Reverse charge mechanism on Supply of Manpower Vis-à-vis Recruitment of Manpower
Applicability of reverse charge mechanism: Supply of Manpower Vis-à-vis Recruitment of Manpower
Prior to the introduction of negative list under Service tax, which came to effect from 01st July, 2012, service tax was levied on “Manpower Recruitment or Supply Agency services”, under section 65(105)(k) of the Finance Act, 1994. Section 65(105) (k) defined “manpower recruitment or supply agency services” as below:
“taxable service means any service provided or to be provided
(k) to any person, by a manpower recruitment or supply agency in relation to supply or recruitment of manpower, temporarily or otherwise, in any manner”
It can be deduced from the above that supply of manpower as well as recruitment of manpower was covered under the ambit of same definition.
Post introduction of negative list, which became effective from 01st July, 2012, scope of Reverse Charge Mechanism (RCM) was widened vide . Under said Notification, entry no. 8 deals with the applicability of reverse charge to supply of manpower, the partial reverse charge mechanism is applicable, inter alia, to services provided or agreed to be provided by way of supply of manpower for any purpose, by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as a body corporate located in the taxable territory. The said entry was amended vide Notification No.7/2015-ST Dated 01st April ,2015 and supply of manpower services were brought under full RCM.
Further recruitment of manpower is not the Supply of manpower, recruitment is altogether different from supply of manpower. On the basis of above information it can be assumed that only supply of manpower is covered under RCM and no reference regarding recruitment of manpower services is made for purposes of RCM.
Changes in relation to the Negative List of services contained under Section 66D of the Finance Act, 1994 (“the Finance Act”) shall be effective from June 1, 2015 i.e New services Taxability from 01/06/2015:
The Ministry of Finance, Department of Revenue vide Notification no 14/2015-ST dated May,19 2015 has notified that the following changes in relation to the Negative List of services contained under Section 66D of the Finance Act, 1994 (“the Finance Act”) shall be effective from June 1, 2015:
♠ Section 66D(f): Services by way of carrying out any processes for production or manufacture of alcoholic liquor for human consumption brought under the Service tax net.
♠ Section 66D(i): Explanation inserted whereby the expression “betting, gambling or lottery” shall not include the activity as specified in substituted explanation 2 to Clause (44) of Section 65B of the Finance Act which reads as under:
“Explanation 2.—For the purposes of this clause, the expression “transaction in money or actionable claim” shall not include––
(i) any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
(ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out––
(a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner;
(b) by a foreman of chit fund for conducting or organising a chit in any manner.”
- Section 66D(j): Omitted, which covers ‘admission to entertainment event or access to amusement facilities’.
Consequently, Service tax to be levied on the services provided by way of access to amusement facility such as rides, bowling alleys, amusement arcades, water parks, theme parks, etc;
Service tax to be levied on services by way of admission to entertainment event of concerts, non-recognized sporting events, pageants, music concerts and award functions, if the amount charged for admission is more than Rs. 500.
Whereas services by way of admission to exhibition of the cinematographic film, circus, dance, or theatrical performances including drama, ballets or recognized sporting events shall continue to be exempt; [Read with Notification No. 16/2015-ST dated May 19, 2015 vide which changes has been made in the Mega Exemption List of Services effective from June 1, 2015]
However, as per TRU Clarification vide D.O.F No 334/5/2015-TRU dated May 19,2015 the effective dates to be notified later in respect of the changes proposed in Section 66D(a) of the Finance Act i.e. under clause (iv), the words ‘support services’ to be substituted by the words ‘any service’.
Accordingly, after such amendment, ‘Any services’ provided by the Government or local authority to a Business Entity would be exigible to Service tax, except for the services that are specifically exempted, or covered by any another entry in the Negative List.
Hence, ‘Support services’ provided by Government or Local Authority to Business Entity will continue to be taxed under Reverse charge mechanism except (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of Section 66D of the Finance Act.
Dilemma of change in taxability of new services effective from June 1, 2015: Rule 5 of the POT Rules Vs. Section 66B of the Finance Act:
With the new services becoming taxable w.e.f. June 1, 2015, the issue may crop up as to whether the services rendered prior to June 1, 2015 are exigible to Service tax when payments for such services are received later or invoices pertaining to such services are raised later.
Before taking insight into the uncertainties and ambiguities, it is pertinent here to understand the basic structure and concept of levy and collection of Service tax under the Finance Act governing taxability of a service.
Levy and Collection of Service tax under the Finance Act
In any taxing statute, the statutory provision containing the charging Section is of foremost importance. It is well settled law that levy of tax is one thing and collection thereof is quite different thing. Once the levy is attracted, the collection of tax may be at any different point/ stage/ event.
