The Union Budget, 2015 has proposed an increase in the rate of Service tax from 12.36% to flat 14% with abolishment of Education cess and Secondary & Higher Secondary Education cess. Further pursuing with Mr. Narendra Modi’s Dream of Swachh Bharat, a new Chapter VI has been inserted in the Finance Bill, 2015 that contains a new levy of cess called the ‘Swachh Bharat Cess’ (SB Cess) which may be levied on all or any of the taxable services at the rate of 2% of the value of such services. With SB Cess, Service tax rate may increase from present 12.36% to 16%.

Since the change in rate of Service Tax rate shall come into effect from a date to be notified by the Central Government after the enactment of the Finance Bill, 2015 , issues may build up in respect of the ongoing transactions for which certain advance payment is received prior to enactment of the Finance Bill, 2015 but the completion of provision of service may take place post facto thereof.

Here again by applying the provisions of Rule 3 of the POT Rules, the service provider would be liable to pay Service tax on the advance payments received at the prevailing rate of 12.36%. However, the service provider may encounter the issue of adjusting this payment of tax for increase in Service tax rate afterwards when the service will be provided and invoice will be raised for the service for which advance has been received already.

Our Comments: Point of taxation involving change in effective rate of tax is governed by Rule 4 of the POT Rules, which provides for determination of Point of taxation when there is change in effective rate of tax as mentioned in the table below:

S. No. In case a taxable service has been provided Invoice has been issued Payment received for the invoice Point of taxation shall be Applicable Rate
1.    

 

BEFORE the change in effective rate of tax

AFTER the change in effective rate of tax AFTER the change in effective rate of tax Date of issuance of invoice or Date of receipt of payment, whichever is earlier New Rate
2. BEFORE the change in effective rate of tax AFTER the change in effective rate of tax Date of issuance of invoice Old Rate
3. AFTER the change in effective rate of tax BEFORE the change in effective rate of tax Date of receipt of payment Old Rate
4.    

AFTER the change in effective rate of tax

BEFORE the change in effective rate of tax AFTER the change in effective rate of tax Date of receipt of payment New Rate
5.        BEFORE the change in effective rate of tax BEFORE the change in effective rate of tax Date of issuance of invoice or Date of receipt of payment, whichever is earlier Old Rate
6.        AFTER the change in effective rate of tax BEFORE the change in effective rate of tax Date of issuance of invoice New Rate

 Accordingly, the above scenario of advance payments may be interpreted as under:

a) Services are completed after change in effective rate of tax but the invoice is raised before change in rate: In terms of Rule 3 read with Rule 4(b)(ii) of the POT Rules, no differential payment may be required (Refer S. No. 5 of the table);

b) Services are completed after change in effective rate of tax and the invoice is also raised after change in rate: In terms of Rule 3 read with Rule 4(b)(iii) of the POT Rules, differential payment (i.e. 16%/14% – 12.36%) will have to be paid at the time of such invoice (Refer S. No. 6 of the table).

Key Concerns:

Even after applying provisions of Rule 4 of the POT Rules, uncertainties and ambiguities will definitely prevail in the Trade in case of on-going services, which warrants some clarification/ relief from the Board such as:

  • One such question would be whether the service provider would also be required to pay interest on differential amount of Service tax;
  • Further considering Rule 4(a)(i) of the POT Rules (Refer S. No. 1 of the Table), why new rate would be applicable when services are rendered before change in effective rate of tax but invoice is raised and payment is made after change of rate. The Hon’ble Supreme Court in the case of All India Federation of Tax Practitioners Vs. Union of India [2007-TIOL-149-SC-ST] held that “a tax on a thing or goods can only be with reference to a taxable event” and the same contention was upheld again in the case of Association of Leasing & Financial Service Companies Vs. Union of India [2010 (20) STR 417 (SC)], wherein the Hon’ble Supreme Court observed that the taxable event under the Service tax law is the rendition of service;
  • Last but not the least, a clarification as to whether SB Cess will be considered as part and parcel of Service tax for the POT Rules is, however, needed to avoid confusion about liability under SB Cess for advances received prior to the date of applicability of such Cess.

(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)

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