Analysis of Point of Taxation Rules, 2011

CA Jaikishan Manghani

Introduction:

The Point of Taxation Rules, 2011 (hereinafter referred to as “the POT Rules”) were notified on March 1, 2011 and have been amended from time to time. As mentioned in my earlier Article, service tax is one of the most important sources of revenue for the Central Government and therefore the legislators are trying to bring more and more persons under the service tax net. The introduction of Negative List Regime w.e.f. 01.07.2012 is an example of this.

In a layman’s language, if the services of a service provider do not fall under the negative list (as provided under section 66D of the Finance Act) or not made specifically exempt, such services become taxable and he is supposed to pay the service tax on rendering of such services, if he crosses the threshold limit of Rs. 10 lacs of rendering of such taxable services.

It is therefore important for every such provider of taxable services to know and understand at what point of time his liability to pay service tax arises.

For better understanding the POT Rules, let us first look into the provisions of Rule 4A of the Service Tax Rules, 1994.

Rule 4A of Service Tax Rules, 1994:

As per the said Rule, a provider of taxable services is required to raise the invoice not later than 30 days of completion of taxable service or receipt of any payment of such taxable service, whichever is earlier.

However, this basic rule has certain exceptions:

• As per the third proviso of sub-rule (1) of Rule 4A, in case of continuous supply service (i.e., the service which is provided or agreed to be provided on continuous or recurrent basis under a contract for a period exceeding 3 months with an obligation of payment to the service provider periodically), the service provider is required to raise the invoice within 30 days of the date when each event specified in the contract which requires the service receiver to make a payment to the service provider, is completed.
• As per the fourth proviso to the said sub-rule, in case of a banking company, a financial institution or a NBFC, the invoice is required to be raised within 45 days of completion of taxable service or receipt of payment whichever is earlier.

Now let us understand the POT Rules, 2011.

Rule 2A of the POT Rules: Date of Payment:

As per the said Rule, the date of payment on which the payment is entered in the books of account of the service provider or the date on which the same is credited to his bank account, whichever is earlier, will be treated as the date of payment.

But this rule has also got some exceptions, which are as under:

As per its first proviso, in the following cases, the date of credit of payment on the bank account of the service provider will be the date of payment:

(i) When there is any change in the effective rate of tax or when the service is going to be taxed for the first time;

(ii) When the bank account of the service provider is credited after 4 working days from the date when there is change in the effective rate of tax or where the service is going to be taxed for the first time or

(iii) When the payment is made by way of an instrument, then, the date on which such instrument is credited to the bank account of the service provider.

Rule 3 of the POT Rules: Determination of Point of Taxation:

As per the said Rule, unless otherwise provided the point of taxation will be:

(i) The time when the invoice for the service provided or agreed to be provided is raised.

However, this rule has also an exception. As per proviso to this rule, when the invoice is not raised within the time stipulated as per Rule 4A of the Service Tax Rules, 1994 (normally 30 days as mentioned above), then, in such cases, the date of completion of service will be the point of taxation.

(ii) When the payment is received before the time as specified in (a) above, then, the time when such payment is received by the service provider, will be the point of taxation.

However, in case of continuous supply service which requires the receiver of service to make any payment to service provider, the date of completion of each such event as is specified in the contract, shall be deemed to be the completion of provision of service.

Rule 4 of the POT Rules: Determination of Point of Taxation in case of change of effective rate of tax:

The provisions of Rule 3 as mentioned above will not be applicable in following the cases which attract the provisions of Rule 4.

For better understanding the provisions of Rule 4 let us assume the date change of effective rate of tax to be 01.06.2015.

