With the introduction of the Negative List of Services, all eyes, including those of the taxmen and the taxpayers were looking forward to a simplified tax regime. To add to the work of the taxmen and the worries of the taxpayers, the Government had introduced the reverse charge mechanism which has been made applicable to certain specified services. These specified services did not enjoy the threshold limit of exemption and an additional onus was placed on the service recipient for discharging the liability of service tax. Three years and several amendments later, those eyes are now glaring into the near future to welcome Goods and Service Tax (GST). Till the same is introduced and enacted, there have been several services which were earlier exempt and are now being brought into the service tax net.
On February 28, 2015, the Finance Minister expressed his intent to widen the service tax base by ‘slightly pruning the negative list of services and withdrawal of certain other exemptions’. In the said context, with effect from April 1, 2015, the following services were isolated from the service tax exemptions list and were made taxable
Further, the aforesaid services (herein after also referred to as ‘subject services’) have been brought under the pre-existing list of services which are subjected to tax under the Reverse Charge Mechanism.
While the rest of the country was debating on the applicability of cesses and the increase in Service Tax rate to 14%, an important concern area appears to have been overlooked. What would be the position of tax for the aforesaid services which have been provided in the months of March, but payment for the service has been received in April. At which point would these services be subjected to tax and in whose hands?
Under the applicable charging section which governs taxation of services, all services other than those mentioned under the negative list, provided or agreed to be provided in the taxable territory by one person to another shall be subjected to service tax.
Notwithstanding the fact that the subject services for the months prior to April 2015 were exempted on account of exemption notification, if one has to determine the point when the service is deemed to be provided, reference needs to be sought to the Point of Taxation Rules, 2011 (‘POTR’). As per the generalised rule (i.e. Rule 3) of POTR, the point of taxation shall be the time when the invoice for services provided or agreed to be provided is issued. In the present case, prior to the Budgetary Amendments, the point of taxation, shall be the date of issuance of the invoice for services provided by Mutual Fund Agents and marketing agents of lottery tickets (i.e March 2015). Therefore, services shall be deemed to be provided prior to the date from when they were subjected to tax. Further, on account of the exemption prevailed prior to April 2015, the issue of determining the onus of tax would not arise.
Insertion of the aforesaid services into the tax regime under the reverse charge mechanism brings us to Rule 7 of the POTR, which specifically provides for the point of tax applicable under the said mechanism. The said Rule commences with a ‘Notwithstanding clause’ which has precedence over the generalised Rule 3 and states that the point of taxation in such cases shall be the date on which payment is made to the service provider, considering the same is made within 3 months of the date of invoice.
On the basis of a combined reading of the above provisions read with the Budgetary Amendments, it is pertinent to note that removal of an exemption and subjecting it to tax under the reverse charge mechanism has caused the point of taxation to migrate from the date of raising the invoice (i.e. prior to April 1, 2015) to the date of payment by the Service recipient (i.e. post April 2015). On account of the above, would a delay in payment of consideration by the service recipient subject the same to tax under the reverse charge mechanism?
Seeking recourse to the aforesaid query, a reference is sought to the Taxation of Service – An Education Guide which clarifies that the onus of payment of tax for a service provider and a service receiver when a service is governed under Rule 7. The illustration mentioned therein pertains to a scenario where a service is subjected to partial reverse charge and the onus to discharge tax rests on the service provider and service receiver. Accordingly the point of taxation for the recipient of services shall be the date of payment whereas the service provider would be liable to tax on the date of issue of invoice. Further for services whose point of taxation has been determined and whole liability has been affixed before the introduction of the reverse charge mechanism, the service recipient shall not be subjected to any ‘additional’ liability under the subject tax regime. Both the aforesaid clarifications do not cover a scenario where a service, earlier exempt, is now taxable in the hands of the service recipient. The clarification pertaining to additional liability would not apply, since the subject service, which was earlier exempt, shall now be taxed in the hands of the service recipient.
Concluding from the above, one wonders if it is a prudent business practice to make payments to the service provider before April 1, 2015, whilst the mega exemption still covers the subject services or would it be beneficial to pay the service tax under the reverse charge mechanism and avail the credit of the same by the recipient of services. Service providers too have some thing to consider, as to whether treating their output service as an exempt service is more beneficial or not, in line with Rule 6 of the Cenvat Credit Rules. A clarification from department to curve out the said issue is expected by the MF industry.
While the above pruning carried out to the mega exemption list, uncovers more hurdles for the taxpayers, all one can do is hopefully look towards the horizon for the State of the Art indirect tax regime, called Goods and Service Tax. Existence and applicability of the reverse charge mechanism under the proposed legislation still awaits some light.
(The article is written by Jigar Doshi and Farhad Dalal working as Senior Manager and Manager at SKP Business Consulting LLP.)