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Shift of Charge in Service Tax

In the General scheme of Service Tax, the person who provides a service takes a registration, observes the required procedures, and pays the service tax to the government. He may then collect it from his customer by billing it in addition to his service charge.

However the law provides for the charge of service tax to be shifted in some cases to a person other than the service provider. In such cases the law requires a person other than the service provider to register under service tax, observe the procedural formalities like filing of periodical returns, and pay the tax to the government. This is applicable for specified services and mostly for service providers and service recipients of specified categories. The mechanism is popularly called “reverse charge”. However, it is more accurate to call it “Shift of Charge”

In decoding the provisions for shift of charge in service tax to determine whether it is applicable to a particular transaction, three elements have to be understood:

• The activity – whether it is the service specified for Shift of Charge;
• The status of the service provider; and

• The status of the service recipient / other person to whom the charge is shifted

The provisions of law are examined below to arrive at an understanding of these elements

Shift of Charge: The Provisions of Law

I.The Act enables Shift of Charge

Shift of charge is enabled under sub-section (2) of section 68 of the Finance Act 1994. Under section 68, in general the service provider is required to pay service tax on the service provided by him. However an exception is made in sub-section (2) for services that may be specified by notification:

In brief, section 68 provides as follows:

(i) Sub-section (1): Persons providing taxable service must pay the service tax; however,
(ii) Sub-section (2): For services that are notified for the purpose, the person as prescribed has to pay the service tax; and
(iii) Proviso: How much service tax on the notified services will be paid by the service provider and how much by the other prescribed person will also be notified.

Thus, section 68 requires that the person liable to pay service tax, if other than the service provider, will be prescribed, and the services to which this will apply will be notified. The extent of liability of the service provider and the other prescribed person, for the notified services, will also be notified. In this context it may be noted that “prescribed” is defined in section 65B(39) as “prescribed by rules made under this Chapter”. Thus, the person, other than the service provider, who is liable to pay service tax on the notified services, has to be specified under the rules.

II.The Rules enumerate the services under shift of charge and the person liable to pay

In keeping with the requirement that the person liable to pay service tax must be prescribed under the rules, rule 2(d) of the Service Tax Rules 1994 defines “person liable to pay service tax”. This is also repeated in notification 30/2012-ST, which stipulates the extent to which the charge shifts for each service.

The persons to whom the charge is shifted are as follows:

Service Person liable to pay the Service Tax
Insurance Agent
Recovery Agent
Selling / Marketing lottery tickets
Goods Transport Agency
Sponsorship
Arbitral Tribunal
Advocate(s)
Company Director
Government Services
Renting of motorcab
Supply of Manpower
Security Services
Works Contract
Import of Service
Service through Aggregator
Insurance company
Bank / FI
Distributor / Seller who receives the Service
Person liable to pay the Freight
Sponsor
Litigant
Litigant
Company
Recipient of Service
Person who takes the Cab on Rent
Person who takes Manpower
Person who uses the Security Service
Person who has Purchased the Service
Importer of Service
Aggregator or his Agent

Further, both rule 2(d) and notification 30/2012-ST stipulate certain attributes of the parties involved that would bring shift of charge into play. Therefore, the list of persons in the second column above must be qualified by reading the necessary attributes, to get the complete picture as to their liability. These will be examined later in this piece.

But before that, the extent of shift of charge is listed for each service.

III.The notification stipulates the extent to which the charge is shifted

As seen in section 68, the reverse charge services and the extent to which a person other than the respective service providers may be required to pay the service tax under the Act is to be notified. Accordingly, the central government has issued notification 30/2012-ST dated 20 June 2012, which is modified from time to time. We have already noted the services under reverse charge and the person liable to pay service tax for each. Below, the extent to which such person is liable is listed out.

Service Percentage of the Service Tax Shifted to another Person
Insurance Agent
Recovery Agent
Selling / Marketing lottery tickets
Goods Transport Agency
Sponsorship
Arbitral Tribunal
Advocate(s)
Company Director
Government Services
Renting of motorcab
Supply of Manpower
Security Services
Works Contract
Import of Service
Service through Aggregator
100
100
100
100
100
100
100
100
100
50
100
100
50
100
100

Persons, attributes of service providers, to attract Shift of Charge

In terms of rule 2(d) of the Service Tax Rules as well as notification 30/2012-ST, shift of charge will apply in certain services only if the service provider or the other person or both have certain specified attributes. These are as follows:

Sponsorship: The liability to pay service tax shifts to the recipient of service only if it is a body corporate or partnership firm.

Supply of Manpower: The liability to pay service tax shifts to the recipient of service if (i) the recipient of service is a business entity registered as a body corporate; and (ii) the provider of service is an individual, HUF or partnership firm, whether registered or not, including association of persons

Security Service: Same as in Supply of Manpower.

Works Contract: Same as in supply of manpower.

Renting of Motorcab: Same as in supply of manpower. In addition, the recipient of service is liable to pay the service tax only if it is not in the business of renting out motorcabs. There is no shift of charge if the person who takes the cab on rent is also in the business of renting out motorcabs.

Advocates, Arbitration: The litigant is liable to pay service tax if it is a Business Entity.

Import of Service: The Recipient of service (including digital downloads) is liable to pay service tax on service provided from outside the taxable territory, if this is considered to be provided in the taxable territory in terms of the Place of Provision of Services Rules 2012, and if the recipient is an individual, governmental authority or local authority who has imported the service for purposes other than commerce, industry or any business or profession.

Goods Transport Agency: The person who is liable to pay the freight is liable to pay the service tax on the freight if (i) such person is a factory, a dealer registered under central excise, a society, cooperative society, body corporate registered under any law, partnership firm, or AoP; and (ii) the provider of service is one that issues a consignment note for receipt of the goods for transport.

Endnote: “Business Entity”?

It will be noticed that for certain categories of service, namely, works contract, manpower supply and security service, the shift of charge is applicable only if the recipient of service is a business entity registered as a body corporate. Thus, it has to be both a business entity and a registered body corporate. Body corporate is not defined in service tax law, but generally means a body that has a legal existence separate from its constituents or members. For example, a partnership firm is not a body corporate, as it has no existence separate from its partners.

“Business entity” is defined in section 65B(17) of the Finance Act 1994 as

“any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession”.

In the case of Advocates and Arbitration the recipient of service is liable to pay service tax if it is a Business Entity.

Service tax authorities have been known to contend that an entity like an educational institution run by a society functions by virtue of teachers practising their profession, or alternatively that it carries out activity relating to the academic profession and should be considered as a business entity. This is not convincing because the entity provides education: it does not carry out an activity relating to the profession of its employees. Furthermore, it was held by the Supreme Court in the case of Hariprasad Shivshankar Shukla, AIR 1957 SC 121, that despite the definition in the relevant statute, the term ‘retrenchment’ could not cover the termination of services of all the employees.

The Court observed that a definition must be read in such a manner as to preserve the essential meaning of the term defined, which it does by employing apt and readily intelligible words. Thus a definition cannot run contrary to the ordinarily accepted meaning of the term defined. Applying this we can conclude that a “business entity” will not include a not-for-profit entity and therefore that the charge of service tax will not shift to these entities for the services discussed above.

Ms. Radha Arun
Consultants to Udyog Software (India) Ltd.
radha.arjuni@gmail.com

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