Determination of Time & Rate in Service Tax (Point of Taxation Rules, 2011)

Prepared By:CA Pradeep Jain,CA Preeti Parihar And Mayank Palgauta INTRODUCTION:- In respect to the service tax Law, the Central Government...

Prepared By:CA Pradeep Jain,CA Preeti Parihar And Mayank Palgauta

INTRODUCTION:-

In respect to the service tax Law, the Central Government of India, as always, has come with lots of amendments and clarifications in the Budget, 2011. When a particular service will be taxed is the major aspect in the service tax law. As on date the service tax is payable on the receipt of payment towards the service provided, but now government has notified the "Point of Taxation Rules, 2011" which prescribe the procedure for determination of point of taxation, i.e. when the service tax will be payable. For prescribing these rules, Notification No. 18/2011-Service Tax dated 1st March, 2011 has been issued which will be effective as from 1.4.2011.

WHAT IS POINT OF TAXATION:-

Rule 2(e) of these rules says that the point of taxation is the point at which the service will be deemed to be provided. In brief, this notification says that the point of taxation will be the earliest of the following dates:-

i. Date on which service is provided or to be provided
ii. Date of invoice
iii. Date of receipt of payment

The detailed analysis of the above general rule is as under-

THE TIME WHEN A TAXABLE SERVICE IS TAXED- 

As per Point of Taxation Rules, 2011, "Point of Taxation^" shall be determined in the following sequence as under: -

(a) a service is said to be taken place at the time when service is provided or to be provided; and

(b) if the person issues an invoice or receives a payment (including any Advances whatever name called from such customers) before the time as specified in (a), the service shall be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier. 

Analysis:-

• In the above clause (a), the point of taxation will be the time when the service is actually provided. But if the service is not actually provided and the date of providing such service is fixed, then the point of taxation will be that date. This is clear by the use of words “provided or to be provided”
• If before actual providing the service / fixing the date of providing such service; the service provider receives the payment for the same or if he raises the invoice for it; the point of taxation will the date of payment or invoice whichever is earlier. In case of reverse charge method where the recipient is made liable to pay the service tax under section 66A of the Finance Act, 1994; the date of receipt of invoice or date of making the payment will be the point of taxation.
• Where any advance is received for service, the point of taxation will be date of receipt of such advance. 

HOW TO DETERMINE THE "POINT OF TAXATION" WHEN CHANGE IN RATE OF TAX HAS TAKEN PLACE-

Levy and collection of service tax revolves around three aspects – providing of service, raising invoice and payment of consideration. If all the three arise at the same time, there is absolutely no problem. But practically all the three transpire at the different points of time. In such case, the litigation arises if the service tax rate changes in between the chain of these three. These rules have dealt with such situation in rule 4 which is analyzed as follows:-

(a)  in case a taxable service has been provided before the change of rate,‑

1. where the invoice for the same has been issued and the payment received after the change of rate, the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or
2. where the invoice has also been issued prior to change in tax rate but the payment is received after the change of rate, the point of taxation shall be the date of issuing of invoice; or
3. where the payment is also received before the change of rate, but the invoice for the same has been issued after the change of rate, the point of taxation shall be the date of payment; 

Analysis:-

If the taxable service is provided before the change in rate of service tax, the point of taxation will be determined as follows:-

Events occurring before ST rate change	Events occurring after ST rate change	Point of taxation
Service provided	Invoice is issued and payment is received	Date of receiving payment or date of issue of invoice whichever is earlier
Service provided & invoice issued	Payment is received	Date of issue of invoice
Service provided & payment received	Invoice is issued	Date of receipt of payment

(b)  in case a taxable service has been provided after the change of rate,‑

1. where the payment for the invoice is also made after the change in tax rate but the invoice has been issued prior to the change of tax rate, the point of taxation shall be the date of payment; or
2. where the invoice has been issued and the payment for the invoice received before the change of tax rate, the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or
3. where the invoice has also been raised after the change of rate but the payment has been received before the change of rate, the point of taxation shall be date of issuing of invoice. 

Analysis:-

If the taxable service is provided after the change in rate of service tax, the point of taxation will be determined as follows:-

Events occurring before ST rate change	Events occurring after ST rate change	Point of taxation
Invoice is issued	Service provided and payment is received	Date of payment
Invoice is issued and payment is made	Service provided	Date of receipt of payment or date of issue of invoice whichever is earlier
Payment is received	Service provided and invoice is issued	Date of issue of invoice

This rule seems to be in contradiction to the basic rule 3 determining the point of taxation. Rule 3 says the point of taxation will be earlier of three – providing of service, issue of invoice or receipt of payment. As such, according to this rule 3, even if any of the three events has occurred the service tax deemed to have been paid. But in case of change in rate, it prescribes entirely different thing. For eg. in the above table, the last provision says that the payment is received before change in rate; so the point of taxation as per rule 3 should be date of payment. But this rule says in case of rate change, it will be date of issue of invoice. It is not clarified when the basic rule says the point of taxation has already occurred whether as per this rule, the assessee will be required to pay the differential tax.

