Analysis of Rule 3 of Point of Taxation Rules, 2011

 CA Gaurav Arora

The purpose of presenting this article to the various members is to provide the clarity on the issue regarding the booking of income (without raising invoice to the respective parties) at the end of the financial year say March 2012 and the applicability of Service Tax on this income. In other words, when the service provider has provided the service before the end of the financial year say March 2012, but the invoice for the same has not been issued till March 2012.

In view of providing the clarity on the above issue, I am hereby presenting the applicability of Service Tax and Accounting Treatment with relevant extracts of the Rules and Acts.

As we are discussing the booking of revenue at the end of the financial year, so the first requirement to start this article is to quote the relevant extracts of Accounting Standard – 9 for the purpose of recognition of revenue in case of service rendered.

Accounting Standard – 9

Relevant extracts from the Accounting Standard – 9 relating to the revenue recognition in case of rendering of services have been enumerated below: –

Revenue Recognition for service rendered

Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method.

1. Proportionate completion method—Performance consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.

2. Completed service contract method—Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognized when the sole or final act takes place and the service becomes chargeable.

As it has been clear from the above extracts of Accounting Standard – 9, that once the service has been completed or partial completed (in case of partial completion method), the revenue should be recognized in the books of accounts in spite of the fact that the invoice for the service has been issued or not.

Now let us consider the Service Tax applicability on the above which has been booked as income in the books of accounts, but the invoices for the same has not been issued.

To check the Service Tax liability on the above income we need to consider the Rule 3 of Point of Taxation Rules, 2011. The relevant extracts for of Rule 3 have been enumerated below: –

Rule 3 of Point of Taxation Rules, 2011

Determination of point of taxation: – For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be-

1. the time when the invoice for the service provided or to be provided is issued:

Provided that where the invoice is not issued within Thirty days of the completion of the provision of the service, the point of taxation shall be date of such completion.

2. in a case, where the person providing the service, receives a payment before the time specified in clause (1), the time, when he receives such payment, to the extent of such payment.

Explanation :- For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.”.

As it has been made clear from the above rule that the Service Tax liability will arise when the invoice for the service provided has been issued if the advance payment has not been received and the invoice has been issued within 30 days of completion of service.

Now let us understand the accounting treatment of the above issue with the help of an example.

Example: – We have provided the Taxable service in the month of say March 20, 2012, however the invoice for the same has been issued to the party in the month of April 05, 2012.

Accounting Treatment at the end of the Month of March 31, 2012: –

• At the time of booking the Income for the service rendered and we don’t need to book the Service Tax liability i.e.
  

Unbilled Revenue………………………………..Dr

To Income

It has been clear from the above Rule 3 of Point of Taxation Rules, 2011, that the Service Tax liability will arise at the time of raising the invoice, so at this point of time service tax liability will not arise.

Note: –

Unbilled revenue is the ledger created under the current asset instead of the party, because we have not raised the invoice yet.

Accounting Treatment in the Month of April 05, 2012: –

• At the time of booking the Income for the service rendered and invoice for the same has been issued to the party.
  

Party Account…….……………………………..Dr

To Unbilled Revenue

To Service Tax Payable

I hope the above article will be useful for the professionals in their professional working. There may be some other opinions also regarding the above treatment. So all other opinions are welcome for the discussion, so that the treatment will to clear to all the professionals.

(Author can be reached at [email protected])