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Domestic Reverse Charge: Register Under Service Tax
There is a paradigm shift in the basis of taxation of services from 1 July 2012 due to the introduction of the negative list basis of service taxation. Effectively, all services other than those explicitly listed in the Negative List or the Exempt List would now be liable to service tax. In addition to this conceptual change, the new regulations have also brought about changes, in certain instances, on the compliance aspects such as who is liable to pay tax and consequently register under the applicable regulations. Taxand India discusses the introduction of the negative list basis of service taxation and the liability that certain companies now face as a result.
To elaborate, the liability to register under the service tax regulations and pay the applicable tax is on the business entity procuring the services, and not on the service provider, in the following instances:
a) Legal services provided by law firms
b) Works contract services, services of hiring motor vehicles and services of manpower supply, when the service provider is an individual, partnership firm or a Hindu Undivided Family
Thus, business entities which may have been otherwise not liable to pay service tax on account of their revenues being non-taxable or exports may now become liable to seek registration and pay taxes in respect of specified services they procure.
This is a significant change for companies who were, until now not registered but are otherwise availing services of advocates or law firms as they will now need to register and pay the applicable taxes. In the context of Indian advisory firms advising overseas PE funds or fund managers, this issue would become relevant particularly where the advisory arms may not currently be registered for service tax on account of their services qualifying as exports. With the recent change, such advisory arms will need to re-evaluate the need to register depending on whether they are procuring services from law firms or services of works contractors etc. Seeking registration will also have the added advantage of allowing for recovery of input tax costs by way of refund.