Service Tax under Partial Reverse Charge - Can it be paid from CENVAT Account?

By Vijay Kumar

THE special feature of 2012 Budget was introduction of partial reverse charge in Service Tax. The liability in respect of some specified services like manpower supply, rent-a-cab, works contract service etc., has been shifted partially to the service recipients depending on the status of the service providers (Individuals, Firms, AOPsetc). But, can the liability under partial reverse charge be discharged from CENVAT account by the recipients of these services? When I asked this question, my editorial colleague immediately said No. I asked him to show if there is any specific provision in this regard. We started with “Education Guide” and have gone through the entire text of Guidance Note 10 (Partial Reverse Charge), but there is no guidance note on this important issue. Then we tried to check CENVAT Credit Rules, 2004. The definition of “output service” given under Rule 2(p) reads as under:

(p) "output service" means any service provided by a provider of service located in the taxable territory but shall not include a service,-

(1) specified in section 66D of the Finance Act; or

(2) where the whole of service tax is liable to be paid by the recipient of service;

Under partial reverse charge, since whole of service tax is not paid by the service recipient, the exclusion under (p)(2) is not applicable. So, this bar is not applicable to partial reverse charge.

Then we moved on to Rule 3(4) where an explanation has been inserted vide Notification No 28/2012- CX., (N.T.), Dated : June 20, 2012 as under:

"Explanation. - CENVAT credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient"

But, again in respect of partial reverse charge, the person liable to pay service tax is not service recipient alone . The service provider is also person liable to pay tax in respect of the specified services. So, it is doubtful whether this explanation puts a bar on utilization of CENVAT Credit for payment of service tax under partial reverse charge.

And then, vide Notification No 18/2012 CE(NT) dated 17.03.2012, in Rule 9[prescribing documents for taking CENVAT credit], sub-clause (e) has been substituted as under:

"(e) a challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax; or".

From this also, it cannot be concluded that the service tax cannot be paid from CENVAT credit.

So, finally, though many assessees and officers strongly believe that CENVAT Credit cannot be utilized for payment of service tax under partial reverse charge, the provisions are not very clear on this. May be it is time to revisit the entire scheme and provide proper clarification and carry out necessary amendments to reflect the intention of the Rule makers. There is no better time than Budget to do this.