Entries from August 2012 ↓

Service Tax under reverse charge- A happy hunting ground for Revenue Audit

Provision of service is the taxable event for service tax although Point of Taxation Rules (POTR) governs the timing of tax. Usually the provider of service is liable to discharge service tax liability unless it is otherwise earmarked for recipient of service. It is comparatively easy to keep a track on service tax liability arises on income but to detect service tax liability under reverse charge basis one needs to give a deep dive in the expenditure statement of a business entity.

Position up to June 30, 2012

Import of any service and limited number of specified services such as insurance auxiliary service, sponsorship service, services pertaining to transportation of goods by road, service of distribution of mutualfundbymutualfund distributor or agent etc. were covered under recipient based service tax, popularly known as service tax paid under reverse charge basis. A close look of the then position revealed that apart from importation of service and Goods Transport Service (GTA) all other services covered under reverse charge basis have limited impact on the routine transactions of the business entities.Moreover,methods of computation of tax were also simple since limited conditions were attached to such computation.

Position from July 1, 2012 on wards

Services that are used by almost all the business entities on a regular basis, such as works contract, security service, car rental service, work force supply service etc are now under the coverage of reverse charge mechanism.

Top of it for some of the services such as Insurance Auxiliary, sponsorship service, services rendered by advocate etc. recipient is liable to pay full service tax and for other services such as car rental, supply of work force, works contract etc. recipient is liable to pay a portion of the tax.

Moreover  partial tax liability is also varies from service to service, e.g. car rental without abatement liability under reverse charge is 40% and with abatement liability is 100%, works contract liability under reverse charge is 50% whereas the same for supply of work force is 75%.

Not only that, one should, need to verify the status of the service provider and the service recipient, in other words, one need to enquirewhether the service provider is a corporate entity or not, whether service recipient is an individual or business entity or corporate entity before apply the rule of reverse tax mechanism to discharge the tax liability.

Manifolds challenges:

  • Tracking of payments that are liable to tax under reverse charge basis.

Manual tracking of payments, which will trigger service tax exposure, is not possible for any sizable business operation. Accounting software is required to be upgraded by putting relevant patches that will help business entity to arrest the payments, vulnerable to service tax.

  • Obtaining registration and compliance of law.

Business entities, which are purely in manufacturing/trading operation and were never before under the service tax net, may require to take fresh registration under service tax and require to comply the relevant provisions of the law, such as payment of tax, filing of return, facing service tax audit etc. Moreover, for appropriate discharge of service tax liability many factors such as nature of service, whether service vendor is availing abatement or whether service vendor is availing cenvat credit needs to be verified. Any short payment of tax will lead to payment of interest and penalty apart from litigation.

  • Payment of tax in cash

Unique feature of service tax, paid under reverse charge mechanism is that the payment has to be made in cash. Business entity cannot touch the accumulated cenvatcredit to discharge the service tax liability. It will definitely have an impact on the cash flow specifically for that entity that does not have any (or less) service tax/excise duty appetite. It will certainly hit bottom line of the pure trading company since trading company does not have any service tax liability to set off the credit.

  • No threshold limit

There is no shelter available to escape the service tax liability under reverse charge basis. Even for a payment of a   single rupee, business entity is required to discharge its service tax liability under reverse charge. It will cause immense hardship for small business entities that were enjoying tax shelter under the threshold limit regime.

  • Eligibility of cenvat credit

In view of the amended definition of input service, eligibility of cenvat credit on service tax paid under reverse charge basis is required to be assessed case-to-case basis.

  • Vendor classification

Applicability of service tax under reverse charge depends on the status of the vendor as well. Most of the cases if the provider of service is a corporate entity, payment of service tax under reverse charge mechanism will not be applicable. Master record of vendors is required to be configured accordingly to avoid compliance lapses.

  • Handling of service tax audit.

Last but not the least is handling of service tax audit under the new tax regime.  Business entities are prone to commit error to comply such complex procedures. The department is also knows this and thus they will focus more on this area, which will eventually become breeding grounds for litigations.


