULTING PRIVATE LIMITED +91 (80) 2226 1371 www.accretiveglobal.com specialists@accretiveglobal.com The views expressed and the information provided in this newsletter are of general nature and is not intended to address the circumstances of any particular individual or entity. Further the above content should neither be regarded as comprehensive nor sufficient for making decisions. Although we endeavour to provide accurate and timely information, there is no assurance August or guarantee 17, 2012 in this regard. No one should act on the information or views provided in this publication without appropriate professional advise. It should be noted that no assurance is given for any 8 loss P a garising e from any actions taken or to be taken or not taken by anyone based on this publication. Should you have any feedback or require any clarifications, please do write to specialists@accretiveglobal.com. This is meant for private circulation only.