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Service tax on receiver: TDS in formation

 

Introduction

Service tax is a tax on service and service provider is liable to do all the tax compliances and pay tax. Since the nature of the tax is an indirect one, the burden of the same is to be borne by service receiver. However over a period of time we have witnessed growth in services where liability of tax compliance is with the person receiving services. This is popularly known as “reverse charge” mechanism. Under the reverse charge method, a legal fiction is created treating as if the recipient had himself provided the services and accordingly, the recipient of services is treated as deemed service provider. The reverse charge mechanism as is scholarly understood is a policy to tax the transaction in the territory in which the services are actually consumed. Thus it takes colour of TDS which today is considered to be widely reliable mechanism to tackle tax evasion as it casts burden on the payer.

 

 

Need for reverse charge

 

Need for installing a reverse charge mechanism by the revenue can be traced in following.

  • Low tax administration: - Categories where service providers are large in number and scattered geographically with few service receivers, levy of tax on reverse charge ensures high tax collection with selective administration. For example services provided by numerous mutual fund agents to mutual funds.
  • Higher tax collection: -Since service receiver is liable to pay tax, the same is deducted tike Income tax –TDS and is deposited accordingly.
  • Taxing beyond territories: - Classic example is tax on import of services. For example if any architectural services are taken from abroad in relation to any immovable property situated in India, the service receiver (property owner) is liable to take registration and deposit tax.

 

Historical background

 

Trails of levying tax on service receiver can be seen in 1997 when service tax was levied on C & F agents and goods transport operators (GTO). However, H’ble Supreme Court in case of Laghu Udyog Bharti and Anr vs. UOI in 1999 ruled that making persons other than service providers liable is ultra vires the Finance Act 1994 and hence tax collected from service receiver was to be refunded.

Finance Act 2000 introduced far reaching retrospective amendments to counter the above judgment by including clients of the service receiver as the assessee and to provide for collection of tax in manner as prescribed. Thus Rule 2 of Service Tax Rules, 1994 defining person liable to pay tax was amended accordingly. Finance Act 2003 revalidating the above further amended Sec 68 of the Finance Act, 1994 to make receivers liable to pay tax with retrospective effect.

 

Legal Validity

The H’ble Supreme Court in Gujarat Ambuja Cement Case, 2005, answered a question of levy of tax on service receiver. Levy of tax could be broken into two parts, namely object of tax and tax collection mechanism. For example if the object is to tax transport of goods, then a tax on transportation of salt is not a tax on salt but a tax on transportation. Secondly method of collection is a matter of legislative convenience as long as it does not affect the nature of tax.

It further stated that the Central Government has legislative right to amend the Act to make any person liable to pay tax in respect of any service tax category. Hence the legislative got powers u/s 66A to charge service tax on services received from outside India-Import of Services; u/s 68 (2) and Rule 2(1)(d) to make the receiver liable.

 

Services Covered under “Reverse charge”

Rule 2(1)(d) of the Service Tax Rules, 1994 specifies the categories of people who are liable to pay tax. The relevant service categories and the person liable under the reverse charge mechanism are:

  • Telecom Services- Director General of Posts and Telegraph/ Telecom License holder
  • General insurance services by insurer or re-insurer: - Chairman-cum-Managing Director of general insurance companies is liable.
  • Insurance auxiliary service by an insurance agent: - Any person carrying on the general insurance business or the life insurance business (Insurance Companies).
  • Import of services, namely any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act: - Recipient of such service liable.
  • Goods transport services by road in a goods carriage, where the consignor or   consignee of goods is from the seven categories specified as factory, company, corporation, society, co-operative society, registered excise dealer or registered partnership firm: - Any person who pays or is liable to pay freight for the transportation of goods.
  • Business auxiliary service by mutual fund distributor or an agent: - Mutual fund or asset management company receiving such service.
  • Sponsorship service provided to anybody corporate or firm: - Service receiver, who receives such sponsorship service.

 

Benefit of 10 lac Exemption: Not available

Proviso to notification no. 6/2005 dated 1st March 2005 granting benefit of four-lac exemption to small service provider states:

“Provided that nothing contained in this notification shall apply to, -

(i)….

(ii) Such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified u/s 68(2) of the said Finance Act read with Service Tax Rules, 1994.”

Since the service receiver is liable to pay tax u/s 68(2), the benefit of Notification 6/2005 is not available to it.

 

Hardships

Hole in providers’ pocket: - Service receiver while discharging his statutory liability deducts the tax amount from payment made to the service provider. This is irrespective of the fact that the payment agreed includes service tax or not, thus resulting in short payment to the service provider.

One time recipient also liable: - In certain categories like sponsorship, if an establishment is a sponsoring any event or competition just once in lifetime still it will have to register itself and pay service tax as a receiver of service and apply for cancellation.

Procedural issue: - Going a step further, if the service receiver again sponsors an event or say avails say goods transport services by road, where it pays freight, again it will have to register itself and pay tax and de-register.

Partial reverse charge: - In case of service tax on transport of goods by road, if the consignor or consignee is from one of the specified seven categories, then the person making payment of freight is liable to pay tax even though it does not belong to those seven categories. In the remaining situations, the goods transport agency is made liable. Determining liability of a person on the basis of status of the other is not only complex for tax administrator but is also proving a nightmare for the trade and transporters.

Denial of ten-lac exemption: - Denying benefit of ten-lac exemption to the service receiver in cases where service provider is a small scale one (<10lac a year) results in an extra outflow in form of tax from the pockets of the service recipient.