Board deserves thanks from taxpayers for advance intimation & invitation for suggestions in respect of Point of Taxation rules that would be made applicable for charge of service tax.
These Rules can provide useful inputs in the process of drafting of Time & Place of Supply of Service Rules that would be required to be framed under proposed GST regime.
Considering importance of taxation provisions which these Rules will bring into Service Tax, certain issues that have came to my mind as matters for deliberation are submitted below for kind consideration.
These comments on issues have been divided into two parts namely
- issues pertaining to specific clarifications/modifications within the policy framework suggested under the Present Draft Rules and
- issues of principal nature that would make the system of service taxation simpler and which involve basic changes in the policy framework suggested under the Present Draft Rules
Comments on issues pertaining to specific clarifications/modifications within the policy framework suggested under the Present Draft Rules and
Applicability of New Point of Taxation
A clear definition of Point of Taxation under service tax is given under Rule 2. This definition of Point of Taxation clearly spells out when tax becomes payable to the Government.
However such Points or taxable event given in the present Draft Rules relate to only exceptional circumstances namely
- Treatment of advances (Rule 4)
- Change in Rate of Tax (Rule 5)
- First Time taxation of New Service (Rule 6)
- Continuous Supply of service: (Rule 7)
- Transactions with Associated Enterprises (Rule 8 )
- Royalties & similar payments (Rule 9)
Point of Taxation for Normal transactions (other than the exceptional ones) for provisions of service thus does not get clearly spelt out in the Draft Rules. This may keep the existing provisions making receipt of money to be the point of taxation for payment of service tax, still applicable to majority of service transactions, even after the Point of Taxation Rules are made operative.
Rule 3 (a) of Draft Rules
This reads as under
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.
Here it is not clear how provision of service can be considered as taken place when such service is to be provided. If the intention is to bring advance payments under service tax, that aspect is already covered in other Rules. Inclusion of service to be provided within the meaning of provision of service appears confusing and contradictory to later provisions in the Rules.
As an example Rule 3 (b) provides contain the words at the beginning as if before the time prescribed in sub rule (a) which creates duplication in respect of service to be provided, because these words again appear in the sub rule (b), at a later part of the provision
Rule 3 (b) of Draft Rules
This reads as under
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.
Definition of Supply of Service needs to be incorporated if the word Supply is to be retained, otherwise meaning of the provision may not be clear.
Issues of principal nature that would make the system of service taxation simpler and which involve basic changes in the policy framework suggested under the Present Draft Rules
Suggestions in respect of Point of Taxation for payment of service tax
Point of taxation should simply be provision of service as reflected by the invoice raised for the same. This will avoid need for complicated set of Rules presently made as Draft Point of Taxation Rules. Provision of Service based taxation has distinct advantages for the taxpayer & Department.
1. System for charge of tax becomes very simple to understand and follow.
2. Point of taxation in this manner is at par with other Indirect Taxes such as VAT & Excise.
3. Easy Reconciliation of taxable sales reported under ST 3 can be established, with the Audited Balance Sheets, which will make monitoring of collections much easier for the Department.
4. Artificial points such as receipt of advance etc which are purely financial arrangements between the parties do not mingle with real subject matter of tax i.e provision of service.
5. Relaxation for slower realizations in case of service payments can still be given by making provision for longer credit period for payment of tax. Monthly Payments can thus be allowed to be made within 2/3 months, from the close of month instead of by 5th of next month as followed at present.
6. Suitable relief for bad debts can also be provided, by allowing deductions for the same on the lines similar to Income Tax.
7. Cases of evasion through non raising of invoices or partial invoicing etc, can still be brought to book because point of taxation will be provision of service & not raising of an invoice per se.
CA M B Abhyankar