HOW TO PAY THE SERVICE TAX IN CASES OF NEW SERVICES- 

In case of new service, no service tax shall be payable to the extent the invoice has been issued and the payment of the same has been received before it became taxable. Service tax will also not be payable if the payment is already been received before the service becomes taxable and the invoice is raised within a period of 14 days as prescribed in rule 4A of the Service Tax Rules, 1994. These provisions are not applicable in case of continuous supply of service. Continuous supply of service means service that is provided for more than three months.

DETERMINATION OF POINT OF TAXATION IN CASE OF CONTINUOUS SUPPLY OF SERVICE- 

The following steps have to be taken for determining the point of taxation in case of continuous supply of service-

(1) Where there is a continuous supply of service, the whole or part of which is determined periodically, shall be treated as separately provided at the date on which the payment is liable to be made by the service receiver, if such date is specified in the contract.

(2) If, before the time specified in sub-rule (1), the person providing the service issues an invoice or receives a payment (including any advance payment), the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

Analysis: -

• The contract between service provider and receiver will play important role as the point of taxation is majorly depended on such agreement.
• In case of continuous supply of service and periodically billing (like weekly, monthly, half yearly etc) by service provider, each period will be treated as separately provided on the date the liability of payment arise.
• If contract provides different dates of payments on which service receiver is liable to pay, then such different-different dates shall constitute point of taxation.
• If before providing the service of fixing date of service, payment is received or invoice is issued, point of taxation will be the date of payment or date of invoice whichever is earlier. In case of reverse charge method where the recipient is made liable to pay the service tax under section 66A of the Finance Act, 1994; the date of receipt of invoice or date of making the payment will be the point of taxation.
• Where any advance is received for the continuous supply of service, the point of taxation will be date of receipt of such advance. 

DETERMINATION OF POINT OF TAXATION IN CASE OF ASSOCIATED ENTERPRISES- 

The point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or invoice under rule 4A of the Service Tax Rules, 1994 has been issued, or the date of debit or credit in books of accounts of the person liable to pay service tax, whichever is earlier.

Analysis:-

The determination of point of taxation in case of "association" will be earlier of following three things- 

• the date of issuing of invoice
• the date of receipt of payment
• debit or credit entry made in the books of accounts 

DETERMINATION OF POINT OF TAXATION IN CASE OF COPYRIGHTS, ETC.-

In respect of royalties and payments pertaining to copyrights, trademarks, designs or patents, where the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed, and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration, the service shall be treated as having been provided each time when a payment in respect of such use or the benefit is received by the provider in respect thereof, or an invoice is issued by the provider, whichever is earlier.

Analysis:-

In case of royalty, copyrights, patents etc. the whole amount is not ascertainable at the time of providing service. In such cases, the service will be deemed to have performed each and every time the payment is received or the invoice is issued. In such cases, the point of taxation will be the date of receipt of payment /the date of receipt of such benefit for such use or date of issue of invoice whichever is earlier.

SAVINGS- 

Nothing contained in these rules shall be applicable in case of invoices issued prior to the date from which these rules become effective.

Analysis:-

No provision of the point of taxation rules, 2011 shall be applicable to those invoices which have been issued before these rules come into force i.e. 1st day of April, 2011.

CONSOLIDATED ANALYSIS OF THESE RULES AND THEIR EFFECTS:-

• As these rules contain that the point of taxation will be determined even when the service is deemed to have been provided by service provider which itself is not exact determinable that when a service is called as "deemed to be provided". 

• These rules provide that service tax rate of such time will be applicable when either service is deemed to be provided or date of receipt of payment, whichever is earlier. The effect of this rule will be that the service provider is liable to pay service tax even before the receipt of payment from service receiver. 

• These rules say that where the person issues an invoice or receives a payment, before providing the service; the point of taxation will be the date of invoice or the date of payment whichever is earlier. But this point of taxation will be applicable only to the extent of the invoice raised or payment received. Thus, if there is a case where the invoice is issued for some value (say Rs. 1 lacs) before providing the service, then the service is provided and then the invoice is issued for remaining value (say Rs. 5 lacs) and finally the payment is received in lumpsum (Rs. 6 lacs); the point of taxation will be determined at two levels. Firstly, at the time when the invoice is raised for Rs. 1 lacs and secondly; at the time of providing the service. 

• As these rules shall be come into force from 1/4/2011 will not be applicable on the invoices issued prior to this date, what will be the point of taxation for those receipts which are received after 1/4/2011 but provided before 1/4/2011. It is also not clarified in these rules. 

• In case of continuous of supply of service, in what manner the point of taxation will be determined if there is no specific contract regarding payments and issuance of invoices. It is also not clarified. 

• The accounting aspect of the service tax will be difficult and would not commensurate with the normal accounting practices. It will be difficult to trace out the defaults as there is not set practice system for this type of accounting. Further, it will be almost impossible to tally the figures of service tax records and Balance sheet. Over and above all, the chances of errors – both intentional and unintentional will increase. 

• There is recent trend in the departmental audit teams to make out paras by comparing the figures of Service tax return & records, with the Balance sheet. If these rules are implemented, Balance sheet will not tally with the return in any way. So, what will be the basis of finding the authenticity of the figures shown in the service tax return? 

In the nutshell, these rules are taking the providing of service as basis of determining the point of taxation. But it is practically not possible to verify whether the service has been provided or not. Thus, when the basis itself is uncertain, what will be the fate of these rules, no one knows…