Now let us understand the provisions of Rule 4 of POT Rules with the help of the following table:

Clause	Sub-clause	Condition	Point of taxation
(a)		When the taxable service has been provided before the change in the effective rate of tax
	(i)	When invoice is raised after 01.06.2015 (date of change of effective rate of tax) say on 05.06.2015 and payment is also received after 01.06.2015 (date of change of effective rate of tax) say on 10.06.2015	05.06.2015(i.e., the date of invoice or the date of receipt of payment whichever is earlier.
	(ii)	When invoice is raised before 01.06.2015 (date of change of effective rate of tax) say 28.05.2015 but payment is received after 01.06.2015 (date of change of effective rate of tax) say on 05.06.2015	28.05.2015(i.e., the date of invoice).
	(iii)	When invoice is raised after 01.06.2015 (date of change of effective rate of tax) say 05.06.2015 but payment is received before 01.06.2015 (date of change of effective rate of tax) say on 28.05.2015	28.05.2015(i.e., the date of receipt of payment).
(b)		When the service has been provided after the change of effective rate of tax
	(i)	When invoice is raised before 01.06.2015 (date of change of effective rate of tax) say 28.05.2015 but payment is received after 01.06.2015 (date of change of effective rate of tax) say on 05.06.2015	05.06.2015(i.e., the date of receipt of payment).
	(ii)	When invoice is raised before 01.06.2015 (date of change of effective rate of tax) say 28.05.2015 and payment is also received before 01.06.2015 (date of change of effective rate of tax) say on 31.05.2015	28.05.2015(i.e., the date of invoice or the date of receipt of payment whichever is earlier.
	(iii)	When invoice is raised after 01.06.2015 (date of change of effective rate of tax) say 05.06.2015 but payment is received before 01.06.2015 (date of change of effective rate of tax) say on 28.05.2015	05.06.2015(i.e., the date of invoice).

 Rule 5 of the POT Rules: Payment of Tax in case of new services:

In the negative list regime as introduced w.e.f. 01.07.2012, there is hardly scope of bringing into effect any new services. But if there is any change in the list of negative services as provided under section 66D of the Finance Act or there is any change in the list of exempted services, there may be an increase or decrease or introduction of new taxable services.

As per Rule 5, there shall be no tax liability:

• To the extent the invoice is raised and payment is received before such new tax becomes taxable;
• If the payment has been received before such new service becomes taxable and invoice is raised within 14 days of the date when such new service becomes taxable.

Rule 7 of the POT Rules: Determination of Point of Taxation in case of specified Services or persons:

The provisions of the said Rule 7 override the provisions of Rules 3, 4 and 8 of POT Rules. As per the said Rule:

• When tax is required to be paid by the recipients of taxable services in terms of section 68(2) of the Finance Act, 1994 under full or partial reverse charge mechanism, the point of taxation in these circumstances will be the date on which the payment is made.

However this rule has got two exceptions:

(i) As per first proviso to the said rule, when the payment is not made within a period of 3 months from the date of invoice, the point of taxation shall be the date immediately following the period of 3 months.

(ii) In case of an associated enterprise (as explained below) when one associated enterprise which is located outside India provides the taxable service to other associated enterprise which is located in India, then, the date on which the Indian associated enterprise debits its accounts for services received from the first mentioned associated enterprise located outside India or the date on which the associated enterprise located in India makes the payment to the first mentioned associated enterprise located outside India whichever is earlier, will be the point of taxation.

Associated Enterprise: As per section 92A of the Income Tax Act, following are treated as associated enterprises:

a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

Rule 8 of the POT Rules: Determination of Point of Taxation in case of copyrights etc.:

In case of payments pertaining to copyrights, trademarks, designs or patents, when the whole amount of service tax is not ascertainable at the time when the service was performed and subsequently, use or benefits of these services by a person (other than the provider of service) gives rise to any payment of consideration, the service shall be treated as having been provided each time when a payment is respect of such use or benefit is received by the provider in respect thereof or an invoice is issued by the provider, whichever is earlier.

Rule 8A of the POT Rules: Determination of Point of Taxation in other cases:

When the point of taxation cannot be determined as per the above Rules and an invoice or date of payment or both are not available, the central excise officer may require concerned person to produce such accounts, documents or other evidence as he may deem necessary.

After taking into account, such material and effective rates of tax at relevant point of time, the said officer shall pass an order in writing after affording an opportunity of being heard to the service provider and determine the point of taxation to the best of his judgement.

The author is a practising CA based at Indore (MP) and can be contacted at jkmanghani@rediffmail.com.

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