.

SERVICE
TAX

REVERSE CHARGES &

JOINT CHARGE
MECHANISM AND
RECENT
DEVELOPMENTS IN
SERVICE TAX

DHANDHANIA & ASSOCIATES

(Chartered Accountants)

Introduction:
In the present Indian economy Indirect Taxes are undergoing rapid change and extending to
every part of business activity. Among the various Indirect Taxes, Service Tax has gained
Importance in the last few years. Service Tax was introduced in 1994-95 and was originally
levied @ 5% on three (3) services. In the year 2011-12 it was extended to 119 services and the
rate of tax was also increased to 30.30% In the year 2012-13 the rate was increased to 12.36%.
In the month of July 2012 the concept of negative list was introduced, by which all the services
except services mentioned in the negative list are chargeable to Service Tax @ 12.36%. An
interesting issue thrown up after the introduction of the negative list is the issue of reverse
charge and joint charge. This note discusses the concept for these two mechanisms.

Concept of Reverse Charges:

Every person providing a taxable service is required to pay service tax at the prescribed rate.
However in certain cases the service recipient is made liable to pay service tax on the services
received. Since the person receiving services is made liable to pay service tax, the mechanism
of collection of such tax is called reverse charge mechanism (RCM).
This concept is set out in service tax law by virtue of section 68(2) by empowering the Central
Government to notify services on which the said RCM would apply. To support this the person
liable to pay service tax has been defined in rule 2(1)(d) of the Service Tax Rules, 1994 to
include service recipients. However, In addition to the concept of reverse charge a new concept
of joint charge (recipient and provider of services both liable to pay tax) is also introduced.
Concept of Joint Charge Mechanism:
Under the concept of joint charge, for one service the service provider as well as service
receiver are made liable for payment of service tax to the extent notified. This liability is
independent of the other person's liability. In other words the failure to comply with the provision
by one person on his part would not impact the compliance requirement of the other person.

Services covered under Reverse Charge:

After changes in the service tax law have been made effective, the notification for reverse
charge and joint charge is Notification No. 30/2012-ST dated 20.06.2012 as amended by
Notification No.45/2012-ST dated 07.08.2012. As per the said notification, the following persons
in relation to the corresponding services mentioned are liable for payment of service tax on
reverse charge.
SI.No.

Description of a service

Person Liable to pay

Service Tax

Services by an insurance agent to any

person carrying on insurance business.

person carrying on
insurance business

Services by a goods transport agency in respect

of transportation of goods by road.

Specified person
(explained below) who
is liable to pay freight.

Services by way of sponsorship to anybodycorporate or partnership firm located in the

taxable territory.

The body corporate or

partnership firm

Services by an arbitral tribunal to any

Business Entity.

The Business Entity

Services by individual advocate or a firm of

advocates by way of legal services to any
business entity

The Business Entity

Services other than

The Business Entity

a.
b.

c.

d.
e.

renting of immovable property; and

speed post, express parcel post, life
insurance and agency services provided by
department of post to a person other than
Government
Service in relation to aircraft or a vessel,
inside or outside the precincts of a port or
airport by Government;
Transport of goods or passengers by
Government
Provided by Government or local authority
by way of support services to any Business
Entity located in taxable territory.

SI.No.

Description of a service

Person Liable to
pay Service Tax

Services provided or agreed to be provided by

a director of a company to the said company

The Company

Services of renting of a motor vehicle designed to

carry passengers provided by

The business entity who

is body corporate

any individual,
Hindu Undivided Family or
proprietary firm or
partnership firm, whether registered or not,
including association of persons
wherein the service provider
has claimed
abatement of 60% following the conditions of the
Notification No. 26/2012-ST dated 20.06.2012
And the services receiver is business entity who is a
body corporate
However if the service receiver is also in similar line
of business, the service provider himself will have to
pay service tax. For eg. Such service provided by to
another person who will give the vehicle on rent.

10

Any taxable services received by any person

who is located in taxable territory from any
person who is located in a non-taxable territory

The person located in

taxable territory who is
receiving such service

Services by director of company to company

Company
receiving services

Note : The "specified persons" are as follows:

any factory registered under or governed by the Factories Act, 1948
any society registered under the Societies Registration Act, 1860 or under
any other law for the time being in force in any part of India
any co-operative society established by or under any law;

any dealer of excisable goods, who is registered under the Central Excise
Act, 1944 or the rules made thereunder ;

any body corporate established, by or under any law; or

any partnership firm whether registered or not under any law including
association of persons;

Services covered under Joint Charge:

Similar to the concept of reverse charge the same Notification No. 30/2012-ST dated
20.06.2012 as amended by Notification No.45/2012-ST dated 7.08.2012 deals with joint charge.
As per the said notification, the cases in which the joint charge would be applicable and to the
extent is detailed below
Sl. No. Description of a service

Percentage of
service tax
payable by
the person
providing
service

Percentage
of service tax
payable by
the person
receiving
the service

1.