Under the Finance Act, Section 66B of the Finance Act is the charging Section which levy Service tax on taxable services. We are reproducing herewith Section 66B of the Finance Act for the ease of convenience:
“66B. Charge of service tax on and after Finance Act, 2012.
There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”
[It may be noted here that the Ministry of Finance, Department of Revenue vide Notification No. 14/2015-ST dated May 19, 2015 has notified increase in the rate of Service tax from 12.36% to flat 14% (Subsuming Education Cess and Secondary & Higher Secondary Education Cess) to be effective from June 1, 2015.]
The literal interpretation of the charging Section 66B of the Finance Act means that the levy of Service tax is on those service ‘other than the one specified in the Negative List’, ‘provided or agreed to be provided’. However, the collection of Service tax may be shifted to any point/ stage/event, in any manner, as prescribed by the Rules made in this behalf.
Further as already quoted in our earlier newsletter, the Hon’ble Supreme Court in the case of All India Federation of Tax Practitioners Vs. Union of India [2007-TIOL-149-SC-ST] has held that “a tax on a thing or goods can only be with reference to a taxable event” and the same contention was upheld again in the case of :
Association of Leasing & Financial Service Companies Vs. Union of India [2010 (20) STR 417 (SC)],
wherein the Hon’ble Supreme Court observed that the taxable event under the Service tax law is the rendition of service.
Now, in view of the above discussions, the levy of Service tax is on the provision of service and accordingly, the service must be taxable service at the time of its rendition in order to attract Service tax levy. In other words, if at the time of rendition of service, it is covered under the Negative List, then as per Section 66B of the Finance Act, no Service tax may be levied on the same irrespective of the date of its payment or raising of invoice.
However, in this regard, Rule 5 of the Point of Taxation Rules, 2011 (“the POT Rules”) governing Point of taxation for levy of Service tax in case of new services, provides contradictory provisions.
Key Concerns:
Whether Rule 5 of the POT Rules can override Section 66B of the Finance Act:
Rule 5 of the POT Rules provides that where a service is charged to tax for the first time, then:
“(a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;”
As per this Rule 5(a) of the POT Rules, no Service tax is payable even if services are rendered after such service becomes taxable only when the invoice has been issued and the payment received against such invoice before such service became taxable.
“(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within 14 days of the date when the service is taxed for the first time.”
Manifestly, the stated Rule provides that in cases of levy on new services, irrespective of date of completion of service, Service tax shall be payable if the payment is received on or after the date of levy and/ or if the invoice is not issued within 14 days of the date of levy.
Now, the moot question here is that whether Rule 5 of the POT Rules can override Section 66B of the Finance Act in terms of which the levy of Service tax is on the provision of service and accordingly, the service must be taxable service at the time of its rendition in order to attract Service tax levy.In view of the above discussed provisions, the matter is subjected to debate as to whether Service tax would be leviable on a service which was not a ‘taxable service’ at the time of its rendition as being covered under the Negative List, merely because its payment is received on or after the date of levy and/ or the invoice is not issued within 14 days from the date service is taxed first time.
Here we would like to mention that the POT Rules were framed by the Central Government in exercise of the powers conferred under Section 94 of the Finance Act and such delegated legislation cannot be extended to go beyond the vires of the Finance Act.
Service tax rate increased from 12.36% to 14% (Subsuming EC and SHEC) effective from 01.06.2015 & Other changes
GOVERNMENT OF INDIA MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) NOTIFICATION No 14/2015-ST, Dated: May 19, 2015 G.S.R. (E). – In exercise of the powers conferred by clauses (a), (c) and (f) of section 107, section 108, sub-sections  (2), (3) and (4) of section 109, section 153 and section 159 of the Finance Act, 2015 (No. 20 of 2015), the Central Government hereby appoints the 1st day of June, 2015 as the date on which the provisions of clauses (a), (c) and (f) of section 107, section 108, sub-sections (2), (3) and (4) of section 109, section 153 and section 159 of the said Act shall come into force. [F.No. 334/5/2015 – TRU] (Akshay Joshi) Under Secretary to the Government of India –
Clarifications:
After the Hon’ble President has given assent to the Finance Bill, 2015 on Thursday, May 14, 2015, the Ministry of Finance, Department of Revenue vide Notification No. 14/2015-ST dated May 19, 2015 has notified increase in the rate of Service tax from 12.36% to flat 14% (Subsuming Education Cess and Secondary & Higher Secondary Education Cess) to be effective from June 1, 2015. –
Swachh Bharat Cess @ 2% on value of taxable services and any Service provided by Government/ Local authority to Business entity to be notified at a later date –
Following change in relation to the Negative List – Section 66D of the Finance Act
♠ Section 66D(a): Under clause (iv), the words ‘support services’ to be substituted by the words ‘any service’.
Accordingly, after such amendment, ‘Any services’ provided by the Government or local authority to a Business Entity would be exigible to Service tax, except for the services that are specifically exempted, or covered by any another entry in the Negative List.
