Highlights some difficulties & clarity to comply the reverse charge mechanism

Highlights some difficulties & clarity to comply the reverse charge mechanism
By: Vijay Chitte
Section 68(2) of Finance Act, 1994, the expansion of the reverse charge mechanism in the Notification No.30/2012-ST, As per the new amendment slowly the scope of RCM (Reverse Charge Mechanism) is enlarged by two new services vide Notification 45/2012ST dated 07-08-2012, there is no surprise, if such list will increase in every budget,. As we know that at no fault of service recipient, he would be under the obligation to comply the law.

This article is small attempt to highlights some difficulties and clarity to comply the reverse charge mechanism.

Now, keeping records under RCM would be a very big challenge. A lot of manual efforts would be required to compute the service tax liability under RCM . Basically, Assesssee has to determine his tax liability based on fiscal invoices, but in case of big companies the documents are voluminous, and one can't go voucher by voucher, generally assessee has to depends on books of accounts to calculate tax liability. As we seen other side, as per the departmental audit, they have conduct an audit depends on Balance sheet and books of accounts of the company . As per the prescribed audit manual of the department, they have require reconciliation of payment of service tax according to return filed by the assessee. Despite of full payment of tax by the assessee, If reconciliation does not match with books accounts/balance sheet, difference of service tax can be recover from the assessee on upfront calculation basis, which can be very difficult to prove for non taxable which is very harsh. For that, from beginning of the period, It will require basic precaution, while accounting of the invoices, If the invoice is wrongly accounted in some other head, there is a possibility of non-compliance of reverse charge mechanism.

Applicability of reverse charge:-
Provision of reverse charge (also termed to as "Tax shift") apply only when the service receiver is a business entity incorporated as a body located in the taxable territory, thus the provision of the reverse charge does not apply when service receiver is individual, proprietary firm, HUF, partnership firm or society, as they are not "Body corporate". Reverse charge also does not apply if the service receiver is not located in taxable territory. Even, service provided by Company, Body corporate society, Trust, Association of person, Body of Individual, to business entity, reverse charge also does not apply.

Further, service receiver should be a business entity. "Business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession - Section 65B(17) of Finance Act, 1994.

Thus, if service receiver is a charity organisation, Government or non-business entity, the provision of reverse charge is not applicable.

Prescribed following few services are to be analys

1) Service tax on Director :-
In terms of Notifications No. 45/2012-ST dated August 7, 2012, the service recipient is liable to pay 100% service tax under the reverse charge mechanism, in respect services provided or agreed to be provided by Directors. This Notification, unfortunately, does not clarify taxability on Managing and Whole-time Directors and Independent Directors. Managing and Whole-time Directors are employees of the company and are consequently governed by the exclusion clause contained in the definition of `service' contained in Section 65B(44)(b) and part-time/expert/independent directors, they are in the nature of providing their professional/expert services to the company. Hence there appear more probability of its chargeable to service tax.

It is conman practice that such type of expense has to be accounted on professional/consultancy service, while some other services i.e chartered accountant service, management consultancy service etc. has been also accounted in the same head which lead to difficulty while ascertain tax liability on director, It may be helpful if this type of expense would be accounted on separate head to ascertain tax liability & to avoid unnecessary finding of other vouchers.

2) Salary to partner not liable for service tax:-
Working partners are entitled to draw salary from the firm, On the basis of provision of Partnership Act. It is settled that, a partner is not employee of the firm. The issue is, whether such remuneration will be subject to service tax?

In Commissioner of Income tax, Madras, Vs. R M Chidambaram Pillai [1976 (11) - Supreme Court - TMI - 6493] It was held that, partner firm is not a legal person, though it has some attributes of personality. Salary paid to partner is only profit known by different name. In strict law, there cannot be contract of service between a firm and one of its partners, since contract of employment requires two distinct person viz. employer and employee. A man can not be his own employer.

Thus, salary to partner is only share of profit by different name. It is only a transaction in money and hence not covered under service tax provisions as mere transaction in money is not 'service' as per section 65B(44)(a)(ii) of Finance Act, 1994.

3) Execution of works contract :-
In terms of revised definition of woks contract, all contracts in which there is a joint supply of goods and services, whether for movable or immovable property, and whether relating to construction or repair/ maintenance are covered. Also, there's a distinction between "original" works contracts — namely, new constructions — and others. Now w.e.f. 01.07.2012 maintenance or repair service, reconditioning or restoration or servicing of any goods, glazing, plastering, floor, electrical fitting of an immovable property are covered. Now service receiver has to review the ledger of both revenue or capital expenditure in every month for transactions relating works contract, If contract is only for service contract (without material) say maintenance contract, electrical fitting contract, mere supply of labour or job work without material etc. It would not be covered under works contract service. Its need to be ensure to comply of reverse charge mechanism on classification prospective & to avoid wrong payment of service tax

As per the new definition of works contract, Now, photocopying/xeroxing has been held to be a works contract under reverse charged mechanism liable to tax, in this case both the elements material and services are involved, this amendment has to be informed to your Xerox vendor unfortunately they have covered under works contract service.

