Partial Reverse Charge and Small scale exemption
WITH the introduction of partial reverse charge in service tax for the services like manpower supply, security services, works contract service etc, it appears many assessees are under some confusion with regard to the benefit of Small scale exemption. The first question is whether the service recipient is liable to pay service tax under Partial reverse charge mechanism. The answer is yes, because as per the second proviso to Notification No 33/2012 ST dated 20.06.2012,
Provided that nothing contained in this notification shall apply to,-
such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules, 1994.
Therefore, it is clear that for persons liable to pay service tax under partial reverse charge under Section 68(2), small scale exemption does not apply. Hence they are liable to pay service tax even if value to service provider falls below Rs 10 lakhs in a Financial Year.
According Para 10.1.3 of the Education Guide,
10.1.3 If the service provider is exempted being a SSI (turnover less than Rs 10 lakhs), how will the reverse charge mechanism work?
The liability of the service provider and service recipient are different and independent of each other. Thus in case the service provider is availing exemption owing to turnover being less than Rs 10 lakhs, he shall not be obliged to pay any tax. However, the service recipient shall have to pay service tax which he is obliged to pay under the partial reverse charge mechanism.
Second issue is , how to compute the exemption limit for a Small scale service provider. For example, if the value of services rendered by service provider is Rs 8 lakhs in a Financial year and on Rs 4 lakhs (50%) the service recipient has paid service tax, the turnover for small scale exemption should be computed as 8 lakhs or 4 lakhs? Para 10.1.3 above does not explain this important issue. Apparently, since service tax has been paid on Rs 4 lakhs by the recipient of the service, the remaining amount only should be taken as taxable value for the purpose of computing the 10 lakhs exemption limit. However, unfortunately para 3 of the Notification 33/2012 ST allows this benefit only to the GTA service under reverse charge. The relevant part of the Notification is as under:
3. For the purposes of determining aggregate value not exceeding ten lakh rupees, to avail exemption under this notification, in relation to taxable service provided by a goods transport agency, the payment received towards the gross amount charged by such goods transport agency under section 67 of the said Finance Act for which the person liable for paying service tax is as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules, 1994, shall not be taken into account.
The above para needs an amendment to include other services on which Partial reverse charge mechanism is made applicable.
Some assessees are under the impression that after paying service tax under Partial reverse charge, they can claim refund if the service provider is under Small Scale exemption. This is not correct as no such provisions exist and the assessment of liability at service receiver is independent of status of the service provider.