Way forward:

  • Review  of expenditure statement to identify payments, which will be liable to service tax under reverse charge basis.
  • Analyse the impact of such payment on additional cash out flow, cenvat credit and profitability of the company.
  • Explore solutions if any to minimise the impact.
  • Upgrade accounting software to make it compatible to new changes.
  • Closely monitor  Vendor  master file
  • Conduct periodic internal review to ensure that the business entity is not in the wrong side of the law.
  • Educate in house people who are dealing with payments.

Curtsy:  Ca. Subhasis Banerjee (subhasis@mukeshraj.com)

Directors’ remuneration- service tax liability is now on the company.

Contributed by Ca. Subhansis Banerjee

Position upto June 30, 2012

Applicability of service tax on remuneration paid to non-executive director (NED), be it as sitting fee, commission or in any other form was a controversial topic under the erstwhile service tax regime.

Before June 30,2012, only selected category of services were liable to service tax andas a result of which, sitting fee, commission or any other form of remuneration if it was for rendering taxable service, question of imposition of service tax was being discussed.

Position from July 1 to August 6, 2012

The definition of service { Sec 66B(44)} under new service tax regime has made it amply clear that any activity performed by a director ( except as an employee) for consideration is liable to service tax with effect from July 1, 2012.

This aspect is being reiteratedby Central Board of Excise & Customs (CBEC) on 13.07.2012, in its presentation clarifying that payment to Directors is taxable and is applicable to all kinds of directors except of government regulatory bodies.

It covers Any monetary or no-monetary consideration Directors’ fee, commission / bonus, company car/ travel reimbursements etc Thus the services performed by a director (other than Managing Director/Executive Director/ Wholetime Director if they are treated as employees of the Company) of a company fall within the ambit of taxable services with effect from 1st July, 2012.

Implication on NED

Because of such change, NED is liable to deposit service tax on remuneration (monetary as well as non-monetary) received from company if the gross service income of NED during the financial year exceeds Rs. 10 lakhs.

Non-monetary consideration such as use of company car, phone or accommodation is required to be valued as per the Valuation Rules and NED is required to comply with all the applicable provision of the service tax law.

Implication on Company
In case of any payment to NED, located outside India, company is required to pay service tax under reverse charge basis and thresh hold limit of Rs. 10 lakhs will not be applicable on such case.
Service tax will be additional cost to the company and company may require taking an approval to accommodate service tax within the ceiling of overall Directors’ remuneration.

Position from August 7, 2012 onwards
Central Board of Excise and Customs have come out with a notification (Notification No. 46/2012) on August 7, 2012, stating that the company is liable to pay service tax as recipient of service on remuneration paid to NED.

Impact of the Notification

  • Company will be liable to pay service tax on any remuneration paid to NED whether in the form of money or otherwise.
  • NED is not required to pay service tax henceforth.
  • No thresh hold limit will be applicable to company. In other words, even if the payment is Rs.1, company is required to pay service tax on the same.
  • Company is required to comply with all the necessary compliances, such as obtaining service tax registration, payment of service tax, filing of tax return as applicable under the service tax law.
  • Company may be required to take permission under company law, because of service tax,if total remuneration to NED exceed the approved amount.
  • For a trading company service tax so paid as recipient of service, will be cost to the company.
  • For non-trading company service tax so paid may be available as credit if it qualifies as eligible input service.

Open Issue

In the absence of mention of any date in the notification, it shall be effective from the date of publication in the official gazette. Notification No. 46/2012, empowering company to pay tax under reverse charge basis was published in the official gazette on August 7, 2012. Accordingly, Notification No. 46/2012 should be effective from August 7, 2012, the date when the same was published in the Official Gazette. Considering the said fact, can company take a position that payment of remuneration to NED will be subject to tax at their end only from August 7, 2012, onwards?

Way forward

  • Any payment to NED needs to be scrutinised from the perspective of service tax.
  • Service rendered prior to August 7 but payment is made after August 7, the liability is required to be determined as per Point of Taxation Rules
  • Taxable value of non-monetary remuneration is required to be ascertained as per Service Tax Valuation Rules.
  • Eligibility of cenvat credit in respect of service tax so paid by the company as recipient of service needs to be examined on cases to case basis.