Soon service tax may be levied when the consideration is received or when the invoice is raised, whichever is earlier
According to the new rules on ‘time of supply’, service tax will also be levied at the point of raising invoice. At present, service tax is charged only when the amount is received. However, it has been proposed in the new rules that it be levied when the consideration is received or when the invoice is raised, whichever is earlier.
“There will be a change from cash system to accrual system. This is similar to taxation in case of goods and direct tax,” a finance ministry official told Business Standard. The rules, approved by Finance Minister Pranab Mukherjee, wolud be put up for public comments very soon, he added.
‘Time of supply’ rules will also address the issues such as management services, leasing of equipment, and hiring of staff, which are in continuous supply of services. Such services are provided on an ongoing basis and, at times, it becomes difficult to compute service tax liability if service charges change at any point.
The rules will help identify the point at which new tax rate should be considered if the amount changes midway in a continuous service. For instance, if a tuition is continuous for 12 months and the fee or tax rate changes in between, the rules will explain till what point the existing tax rate would be paid.
The government is also working on ‘place of supply’ rules, which will clearly define what should be considered the place of supply for levying service tax. The rules, however, may be delayed as these are being considered in preparation of Goods and Services Tax (GST), which has not seen much progress.
Official sources said the rules did not hold relevance if GST was not there. In the exiting tax regime, service, being a federal issue, was taxed by the Centre and the place of levy did not affect its revenue receipts. In GST, the place of supply would be defined to avoid disputes among states in inter-state transactions.
“We are studying international practices. We have to see if the place of supply rules are actually required before GST is introduced,” said the official.
The Task Force of 13th Finance Commission on GST had also given suggestions on ‘place of supply’ rules based on international tax practices, especially in the European Union.