SERVICE TAX LIABILITY UNDER REVERSE CHARGE MECHANISM CA KR RAMANKUTTY FCA KOCHI

SERVICE TAX IN INDIA IT IS A TAX ON RENDERING OF SERVICE INTRODUCED IN 1994 BY CENTRAL GOVERNMENT EXTENDED TO 119 CATEGORIES OF SERVICES BY 2012 JUNE 30th 2012 WITNESSED A SEA CHANGE IN THE SCHEME OF LEVY THE NEGATIVE LIST BASED TAXATION OF SERVICE WAS INTRODUCED WITH EFFECT FROM AND THE SELECTIVE LIST OF TAXATION WAS ABLOSIHED TAXABLE SERVICE IS = TOTAL SERVICES (NEGATIVE LIST +EXEMPTIONS) SERVICE TAX LIABILITY IS TO BE DISCHARGED BY THE SERVICE PROVIDER. BUT SPECIFIED CASES SERVICE RECEIVER HAS TO DISCHARGE SERVICE TAX LIABILITY –THIS LIABILITY OF THE SERVICE RECEIVER IS KNOWN AS REVERSE CHARGE MECHANISM (RCM)

ORDER OF DISCUSSION THE NEGATIVE LIST BASED SYSTEM OF TAXATION CHANGE IN THE SYSTEM EFFECTIVE THE NEGATIVE LIST THE EXEMPTIONS TAX LIABILITY THE REVERSE CHARGE LIABILITY VARIOUS SERVICES COVERED DISCUSSION ON THE SERVICES THE PRECAUTIONS TO BE TAKEN TAX PAYMENTS VARIOUS ACCOUNTING CODES TAX PAYMENTS - EXCESS PAYMENT ADJUSTMENTS TAX DEFAULT CONSEQUENCES INTERESEST PENALTY TAX ARREAR PAYMENT WITHOUT PENALTY AND INTEREST BEFORE

TAXATION OF SERVICES CHANGE IN THE SYSTEM EFFECTIVE THE SYSTEM OF TAXATION IN FORCE UP TO THE SELECTIVE LIST OF TAXATION -119 CATEGORY THE NEGATIVE LIST BASED SYSTEM OF TAXATION –66D TAX ON SERVICE – SERVICE DEFINED – ACTIVITY RENDERED FOR A CONSIDERATION NO CONSIDERATION IN RETURN SIMPLE RECEIPT OF MONEY – Eg.DONATION FOR AN EVENT. SPONSORSHIP – CONSIDERATION IN RETURN – IS SERVICE TAX LIABILITY HOW ARISES ? TAX IS TO BE LEVIED ON ALL SERVICES PROVIDED IN TAXABLE TERRITORY OTHER THAN SERVICES SPECIFIED IN THE NEGATIVE LIST+ EXEMPTED SERVICES [Section 66B] TAXABLE TERRITORY MEANS INDIA (EXCLUDING J & K)

TAXABLE SERVICE TAXABLE TA TAXABLE SERVICE = ALL SERVICES – [NEGATIVE LIST +EXEMPTIONS] NEGATIVE LIST OF SERVICES

ABATEMENT In the case of services merged with value of material and value of material is pre dominant, percentages are fixed in the case of specified services (See Abatement Notification 26/2012 attached) for the value of materials, that can be deducted from the gross value.Technically called abatement. This abatement is subject to the condition of non availment of Cenvat credit. Liability for payment of service tax – on service provider - specified cases –> service receiver [PL refer to Notification 30/2012] No escape – if the service provider paid the full tax liability.This is due to the specific provisions in section 68(2) of the Finance Act 1994

TAX LIABILITY ON WHOM Notification 30/2012 prescribes the different categories of services where the receiver has full or partial liability. The tax is to be paid on the basis of invoice issued by the service provider. In the case of a service receiver the date of payment of service tax depends on the time of payment to the service provider. Eg.Bill paid in July, liability to be discharged in August in the case of Companies. In the case of service provider the time of raising of the invoice or the time of payment whichever happens earlier. Make payment on 6 th if its is e-payment. Description of the service rendered has to be mentioned under the particulars in the invoice. How the tax to be remitted and under what code.? Category in the invoice Need not to be given–> Circular no.165 – existing codes out of 119 services – 120 th code for not specified ( see the circular in the material )

SERVICE Service was not defined till Service is defined service as service. Any activity For consideration Carried out by a person for another And includes declared services Service does not include : an activity that constitutes only transfer in title of goods or immovable property by way of sale, gift etc. It also does not include a transfer, delivery or supply of goods which is a deemed sale. Transaction in money or actionable claim Service by employee to employer in the course of employment. Fees payable to a Tribunal or Court

CONTRACT EMPLOYMENT CASUAL WORKERS. ETC Contract employment falls within the meaning of Service. They are not services provided in the ordinary course of employment and therefore taxable Casual workers / contract labour paid on daily wages Services provided by the worker in the course of employment (and not taxable). Casual workers supplied by the contractor working under the control and supervision of the company -manpower supply (reverse charge liability). Casual workers employed by a contractor who deploys them for execution of a contract or for the provision of service to the client. – Contractors Liabilty. [ E-guide ]

THE NEGATIVE LIST AND EXEMPTIONS THE NEGATIVE LIST OF SERVICES In terms of section 66B of the Finance Act service tax will be leviable on all services provided in the taxable territory by a person to another person for a consideration other than the services specified in the Negative list. PL refer to the detailed list. EXEMPTIONS Taxable services can be exempted by Government by issuing emption Notifications. Accordingly Notification 25/2012 dated was issued exempting 39 services.PL refer to the detailed list in Notification 25.