Hence, ‘Support services’ provided by Government or Local Authority to Business Entity will continue to be taxed under Reverse charge mechanism except (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994.
Gist of changes vides other Service Tax Notifications dated May 19, 2015
A: Notification No. 26/2012-ST dated June 20, 2012,
Amend Notification No. 26/2012-ST dated June 20, 2012,, thereby removing the entry relating to Chit in the definition part in view of withdrawal of abatement in relation to Chit Fund vide Notification No. 26/2012-ST dated June 20, 2012,(effective from April 1, 2015).
Notification No. 26/2012-ST dated June 20, 2012,
♠ Increase in the rate of Service tax from 12.36% to flat 14% (Subsuming Education cess and Secondary & Higher Secondary Education cess) to be effective from June 1, 2015;
♠ Following changes in relation to the Negative List – Section 66D of the Finance Act to be effective from June 1, 2015
- Section 66D(f): Services by way of carrying out any processes for production or manufacture of alcoholic liquor for human consumption brought under the Service tax net.
- Section 66D(i): Explanation inserted whereby the expression “betting, gambling or lottery” shall not include the activity as specified in substituted explanation 2 to Clause (44) of Section 65B of the Finance Act.
- Section 66D(j): Omitted, which covers ‘admission to entertainment event or access to amusement facilities’.
♠ Consequent to the above changes in the Negative List of services, definition of following terms to be omitted/ amended in Section 65B of the Finance Act w.e.f. June 1, 2015:
- Definitions of certain terms omitted [Section 65B(9): ‘amusement facility’, Section 65B(24): ‘entertainment event’]
- Definitions of certain terms amended [Section 65B(40): ‘process amounting to manufacture or production of goods’ excluding alcoholic liquors for human consumption]
C:Notification No. 26/2012-ST dated June 20, 2012,
- Effective from June 1, 2015, consequent to the upward revision in Service tax rate, the composition rate to be revised proportionately under Rule 6(7), 6(7A), 6(7B) and 6(7C) of the Service Tax Rules, 1994 on specified services, namely Air Travel Agent, Life Insurance service, Money changing service provided by banks or authorized dealers and Service provided by lottery distributor and selling agent.
D: Notification No. 26/2012-ST dated June 20, 2012,
♠ Following changes in Notification No. 26/2012-ST dated June 20, 2012,Entry 30: Service tax would be levied on services by way of carrying out of intermediate production process of alcoholic liquor for human consumption on job work, consequent to imposition of Service tax on services by way of manufacture of alcoholic liquor for human consumption.
New Exemption:
Entry 47: Services by way of right to admission to:
- exhibition of cinematographic film, circus, dance, or theatrical performances including drama or ballet;
- recognized sporting events;
- award functions, concerts, pageants, musical performances or any sporting events other than recognized sporting event, where the consideration for such admission is upto Rs. 500 per person
Notification No. 26/2012-ST dated June 20, 2012,
Exempts taxable services provided under the Power System Development Fund Scheme of the Ministry of Power from the whole of the Service tax leviable thereon under Section 66B of the Finance Act till April 1, 2017 subject to the conditions specified therein.
Changes in Cenvat Credit Rules – Reversal of Cenvat Credit on Exempted Services:
Notification No. 26/2012-ST dated June 20, 2012,
In the light of increase in the rate of Service tax from 12.36% to flat 14% (Subsuming Education Cess and Secondary & Higher Secondary Education Cess) to be effective from June 1, 2015, the rate of reversal of CENVAT Credit under Rule 6(3) of the Cenvat Credit Rules, 2004 has also been enhanced from 6% to 7% in case of exempted services with effect from June 1, 2015.
Dilemma of change in effective rate of Service Tax: Rule 4 of the POT Rules vs. S 67A of the Finance Act, 1994:
With the new Service tax rate becoming effective from June 1, 2015, the much hyped hue and cry among the Trade on the presently applicable rate of Service tax would definitely come to an end but there are chances of turmoil being faced by the service provider in respect of the ongoing transactions for which either certain advance payment is received prior to June 1, 2015 but the completion of provision of service may take place post facto thereof or vice versa.
Before taking deeper dive into the area of turmoil, which may crop up pursuant to new rate of Service tax being notified, it is apposite here to have an overview of the Point of taxation as governed under the Notification No. 26/2012-ST dated June 20, 2012, (“the POT Rules”). With the introduction of the POT Rules, Service tax payment is made on accrual basis in terms of the provisions contained under the POT Rules. The general Rule 3 of the POT Rules stipulates that Point of taxation shall be the earlier one among raising of invoice or date of making the payment. Further, if the invoice is not raised within 30 days (45 days for Banking and financial services) from the date of completion of provision of service, Point of taxation shall be the date of completion of provision of service.
