The finance ministry is in a fix over the proposed implementation of point of taxation rules for service tax from October 1 this year, with the industry resisting transition to the accrual basis for taxation of services. Simply put, under the accrual-based method, the tax will be considered ‘paid’ when the invoice is made, irrespective of whether or not it is actually paid. This means that once the invoice is issued, the service provider will have to account for the tax even if he has not received the amount.

Currently, in the absence of clear rules, there is no clarity on when the tax is to be paid.

The Central Board of Excise and Customs (CBEC), which has been flooded with comments and suggestions on the draft rules for point of taxation, will soon decide on whether it should implement the new rule so soon as the industry pleads for more time for transition—in terms of IT and other processes.

The CBEC had come out with the rules for point of levying service tax which said that service tax should arise at the time of provision of service, raising of invoice or making payment, whichever is earlier.

The rules assume a greater significance for streamlining the point of taxation system as part of the preparation for the Goods and Services Tax (GST). In the GST regime, the rules would have to be aligned for both goods and services in a similar manner. Currently, the rules are defined in case of other indirect taxes like the sales tax or excise.

“We have received many comments and after going through these, we feel that the industry may not have a problem with the system being changed, but they have sought more time for the transition,” an official told  “We will soon decide on the course of action— whether to stick with the plan to introduce the rules by the end of this month or to postpone it,” he added.

However, some stakeholders have opposed the draft, saying that the rule may cause a problem for the sectors where there are bad debts. These are cases where, after raising invoice and after the provision of service tax, the service receiver has still not paid the entire payment for the service.

Experts also believe that the move is in the right direction for aligning the system before GST comes in but clarity will be required on.

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Category : Service Tax (3395)
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