4) Goods Transport Agency service :-
a) Service receiver has to pay service tax on freight paid by the c/nor or c/nee on 25% of the freight amount subject to condition that service provider does not avail any cenvat credit. The person receiving the GTA service cannot know or prove whether the GTA has availed any cenvat credit or not as per condition lay down in Sr. No.7 notification 30/2012-ST. Unfortunately the impractical condition has been brought back again to get declaration from every GTA service provider.

b) As per rule 4B of Service tax Rules, A GTA is required to issue a consignment note, except when transport of goods by road is exempted, If goods transporter does not issue "consignment Note" he is not a Goods Transport Agency service at all as per definition of GTA section 65B(26), 1994 introduced w.e.f. 01.07.2012 and therefore, rule 4B does not apply to them. It needs to be take care to avoid wrong payment of service tax.

5) Manpower recruitment and supply agency service:-
In respect of services provided or agreed to be provided by way of manpower supply for any purpose, the service receiver is liable to pay service tax on 75% of the value as per Sr. no. 8 of Notification 30/2012-ST. As we seen many other contract service are also availed by the assessee, but some contract does not amount to manpower supply service i.e cleaning contract, loading / unloading, contract for any execution of job, if hired employee directly without any intermediary etc. which does not qualify as a manpower service. There will be some cases where, there will be a dispute between the service provider and the service receiver, in terms of classification of a service as a, manpower supply services, let's say. In this case, it is possible that, the service provider would charge 100% service tax, while the service receiver could also pay up service tax on 75% of the value, being his part of the liability.

6) Rent a cab service :-
Business entity has to pay 100% service tax on gross amount charged by rent a cab service, if service provider not availing any cenvat credit, in this case service provide do not charge any service tax, If service provider has to avail cenvat credit, service provider has to charge 60% service tax on gross amount and reaming 40% of service tax has to be paid by service receiver, However, service receiver is always liable to pay service service tax on 40% of the value. Before making any payment of service tax to be verify the contract of the service, if contract for rent and control and possession of vehicle is handed over the service recipient, then there is a transfer of right to use goods which is deemed sale, therefore sales tax / Vat will be applicable. its need to be ensure to avoid double taxation.

7) Legal consultancy service:-
service receiver has to pay 100% service tax on service is availed form any advocate/firm to any body corporate by individual, proprietary firm, HUF, partnership firm or society. Most of the legal charges say 'Govt./ statutory fees, legal expense, legal consultancy service etc. has been accounted in one common head lik "Legal fees/charges", which lead to confusion while ascertain the tax liability on which assessee has to pay service tax on reverse charge mechanism. It is advisable to make separate account head for legal consultancy service (on which liable for service tax) and other statutory legal fees (not in nature of service) in separate accounting head, so one can easily identify the nature of expense would be liable to tax or not. It is also advisable to make narration more appropriate while accounting of the invoice to get upfront clarification, whether it is consultancy or any statutory fees.

8) Place of provision of service :-
The Export of service and Import of service have been rescinded w.e.f 01.07.2012 by implementation of Place of provision of service vide Notification No. 28/2012-ST dated 20.06.2012. If the recipient of service has it's offices / branches spread across India, he has to be more cautions in complying the law. He has to educate his office / branches to comply with law of reverse charge. In such cases it it suggested to get centralized registration to discharge such service tax liability on reverse charge mechanism.

9) Service tax on security service:-
Now the Security Agency has to pay 25% and service recipient has to pay 75% in terms of Notification 45/2012-ST, dated 07-08-2012, Meaning of security service "security services" means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity;".

I do hope so, as this kind of an issue is sure to come up, under RCM. some other issue will be arise like, now recipient of service being a body corporate has to track of the identity of service provider to know whether he is an individual, firm,or LLP in order to apply the reverse charge, it may be happen, that the assesssee come under the mandatory audit by the department due to his PLA account will be increase to the effect of new reverse charge mechanism, classification disputes will be arise it may be happen that the service provider may be opinion that his service may not fall under the service as notified and accordingly charge full service tax, where as recipient of service of the opinion that if falls under reverse charge hence he wants to pay service tax under reverse charge. So, Both of them want to play safe in order to comply the law rather than facing the wrath of department. taxmanagementindia.com

Conclusion:-

The transition to the negative list scheme would be another challenge. For contracts on both sides w.e.f. July 1, 2012, there could be issues ranging from taxability to classification, valuation, rate of tax, Cenvat credit, point of tax, place of supply, Accounting and compliance. An analysis of the `tax clauses' in contracts would be vital here. Also, a carefully planned transition strategy would be necessary to guard against wrong payment of tax, penalty exposures & also fruitless efforts of refund procedure.