REVERSE CHARGE OR JOINT CHARGE Service is liability --entire liability or part of the liability for payment of service tax is fixed on the service recipient by statute. [section 68(2) and Notification 30] If the entire tax of is paid by the service provider ? Receiver still liable. Take care while passing the bill. Service provider is not liable for service tax- the taxable service value being below 10 lakhs, the service receiver is not discharged of the liability on him by notification 30/2012. When does the liability falls on the service receiver ? Payment is the criterion..Discussion on some of the services ----

REVERSE CHARGE Goods Transport Agency - Receiver -100% Specified persons making payment to GTA- liability falls on the person who makes payment to GTA. Only GTA covered and not GTO – individual truck owners – Tempo etc Tax liability is on 25%of the value (Bill amount) Payments to tempo, truck owners who are not GTA are not covered under this category. Accounting for Freight in GL Sponsorship –Receiver -100% -- Accounting how Sponsorship to any Body Corporate /partnership in the taxable territory -- taxable at the hands of the sponsor. Donations are not covered.-What is sponsorship ? Not defined after Payment by Body Corporate and partnership only is covered. Donations / Financial Assistance not covered Cenvat credit available -

REVERSE CHARGE Renting of motor vehicle designed to carry passengers Engagement of taxi, hiring vehicles for transportation of employees are covered. Ambulance …?If no abatement is claimed in the Bill by the travel agency, liability of service receiver is 40%.....on abated value 100%. Supply of Manpower /Security services- 75% by receiver Manpower taxable from Supply of security services taxable only from It has been clarified by Govt. Services provided by Casual Labour is NOT liable to service tax.- How to distinguish Manpower from other supply of labour ? Service Rendered by Directors from –100% Non Executive Directors are covered. Managing Director and Executive Director who are salaried employees of the Company are not covered. Sitting fee paid and expenses incurred in attending the meeting like travelling expenses, hotel accommodation are to be included in the value of taxable services Import of service 100%----Expenditure in Foreign currency Service provider in non taxable territory(outside India) and recipient in India – liability is on receiver

REVERSE CHARGE WORKS CONTRACT Works contract -- a contract to execute a job which involves supply /usage of material and labour but are inseparable /indivisible. Ownership of the goods gets transferred in the execution of the contract. If there is no transfer of ownership in the execution of the contract, it is not taxable as works contract for service tax. In the case of works contract 50% of the tax liability is to be borne by the service receiver. How the services are valued for the purpose.? Rule 2 A of the the Service tax (Determination of Value) Rules 2006 prescribes the method of valuation of service part in works contract.

VALUE FOR WORKS CONTRACT REVERSE CHARGE LIABILITY IS ON 50 PERCENT OF THE TAX Method-1 Taxable service = Gross value – Value of goods on which VAT paid. Calculate tax on the above Method -2 Rule 2A value /abated value: Original construction : all types of new constructions, all types of additions, alterations to abandoned or damaged structures on land etc., erection commissioning or installation of plant, machinery or equipment or structures etc. 40% of gross value including material cost is taxable- apply the rate (12.36%) Receiver liability is 50% of the tax

WORKS CONTRACT Maintenance Repair etc ( movable property ) Contracts for maintenance or repair or reconditioning or restoration or servicing of any goods 70% of the gross amount is the taxable part %. –Receivers liability -50% Goods means – movable property. Eg. Computers – Air conditioners removable(other than centralised ) etc –AMCs of such movable goods covered under Reverse Charge. Maintenance repair Others ( Immovable property). Maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of immovable property. 60% of the gross 12.26% - Lift maintenance (Movable ?), Building white washing painting where material is also taken by the contractor is covered here. --- liability is 50% on receiver Contractor not in tax net (< 10LK) – receiver liable for 50% of tax ALL ABOVE PAYMENTS TO NON CORP ENTITY ONLY TAXABLE – IF WORK DONE BY A COMPANY –RECEIVER HAS NO LIABILITY

COMMON ERRORS 1. ST-3 Filling up common mistakes : Gross service charges to be entered. Deduct non taxable services and arrive at taxable value and do not enter only the value on which tax is paid. Non entry of such data in ST is usually taken as a deliberate attempt to avoid tax and tax for the past five year period is demanded. If there is liability as service provider and as a service receiver better use two challans for service tax payment – one for the amount payable as service provider and the other as a service receiver. For reverse charge liability Cenvat credit cannot be used. 2.Tax calculation working & reconciliation of the amount of taxable service with GL:Always keep working of tax calculation with reconciliation as to GL figures on monthly basis wherever possible, to answer the Dept.audit.

COMMON ERRORS Excess remittance of service Tax: Can adjust the excess in the subsequent months tax liability. Proper working must be kept and this should get reflected in the ST-3 Revision of ST-3 Permissible- IF mistakes are noticed subsequent to filing of the return- revised return can be filed within a period of 90 days. Tax not paid: Attracts interest and penalty. Always remit the tax arrear with interest. The finance Act 2013 has provided certain stringent penal provisions for tax default. Therefore utmost care to be exercised while determining the tax liability.

VCES 2013 SCHEME TAX ARREAR PAYMENT WITHOUT PENALTY AND INTEREST BEFORE – VCES 2013 SCHEME Tax remaining unpaid (by mistake) for the period to can be paid without interest and penalty if no show cause /no Departmental enquiry is pending as on If my mistake KFC omitted to make payment of service tax - - can opt for the Voluntary Compliance Encouragement Scheme 2013 and remit tax arrears without any penalty and interest. The scheme is open and option has to be exercised before More details refer to FAQ by CBEC recently released.

ANY QUESTIONS ? THANKS CA.KRRAMANKUTTY FCA, Kochi, Mob address your queries to cc to FC KFC