India: Reverse Charge Mechanism In Light Of Special Economic Zones

Service tax is one of the indirect taxes, where the service provider is required to collect tax on the services rendered by him and deposit the same with Government. Section 68(1) of the Finance Act makes such a provision, according to which, "every person providing a taxable service to any person shall pay service tax at the rate specified, in such manner and within such period as may be prescribed ".

However, an exception to the above rule has been provided by Section 68(2), which provides that "in respect of such taxable services as may be notified by the Central Government in the Official Gazatte, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying service tax in relation to such service". This is termed as reverse charge, since in such case service recipient is liable to pay service tax instead of service provider.

In case a service recipient is required to make partial payment of tax, then such mechanism is termed as Partial Reverse Charge Mechanism. The Central Government has vide Notification No. 30/2012-ST, dated 20.06.2012, as amended by Notification No. 45/2012-ST dated 7.08.2012 notified some services under the Partial Reverse Charge Mechanism, wherein Service recipient is required to pay tax, these are as follows:

S. No. Description of a service Percentage of service tax payable by the person providing service Percentage of service tax payable by the person receiving the service
1. In respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business Nil 100%
2. In respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road Nil 100%
3. In respect of services provided or agreed to be provided by way of sponsorship Nil 100%
4. In respect of services provided or agreed to be provided by an arbitral tribunal Nil 100%
5. In respect of services provided or agreed to be provided by individual advocate or a firm of advocates by way of legal services Nil 100%
5A. In respect of services provided or agreed to be provided by a Director of a company to the said company Nil 100%
6. In respect of services provided or agreed to be provided by Government or local authority by way of support services excluding,-(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. Nil 100%
7. (a) In respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business. (b) In respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any 60% 40%
8. In respect of services provided or agreed to be provided by way of supply of manpower for any purpose [or security services] 25% 75%
9. In respect of services provided or agreed to be provided in service portion in execution of works contract. 50% 50%
10. In respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory Nil 100%

Service tax on Units located in Special Economic Zones (i.e. SEZ)

  • The Central Government, as per Notification No. 40/2012-ST, dated 20.06.2012 [hereinafter referred to as the "Said Notification"] has exempted the services on which service tax is leviable under section 66B of the said Act, received by a unit located in a Special Economic Zone (hereinafter refereed to as SEZ) or Developer of SEZ and used for the authorized operations, from the whole of the service tax, education cess and secondary and higher education cess
  • However, the exemption contained in the Said Notification shall be subject to the following conditions, namely-
    1. The exemption shall be provided by way of refund of service tax paid on the specified services received by a unit located in a SEZ or the developer of SEZ and used for the authorized operations:

      Provided that where the specified services received in SEZ and used for the authorized operations are wholly consumed within the SEZ, the person liable to pay service tax has the option not to pay the service tax ab intio instead of the SEZ unit or the developer claiming exemption by way of refund in terms of this notification.

      Explanation- For the purposes of this notification, the expression "wholly consumed" refers to such specified services received by the unit of a SEZ or the developer and used for the authorized operations, where the place of provision determinable in accordance with the Place of Provision of Services Rules, 2012 (hereinafter referred as the POP Rules ) is as under:-

      1. In respect of services specified in rule 4 of the POP Rules, the place where the services are actually performed is within the SEZ; or
      2. In respect of services specified in rule 5 of the POP Rules, the place where the property is located or intended to be located is within the SEZ, or
      3. In respect of services other than those falling under clauses (i) and (ii), the recipient does not own or carry on any business other than the operations in SEZ;
    2. Where the specified services received by the unit of a SEZ or developer are not wholly consumed within SEZ, maximum refund shall be restricted to the extent of the ratio of export turnover of goods and services multiplied by the service tax paid on services other than wholly consumed services to the total turnover for the given period to which the claim relates, i.e., consumed services to the total turnover for the given period to which the claim relates, i.e., consumed services to the total turnover for the given period to which the claim relates, i.e.,

      Refund amount= (Export turnover of goods + Services of SEZ Unit/Developer) * Service tax paid on services other than wholly consumed Services (both for SEZ and DTA)
      -------------------------------------------------------------------------
      Total turnover for the period
  • Therefore, from above provisions as contained in the Said Notification, it can be concluded that only for services, exclusively performed in SEZ units are exempt from tax. However in case, services are partly performed in SEZ and partly outside, then only the amount of services as provided in the premises of SEZ will be exempt from service tax and will be calculated as per the formula stated above.

Conclusion

In case the SEZ Unit / Developer/ Co – Developer is having no other operations other than SEZ, then, there is no need to pay service tax on reverse charge mechanism and ab-initio exemption can be availed. However, in other cases, if the recipient of services, i.e. person liable to pay tax (in respect of services to which Reverse Charge Mechanism is applicable) is situated in SEZ, then the exemption/refund under the Said Notification will vary according to the place of provision of services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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