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08 August, 2012 Ahmedabad :

The principles of taxation are usually governed by logic and when a taxation system defies logic such a provision is considered a bad piece of legislation. Indirect tax system has derived its name for its concept where the person liable to pay the tax has the option to collect such tax from another person. In Service tax provisions such a liability is conjoined on the service provider with the law permitting the provider of service to recover the tax from the service receiver. A departure from this system of taxation, which is not in consonance with the fundamental principles of indirect taxation, can be found in the service tax provisions where the law requires the service receiver to pay the tax as a person liable to pay tax. This concept is known in common parlance as “reverse charge mechanism”. Although the Service Tax provisions have seen many changes during the two decades after its introduction in the year 1994, the fundamental principles to levy tax only on those services which are defined in the provisions have more or less remained unchanged. But from 01.07.2012, after introduction of the Negative List in the service tax provisions, the new concept of the taxing statue is it to tax all services which confirm to the definition of “service” but do not find mention in the Negative List or does not enjoy exemption under a Notification. Along with this change the Government has also succeeded in silently pushing through a new legislation of taxation whereby the existing system of “reverse charge mechanism” has been expanded to include “partial reverse charge mechanism” also. In this new system in respect of specified services provided by a certain category of service providers the liability of payment of service tax shall be partially shared between the service provider and the service recipient.

The Notification No. 30/2012 dated 20.06.2012 specifies the services provided by certain category of service providers where part of the service tax has to be shared between the service receiver and provider. The new concept of ‘partial reverse charge’ is applicable in respect of the services of (1) renting of a motor vehicle designed to carry passengers, (2) supply of manpower (3) service portion in execution of a works contract, provided by an individual, Hindu undivided family (HUF), partnership firm whether or not registered and association of persons to a business entity registered as a body corporate located in the taxable territory.

As has been the case of any new taxing concept, the introduction of partial reverse charge mechanism has brought along with an host of issues, some of which have been clarified and some ignored ostensibly with a view to create a breeding ground for litigations. The governing body for Central Excise, Customs and Service Tax (CBEC) has issued clarification in the Education Guide that in “partial reverse charge” method the service provider shall issue an invoice indicating the name, address and the registration number of the service provider; the name and address of the person receiving taxable service; the description and value of taxable service provided or agreed to be provided; and the service tax payable thereon inclusive of service tax payable by the service provider.

The Education Guide has also clarified that since the liability of the service provider and service recipient are different and independent of each other, in case the service provider is availing exemption available to Small Service Provider under Notification No. 33/2012-ST dated 20.06.2012 owing to his turnover being less than Rs 10 lakhs, the service recipient shall be obliged to pay his share of service tax under the partial reverse charge mechanism. Although this clarification lacks legal sanctity being contrary to the provisions of the Notification No. 33/2012-ST dated 20.06.2012, there is no doubt that unless the Small Service Provider exemption is not extended to the Service Receivers as well, the partial reverse charge mechanism will lead to several administrative issues in implementation and enforcement. This provision in its present form has the potential to increase the tax base several folds leading to breakdown of the tax enforcement machinery presently in place.

Another grey area left untouched is the availability of Cenvat credit to the service receiver for payment of tax under partial reverse charge mechanism. The Cenvat Credit provisions have failed to consider that in majority of the cases, the service receiver would be paying tax under partial reverse charge mechanism on such services which are “input services” for them and hence the facility of payment of tax on such services from the accumulated Cenvat credit was required to be rightly extended to the service receivers. The present provisions only allow credit of Service tax paid on such “input services” but requires the payment of such tax by the Service Receiver by challan. The service provider is however allowed to utilize the Cenvat credit for payment of his share of the Service Tax under the partial reverse charge mechanism.

The education guide released by CBEC states that in partial reverse charge mechanism the service receiver is not bound by the valuation method adopted by the service provider, when the service tax liability is required to be shared between them. The invoice raised by the service provider would normally indicate the abatement taken or method of valuation used for arriving at the taxable value. However since the liability of the service provider and service recipient are different and independent of each other, the service recipient can independently avail or forgo abatement or choose a valuation option depending upon the ease, data available and economics. This means that irrespective of availment or otherwise of abatement by the service provider, the service receiver can independently choose the method of valuation of his choice to discharge his share of the service tax liability under reverse charge mechanism.

A school of thought holds the view that partial reverse charge mechanism was incorporated in the service tax provisions to reduce the load of Service Tax on providers of service who are in the unorganized sectors. But it is a travesty considering that such classes of service providers were even otherwise enjoying the exemption available to Small Service Providers upto an amount of Rs. 10 Lakhs during a financial year. If the idea was to create a divide between the receivers of such services provided by the unorganized sectors and to tax those service receivers (body corporate) with a view to boost the tax kitty, the effort appears too ill conceived and half hearted without appropriate safeguards in place. The law makers need to wake from the slumber and fine tune the law for its proper implementation, with no grey areas or it would be a return of Inspector raj for the Service Tax assessee.

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Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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