Thus, by applying the provisions of Rule 3 of the POT Rules, the service provider would be liable to pay Service tax on the advance payments received at the prevailing rate of 12.36%. However, the service provider may encounter the issue of adjusting this payment of tax for increase in Service tax rate afterwards when the service will be provided and invoice will be raised for the services rendered, for which advance has been received already.
Point of Taxation (POT) when there is change in effective rate of taxes:
Point of taxation involving change in effective rate of tax is governed by Rule 4 of the POT Rules, which provides for determination of Point of taxation when there is change in effective rate of tax as mentioned in the table below:
| S. Calvin Klein Underwear Mujer No. | In case a taxable service has been provided | Invoice has been issued | Payment received for the invoice | Point of taxation shall be | Applicable Rate |
| 1. | BEFOREthe change in effective rate of tax | AFTER the change in effective rate of tax | AFTER the change in effective rate of tax | Date of issuance of invoice or Date of receipt of payment, whichever is earlier | New Rate |
| 2. | BEFORE the change in effective rate of tax | AFTER the change in effective rate of tax | Date of issuance of invoice | Old Rate | |
| 3. | AFTER the change in effective rate of tax | BEFORE the change in effective rate of tax | Date of receipt of payment | Old Rate | |
| 4. | AFTER the change in effective rate of tax | BEFORE the change in effective rate of tax | AFTER the change in effective rate of tax | Date of receipt of payment | New Rate |
| 5. | BEFORE the change in effective rate of tax | BEFORE the change in effective rate of tax | Date of issuance of invoice or Date of receipt of payment, whichever is earlier | Old Rate | |
| 6. | AFTER the change in effective rate of tax | BEFORE the change in effective rate of tax | Date of issuance of invoice | New Rate |
Accordingly, the above scenario of advance payments may have exemplary situation and countered as under:
- Services are completed after June 1, 2015 but the invoice is raised before change in rate: In terms of Rule 3 read with Rule 4(b)(ii) of the POT Rules, no differential payment may be required (Refer S. Comprar Bragas Calvin Klein No. 5 of the table);
- Services are completed after June 1, 2015 and the invoice is also raised after change in rate: In terms of Rule 3 read with Rule 4(b)(iii) of the POT Rules, differential payment (i.e. 14% – 12.36%) will have to be paid at the time of such invoice (Refer S. No. 6 of the table).
Key Concerns:
Whether Rule 4 of the POT Rules can override Section 67A of the Finance Act:
Question is whether Rule 4 of the POT Rules can override the Section 67A of the Finance Act, 1994 (“the Finance Act”), inserted therein w.e.f. May 28, 2012, this reads as under:
“67A. Date of determination of rate of tax, value of taxable service and rate of exchange. – The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.”
Bare perusal of Section 67A of the Finance Act makes it clear that the rate of Service tax to be applied is the rate in force at the time when the taxable service has been provided or agreed to be provided.
Hence, considering Rule 4(a)(i) of the POT Rules (Refer S. No. 1 of the Table), question arise why new rate would be applicable when services are rendered before change in effective rate of tax but invoice is raised and payment is made after change of rate when as per Section 67A of the Finance Act, applicable rate of Service tax is the rate in force at the time when the taxable service has been provided or agreed to be provided.
Here, we would also like to draw your attention towards the decision of the Hon’ble Supreme Court in the case of All India Federation of Tax Practitioners Vs. Union of India [2007-TIOL-149-SC-ST]wherein it was held that “a tax on a thing or goods can only be with reference to a taxable event” and the same contention was upheld again in the case of Notification No. 26/2012-ST dated June 20, 2012, wherein the Hon’ble Supreme Court observed that the taxable event under the Service tax law is the rendition of service;
In view of the above discussed provisions, the matter is subjected to debate as to what would be the applicable rate of Service tax in respect of ongoing transactions and whether the same should be determined by applying Rule 4 of the POT Rules or as per Section 67A of the Finance Act.
Here it would not be out of place to mention that the POT Rules were framed by the Central Government in exercise of the powers conferred under Section 94 of the Finance Act and such delegated legislation cannot be extended to go beyond the vires of the Finance Act.
Hence, an illustrative clarification to this effect is much warranted from the Board before the new rate of Service becoming effective from June 1, 2015.
What Happen to balance of Education Cess and Secondary and Higher Education Cess’ standing in the hands of Service Provider as on June 1, 2015:
Further, next question what happen for balance lying in ‘Education Cess’ and ‘Secondary and Higher Education Cess’ as on June 1, 2015 will be allowed to be adjusted with Service tax liability as this is being denied in terms of Rule 3(7)(b) of the Cenvat Credit Rules, 2004 (“the Credit Rules”), also requires clarification by the Board at the earliest.
Hope the information will assist you in your Professional endeavors.