Pending roll out of the much awaited “Place of Supply Rules for Services”, which was announced in Union Budget 2010-11 speech, the Government Of India has published the Draft Point of Taxation (For Services Provided or Received in India) Rules (‘the draft Rules’) for services alongwith Explanatory Notes to the Rules. The Rules are proposed to be issued by exercising the powers conferred under Section 94 (2) (hhh) of the Finance Act, 1994 (‘the Act’).
The Government has invited industry responses on the draft Rules by 1 September, 2010 post which the Rules with modifications if any, would be formulated.
Objective of the draft Rules:
As per the preamble to the draft Rules, the purpose is as follows:
- To clarify the levy and collection of service tax particularly in case of change of rate of service tax and imposition of service tax on new services depending upon the situation;
- To link the payment of tax to raising of invoice, provision of service or payment for service, whichever is earlier;
- To align the service tax provisions with other indirect taxes for smooth transition to proposed Goods and Services Tax regime.
Draft Rules – Key Highlights:
Following are the key highlights of the draft rules:
- Provision of service shall be treated as taken place on actual provision of service, issue of invoice or payment of service whichever is earlier;
- Service tax, in case of advance payments, shall be payable on date of receipt of advance;
- In case of change in rate of service tax or introduction of new services, levy and collection of service tax shall be based on date of invoice, payment of service or provision of service;
- In case of Continuous supply of services, the supply shall be determined depending upon:
– Terms of payment / completion of event as per the contract;
– When no terms are prescribed in the contract, the date of payment of service or issue of invoice whichever is earlier.
Our Comments:
- The preamble suggests that the Rules are proposed in exercise of the powers given under Section 94 (2)(hhh) of the Act. This section empowers the government to form rules relating to the date for determination of rate of service tax, whereas the draft rules seem to be defining the taxable event and the point of taxation itself. To that extent, the validity of the draft rules needs to be evaluated.
- The Rules have been framed to govern the levy and collection of service tax for few conflicting situations such as change in rate of tax, introduction of new service under service tax, continuous supply of services etc. While this a welcome move to introduce clarity and certainty in the matter, the multiplicity of parameters used for this purpose in the draft Rules could fuel more complexity in interpretation and implementation.
- Although the objective and Explanatory Notes suggest that the service tax payment, in all situations, is being linked to the raising of invoice, provision of services or payment for services, whichever is earlier, the draft rules appear to address specific conflicting situations. In any case, if the point at which a service provider should pay tax is to be changed, it should be in consonance with existing provisions of the Service Tax Rules 1994.
- Considering the above, the stated objectives and the contours of the draft Rules needs to be reconsidered in view of the powers entrusted under Section 94 of the Act and the existing service tax framework. To this aspect, the industry should proactively provide feedback to the draft Rules.