60%

40%

Services of renting of a motor vehicle

designed to carry passengers provided
by
-

any individual,
Hindu Undivided Family or
proprietary firm or
partnership firm, whether
registered or not,
including association of persons
Wherein the service provider is not
claiming any abatement
And the services receiver is business
entity who is a body corporate
However if the service receiver is also in
similar line of business, the service
provider himself will have to pay service
tax. For eg. Such service provided by to
another person who will give the vehicle
on rent.

Sl. No.
Description of a service.

2.

Services of supply of manpower for any

purpose or security services provided by

Percentage of
service tax
payable by
the person
providing
service

Percentage of
service tax
payable by
the person
receiving
the service

25%

75%

50%

50%

any individual,
Hindu Undivided Family or
proprietary firm or
partnership firm, whether
registered or not,
including association of persons
And the services receiver is business
entity who is a body corporate
Services of service portion in execution
of works contract provided by

3.

any individual,
Hindu Undivided Family or
proprietary firm or
partnership firm, whether
registered or not,
including association of persons
wherein the service provider is not
claiming any abatement
And the services receiver is business
entity who is a body corporate

Other relevant aspects:

While following the reverse charge or joint charge mechanism the following aspects are
relevant.
a) The service recipient is liable to pay service tax irrespective of the fact whether the
service provider was exempted or not by virtue of small service provider exemption
under Notification No. 33/2012-ST dated 20.06.2012. in other words even if the total
value of !service provided by the service provider is less than 10 lakhs, the service
recipient wherever liable to pay service tax, has to pay tax.

b) The exemption if any available to service provider (other than small scale service

provider exemption) can also be availed by the service recipient, e.g., if the works
contract is for construction of public road, then service recipient need not pay service
tax.
c) The service recipient is given freedom to choose the methodology of computation of tax

in case of works contract irrespective of the service provider's option to pay tax.
d) The service recipient is eligible to claim CENVAT Credit of service tax paid by the

service provider, if any and service tax paid by the service recipient himself.

Payment and Utilization of CENVAT Credit:

As discussed above the service recipient has to pay tax once the service recipient makes
payment to service provider within six months. However, if the service recipient fails to make the
payment within six months then the liability of service tax would be deemed to have been arisen
when the invoice for the service is raised or if it is delayed beyond the period of 30 days from
completion of service, the date of completion of service would be considered. The service
recipient would be liable for the interest for delayed payment beyond the above dates.
The Explanation under Rule 3(4) specifically put a bar on the use of CENVAT credit to pay the
service tax in cases in which the service recipient is liable to pay tax. Hence, it is not possible to
utilise the CENVAT credit for the payment of tax under the reverse charge mechanism and the
same has to be paid by way of cash or cheque.

Recent Developments:
1. The Finance Ministry has notified vide Circular No.172/7/2013ST dated 19th Sep, 2013
that "auxiliary educational services" like hostels, canteen and school buses will not attract
12 per cent service tax. The Central Board of Excise and Customs (CBEC) has further
clarified that there are many supplementary services or "auxiliary educational services"
which have been defined in the exemption notification e.g., transport services provided by a
transport operator to a school to ferry students and which are exempt by virtue of the
exemption notification.
2. Previously services provided by way of temporary transfer or permitting the use or
enjoyment of copyright of cinematographic films was fully exempt from service tax. Now
exemption will be restricted only to cinematographic films for exhibition in a cinema hall or
cinema theatre.
3. Earlier services provided by an air-conditioned restaurant with liquor license was taxable
under service tax. Now it is proposed to bring all air-conditioned / central air-heating
restaurants, eating joints or mess into service tax net, besides all bars, irrespective of liquor
license.
4. Services by way of transport of certain goods by rail or vessel from one place to another
within India was earlier exempt from service tax. These goods were :
(a) Petroleum and petroleum products
(b) Postal mail or mail bags
(c) Household effects.

This exemption will no longer be available.

5. On the other hand, services by way of transportation of following goods by goods transport
agency have been brought into exemption list:a) Agricultural produce
b) Foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil,
excluding alcoholic beverages
c) Chemical fertilizer and oilcakes
d) Newspaper or magazines registered with the Registrar of Newspapers
e) Relief materials, meant for victims of natural or man-made disasters, calamities,
accidents or mishap
f)

Defence or military equipments

6. Service provided by way of vehicle parking to general public, which was earlier exempted,

has now been brought into service tax net.

7. Services provided to Government, a local authority or a governmental authority by way of

repair of aircraft, which was earlier exempted, will now attract service tax.
8. The percentage of abatement for construction of building complex, civil structure or part

thereof intended for sale to a buyer, wholly or partly, except where consideration is received
after issuance of completion certificate by competent authority has been amended as
follows:(a) Residential unit having carpet area up to 2000 sq.ft. or where amount charged is

less than Rs.1 crore Abatement continues to be 75%

(b) Any other case Abatement reduced to 70%