Service Tax - Draft Point of Taxation Rules 2010

Service Tax

Draft Point of Taxation Rules (for Services provided or Received in India) :

The government has proposed to make major changes in Service Tax by seeking to introduce the Point of Taxation Rules. Earlier, the provision of service was considered to be the point of taxation in most cases. However, there were stipulations regarding issue of invoices under rule 4A of the Service Tax Rules. However, there was lack of clarity vis a vis changed tax rates, services becoming taxable, etc. As a result, the government seeks to introduce these rules. Though, the rules are still at a draft stage, it is extremely important to understand these rules since, they will form the base for the rationalization of the tax structure. Another important reason for the introduction of these rules is to bring the service tax structure in line with Central Excise and VAT laws where the tax liability is on accrual basis.

Rule 1- The rules will be applicable from the date of notification by the government.

Rule 2 – Important definitions of terms such as,

i) “Continuous supply of service” –“Any service which is provided, or to be provided, under a contract, for a period exceeding six months ,or where the Central Government, by a notification, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition”

ii) “Point of taxation” – “means the point of time when the tax becomes payable to the Government”

iii) “Taxable services” – “service which is subjected to service tax, whether or not the same is fully exempt by the Central Government vide powers conferred under Section 93 of the Act.

iv) “Taxable event”-” an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or the receipt of payment”

Rule 3 – Interestingly, there is an introduction of a deeming provision in case of the provision of service. The rule lays down that the tax shall be levied at the stage when the service is provided. This rule is also applicable in the case of future provision of service. The deeming provision comes into effect when the provider of service receives a payment or issues an invoice before providing a service. In such a case, the service (though not actually provided) is “deemed to be provided” to the extent of the invoice amount or the payment received. Therefore, the service provider will be liable to pay service tax on the invoice or payment amount, as the case may be.

Rule 4 – This rule deals with the taxation of advances received from customers. The point of taxation is sought to be laid down. This is also important to avoid any difficulty at the time of changes in the tax rates.

The rule essentially states that the advances will be taxed on the date of their receipt. In other words, the rate of tax shall be the rate applicable when the advance is received. As per the explanation to the rule, tax payment is linked to the general rule of issuance of invoices or receipt of payment, whichever is earlier. However, interest free deposits which are not subject to this rule.

Rule 5 – This refers to the point of applicability of revised tax rates. There are various events which are of prime importance. They are :-

i) Date of Provision of service

ii) Date of issuance of invoice

iii) Date of Receipt of payment

iv) Deeming period for receipt of invoice.

PROVISION OF SERVICE	ISSUE OF INVOICE	PAYMENT	POINT OF TAXATION	Remarks
Service provided before change in tax rate.	Invoice issued after change in tax rates.	Payment received after the change in tax rate.	Date of invoice or payment, whichever is earlier	As service was already taxable, and the tax point is invoice/ payment, tax charged on revised rate.
Service provided before change in tax rate.	Invoice issued before change in tax rates.	Within 30 days of invoice.*	Date of invoice	If payment not received within 30 Days*, invoice is invalid and date of payment shall be the effective date for determining the rate of tax.
Service provided after change in tax rate.	Invoice issued before change in tax rates.	Payment received after the change in tax rate.	Date of payment	A supplementary /additional invoice will need to be issued for recovery of tax.
Service provided after change in tax rate.	Invoice issued before change in tax rates.	Payment received before the change in tax rate.	Date of payment or invoice, whichever is earlier.	Takes care of services like public performance, airline ticketing etc.

Thus, the general rule is followed. This means that the point of taxation would be the earlier of two events, i.e. Issue of invoice or receipt of payment.

Rule 6 – When a non-taxable service becomes taxable, this rule is to be referred to. However, the service referred to is a one-time supply of service and not one involving continuous supply of service (e.g. construction service, repairs and maintenance AMCs, etc.)

There is no service tax liability in the following situations.

i) When an invoice is issued and payment is received, before a service becomes taxable.

ii) When there is a late issuance of an invoice, if a payment for a service is received prior to the change in the tax rate AND the invoice is issued within a period of 14 days from the date of receipt of the payment.

iii) If any one time service is provided before the date of taxability of the service, such a service will not be taxable.

Rule 7 – This rule is a bit complex since it deals with continuous supply of services i.e. construction services, repairs and maintenance AMCs, etc.

The conditions of the service contract or agreement determine the tax rate applicable in case of such services. Thus, tax is due as follows :-

i) On the due dates of payment as specified in the contract.

or

ii) Completion of certain events or “milestones” to which payment is linked.

or

iii) If none of the above two conditions is specified in the long term contract or agreement, then as per the general rule, the point of taxation occurs when the invoice is issued or upon receipt of payment, whichever is earlier.

Provisos –

i) Generally, If any payment is received before a non taxable services becomes a taxable one, then the payment would not be taxable. This is so, even though the service may be provided after the service becomes taxable.

However, there is an exception in the case of continuous supply of service when the service becomes taxable during the currency of its provision but the payment is received after the service has become taxable.

a) The payment for construction services is made before the tax becomes applicable but the construction is started after the service becomes taxable.

b) Part of the construction is done before the service becomes taxable but payment for the same is received after the service becomes taxable

c) Water supply has been made in the month of March & April, the bill is raised in month of May, but the service has become taxable in the month of April.

In the abovementioned examples of continuously supplied services, tax is liable to be paid on the basis of raising of invoice or the date provided for payment in the contract or the actual payment, as the case may be. This Rule is drafted keeping in view the fact that the extent of service provided during a particular period of time in continuous supply of the service is difficult to determine.

Note : It appears that this could lead to some difficulty in determining the point of taxation. A lot will depend on the due dates of payment for services specified in the service contract.

Rule 8 – This rule relates to associated enterprises. The Point of taxation shall be the

i) date on which payment has been made;

ii) the date of debit or credit in the books of account or;

iii) issuance of debit or credit notes, whichever is earlier.

Rule 9 – Provides that in the case of royalty and other such payments, the whole amount of the consideration for the provision of service may not ascertainable at the time of provision of the service. Subsequently, if the use or benefit of these services by a person other than the supplier gives rise to any payment of consideration, then the general rule shall apply. In other words, the taxable event shall be whatever occurs earlier viz., payment received by the provider for such use or benefit or an invoice is issued.

Conclusion – The government has invited reactions from the professional community and the general public on these rules. However, there are still a lot of problem areas which have to be sorted out. But, these rules are an invaluable guide towards understanding the rationale of the government. They are also a curtain-raiser to the introduction of G.S.T. next year.