REVISED GRAMMAR FOR TAXATION OF SERVICES by SANJEEV MALHOTRA FCA, FCS, AICWA. Head North India – STVAT Consulting In this article Sanjeev Malhotra discusses certain concerns in the Point of Taxation (for Services Provided or Received in India) Rules, 2010

 

The delay in implementation of GST from Ist April 2011 is a temporary hitch. The delay can be attributed to political issues rather than merits of the new taxation regime. In the background, the system is working fast enough to align itself to the realities of GST. One such issue is the taxation of services. Though we have been living with taxation of services since 1994,  as service tax is regulated through Finance Act, 1994. Hitherto, taxation of services is the sole purview of Union Government but in GST environment, services will also be taxed by State Governments. The structural changes in taxation of services were required in view of GST. The same is proposed to be implemented through new rules called Point of Taxation (for Services Provided or Received in India) Rules, 2010, the draft of which has been released for stakeholders comments. Presently the services are taxed on receipt basis, through this change a complex model is proposed to be put in place for taxation of services. This will completely change the way the service tax is charged as on date and the proposed new model of taxation of services is said to be aligned to GST. A critical analysis of the provisions of proposed rules, 2010 has been attempted through the following article.  

PRESENT SCENARIO

 Presently service tax is charged on receipt of payment basis. Rule 6 of Service Tax Rules, 1994 provides for payment of service tax as under :-

(1)The service tax shall be paid to the credit of Central Government :-

 i. By the 6th day of the month, if the duty is deposited electronically through internet banking; and

 ii. By the 5th day of the month, in any other case.

Immediately following the calendar month in which the payments are received, towards the value of taxable services;

Provided that ……………………………………………………..

Provided further that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable.

Thus presently the tax is levied on the basis of receipt of consideration and no cognizance is taken of the time of provision of service or raising of invoice of service. Though sub rule (1) of Rule 4A provides that “ Every person providing taxable service shall not later than fourteen days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier, issue an invoice, a bill or as the case may be, a challan signed by such person ………………………………………………………………….  

PROPOSED SCENARIO

In respect of point of taxation of service tax, following changes are proposed to be made through Point of taxation (for Services Provided or Received in India) Rules, 2010.

Rule 2 

b) “ associated enterprises” shall have the meaning assigned to it in section 92 A of the Income Tax Act, 1961 (43 of 1961):

d) “ Invoice” shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan             as prescribed therein;

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

 g) ‘taxable event” means an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or      the receipt of payment.

  Rule 3 : For the purposes of these rules, -

a) A provision of service shall be treated as having taken place at the time when service is provided, or is to be provided.

b) If, before the time prescribed in sub-rule (a), the person providing the service issues an invoice or receives a payment in respect of service to be provided, the supply shall be, to the extent covered by the invoice or the payment made thereof, deemed to be have taken place at the time the invoice was issued or the payment is received, as the case may be, whichever is earlier.

  Rule 4 : Treatment of advances:  Wherever any advance, by whatever name it is known, is received by the service provider towards the provision of taxable service, the tax becomes payable on the date of receipt of each such advance.

Provided that no tax shall be payable on an interest free refundable deposit.

Rule 5 : For the purposes of these Rules, if there is a difference in date and time between the raising of invoice, date of payment and providing of taxable service, and the tax rate changes during such period, the point of taxation shall be determined in the following manner

a) Where a taxable service has been provided before the change of rate*, but the invoice for the same has been raised and the payment received after the change of rate, the point of taxation shall be the date of payment or issuance of invoice, whichever is earlier.

b) Where the invoice has been raised and service provided prior to a change in tax rate*, the point of taxation shall be the date of raising of invoice, provided the payment for the invoice is made within 30 days of raising of invoice. In other cases, it would be the date of payment.

c) Where the invoice has been raised prior to the change of tax rate*, but the service has been provided and the payment for the invoice made after the change in tax rate, the point of taxation shall be the date of payment.

d) Where the invoice has been raised and the payment for the invoice received before the change of tax rate*, but the service provided after the change of rate, point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier.

*(Note:- change in tax rate includes withdrawal of exemption)

Thus besides receipt of consideration for services, issue of invoice of services and date of provision of services is also proposed to be included as Point of taxation of services. Earliest of any of the following three events will trigger the liability of service tax in the proposed environment.  

1. Receipt of consideration of services.

2. Issue of invoice of services.

3. Date of provision of services.

 CONCERNS

Though the taxation of services is proposed to be streamlined through the new rules but it is likely to bring with it the following issues which need to be addressed before these rules are finalized.

 1. Advance Vs deposit : the receipt of advance (by what ever name called) by the service provider triggers the liability of tax as per rule 4 but interest free refundable deposit is an exception to this rule.  Following points are of interest in this regard.

a. What is the difference between Advance and deposit. How can a deposit be distinguished from Advance.

b. Revenue will be tempted to prove even the genuine deposit as advance and tax payer will be tempted to prove every advance as deposit.

c. Any service receiver giving interest free deposit to service provider is unheard phenomenon. It is always the advance payment. Thus the exception provided needs to be clarified.

 2. Date of payment : Date of receipt of payment is another point which  is relevant for arriving at the point of taxation. Following points will arise in this context.

a.   What is exactly the date of payment. In case of cash payments, there can't be any confusion but in reality most of the payments are made by cheques. It is a known fact that in case of cheques / payorders,  following dates are relevant.

i.    Date of issuance of cheque.

 ii.    Date of receipt of cheque.

 iii.    Date of banking of cheque.

iv.    Date of credit of cheque in the bank account.

Invariably all the four dates are different. It is also quite possible that one of the dates fall in one tax period and other date falls in another tax period. Out of the above four dates, which date will be considered as date of payment and what kind of record will be considered as final proof of that date.  

3. Payment by Book adjustment : The payment can also be made by debiting the account of the party against credit balance lying in his account for some other transaction. This method of payment has been considered in proposed rules in respect of payment to associated enterprises. This method has also been clarified by CBEC vide circular issued in 2010. But in respect of unrelated enterprises, no provision has been made for this mode of payment. This method of payment is very common in respect of parties which are service receivers and also suppliers to the same enterprise. It is pertinent to note in this regard that Income Tax Act provides for date of credit of account as one of the dates relevant for calculation of TDS.

4. Issuance of Invoice :Invoice includes any bill or challan issued. There is a proper control procedure prescribed for issuance of invoices. Would same stringent provisions will apply for issuance of any other bill or challan? In the service industry, it is generally found that the progress of service is intimated to the service receiver by way of correspondence and payment is demanded on that. Would this intimation sent to the service receiver become invoice for the purpose of calculation of service tax liability?

5. Date of provision of service : Continuous supply of service has been considered in rules only to provide for contracts where service is provided for a period of more than six months. The service contracts which provide for service to be provided within six months, the method to arrive at the date of provision of service has not been prescribed. Example : Architecture services, Chartered Accountants services, Management consultancy services  etc. The services are generally provided over a period. How will date of provision of service be arrived at ?

  02/09/2010