Refund of Cenvat Credit for Services taxed under Reverse Charge (Rule 5B) – Part 1

Refund of Cenvat Credit for Services taxed under Reverse Charge (Rule 5B)

W.e.f. 01.07.2012, u/s 68(2) read with Notification No. 30/2012-ST dated 20.06.2012, Service Tax liability is required to be discharged under reverse charge mechanism for specified services. In such cases, Service Tax is required to be either fully paid by service receiver or paid @ specified ratio by both, service provider as well as service receiver. In such proportional or partial reverse charge, there can be (and are) situations where the service provider is not in a position to take Cenvat credit to the till extent of accumulated Cenvat credit with the result that entire credit or some part thereof may remain unutilized and may therefore, result in no financial gain to such service provider. This is so because in partial reverse charge, service provider pays only a part of total Service Tax liability to the Government (may be 25% or 50% or 60% as the case may be). As such there will generally be accumulation of Cenvat credit in the books of service provider with no or little hope for credit utilization.

In terms of Serial Nos. 7(b), 8 and 9 of the table in Notification No. 30/2012 dated 20.6.2012, the new partial reverse charge mechanism is applicable to services provided or agreed to be provided by way of –

1. renting of a motor vehicle designed to carry passengers on non-abated value to any person who is not engaged in a similar business, or
2. supply of manpower for any purpose, or
3. service portion in execution of a works contract;

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. Thus the nature of the service and the status of both the service provider and service receiver are important to determine the applicability of partial reverse charge provisions.

The ratio of Service Tax liability to be discharged for these specified services is as follows:-

Rule 5B inserted in Cenvat Credit Rules, 2004 w.e.f. 01.07.2012 vide Notification No. 28/2012-CE(NT) dated 20.06.2012 provides as follows:

'Rule 5B - Refund of CENVAT credit to service providers providing services taxed on reverse charge basis. A provider of service providing services notified under sub-section (2) of section 68 of the Finance Act and being unable to utilise the CENVAT credit availed on inputs and input services for payment of service tax on such output services, shall be allowed refund of such unutilized CENVAT credit subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette.'

Under Rule 5B, inserted w.e.f. 1.7.2012 vide Notification No. 28/2012-CE(NT) dated 20.6.2012, refund of Cenvat Credit will be allowed to service providers providing services on reverse charge basis. The service providers providing services specified in section 68(2) and being unable to utilize Canvat credit availed on inputs and input services for payment of Service Tax on such output services shall be allowed refund of unutilized cenvat credit. For claiming such refund of credit, CBEC shall notify safeguards, conditions, procedures and limitations.

Procedure for Refund

Though delayed by 21 months, Government has now issued Notification No. 12/2014-CE(NT) dated 03.03.2014 for implementation of Rule 5B which provides for safeguards, conditions and limitations for claiming refund under rule 5B of Cenvat Credit Rules, 2004, alongwith application form / declaration to be submitted to the jurisdictional office of Central Excise.

CBEC has notified the procedure for filling refund application by service provider under Rule 5B of the Cenvat Credit Rules 2004 for claiming refund of unutilized Cenvat credit availed on inputs and input services received on and after July 1, 2012 in respect of only the following specified services under partial reverse charge mechanism:

1. renting of a motor vehicle designed to carry passengers on non-abated value, to any person who is not engaged in a similar business;
2. supply of manpower for any purpose or security services; or
3. service portion in the execution of works contract

Refund Applicable to Whom

Since partial reverse charge is applicable only when service provider is an individual or HUF or firm or LLP or association of person located in a taxable territory and when service receiver is a body corporate being a business entity located in taxable territory, refund under Rule 5B of Cenvat Credit Rules shall automatically apply only to such class of service providers.

Therefore, refund shall be eligible to the following output service providers –

1. Renting of motor vehicles designed to carry passengers to any person who is not engaged in similar business (for non-abated cases)
2. Supply of manpower for any purpose including security services
3. Service component in the execution of works contract

In full (100%) reverse charge cases, the concerned service is not considered to be an output service for the service provider and as such, is not eligible for Cenvat credit. In such cases, since credit itself is not allowable, there is no question of Cenvat refund. Therefore, Rule 5B of Cenvat Credit Rules is not applicable to such cases.

(To be continued)