Generally, it is the service provider that is liable to pay service tax to the Central Government. However, the Government can also notify the service recipient as the entity liable to pay service tax. This is popularly known as the Reverse Charge Mechanism(rcm). Until recently, the service recipient was liable to pay service tax only in the case of a few services such as goods transport, sponsorship and so on. However, from July 1 this year, the scope of RCM has been extended to include more services, such as support services from the Government or local authorities, legal services from advocates/ law firms, renting of passenger vehicles, supply of manpower, security services, and service portion in the execution of works contracts among others. In the case of support services from the Government or legal services from advocates/ law firms, if the recipient is a business entity it is liable to pay the entire service tax. For the remaining services specified above, the service tax liability is split between the provider and recipient if the provider is an individual/ HUF (Hindu undivided family)/ proprietary firm/ partnership firm (whether registered or not, including an AOP, or association of persons), and the recipient is a company. As a result, several companies that are not service providers are required to register with the service tax authorities in the event they use the above specified services. This could result in the following issues:
Disputes due to classification
The recent amendments could heighten contractual disputes between the service provider and the recipient over who should pay the service tax if there is no consensus on the nature of service. Also, for most services, the provider would have registered with authorities prior to July 1. Any incorrect classification in the past may lead to dispute with authorities, who will demand service tax from both the service provider and the recipient. Date from which the service recipient is liable The cut-off date for applicability of RCM is also a complex issue. The tax department in a circular dated July 6 clarified that the “provisions of partial RCM would also be applicable in respect of such services where point of taxation is on or after July 1, 2012 under the applicable rule in respect of the service provider”. According to Rule 4 of the Point of Taxation Rules, 2011, the service recipient is liable to pay service tax if the payment was received and the invoice issued after July 1 this year even if the services were rendered before that date. Also, for services rendered and payment received after July 1, even if the invoice is dated prior to July 1, the service tax liability would fall on the recipient.
New services notified for RCM
In the case of services brought into the tax net from July 1 and notified for RCM (for instance, construction of residential complex of less than 12 units and support services by Government), Rule 5 of the POTR would be applicable. Even if such services were rendered prior to July 1, but the invoice is dated post-July 1 and was raised 14 days after the completion of service, the recipient is liable to pay service tax. It is, therefore, imperative for service receivers to ascertain their liability even in cases where the service or the invoice or payment is dated after July 1.
Different dates of liability for the service provider and the recipient
The point of taxation for the service provider is based on the date of invoice if issued before receipt of payment. However, for the Point of taxation for service recipient, the liability is always on payment of the value of the service. However, if there is no payment within six months, the due date for the recipient shall be reckoned as the date of invoice, as it applies to the service provider. This could lead to potential interest exposure in the hands of the service recipient if the payment for services is not made within six months. It appears that the intent behind enlarging the scope of RCM is to reduce the difficulties faced by Revenue in collecting service tax from small service providers that are either individuals or partnership firms. However, instead of strengthening the administration, the Government appears to have taken a shortcut and shifted the service tax burden on to the recipient, who will now be saddled with additional compliances and litigations. The move is also detrimental to small and medium service providers as many recipients would now prefer corporate service providers in order to avoid the compliances.