If one was to trace the key milestones in the evolution of service taxation in the country, reference will have to be made of import
and export rules for services. Equally important and which probably should have been introduced much earlier, are the rules to define “the place” and “the time” of taxation, which was recently made public by the government for feedback.
The need for these rules has been long felt due to challenges faced and diversity of possible views with respect to determining the point of levying service tax.
While the statute and the courts have ruled in favour of service rendition to be the point of taxation, it is seldom possible to determine the point of service rendition in many real-life instances. The recent online survey carried out by Ernst & Young threw some interesting industry perspectives about the draft of point of taxation rules.
In the past several occasions, questions were raised on the validity of certain provisions of law. The classic example is of when service tax was made payable in the hands of service recipients, instead of service providers.
Service tax on renting is another example to cite. It was felt by the survey participants that the draft rules may face a similar predicament, since they appear to extend the basic “taxable event” of levying service tax from the “provision of service” to raising of invoice or the receipt of payment.
Prior to introducing such rules, more than 85% of the survey respondents felt that the corresponding amendments will have to be made in the Act empowering the government to levy tax or make rules in this regard.
The intention of these rules is to simplify the matters on levy and collection of service tax and align with the excise and VAT system of paying tax on accrual basis. While doing the same, it is critical that the basic difference between goods and services is understood — goods being tangible in nature, the point of clearance and sales returns can be easily monitored. But for services, to truly keep the point of taxation simple, it will be preferable to keep date of invoice or receipt of consideration and not ‘rendition of service’ as an event for paying tax, as is followed in many countries. The survey respondent share the same thought, on the contrary, almost an equal number of respondents recommend that the tax payer should be granted an option to choose of paying service tax either on an invoice basis or receipt basis. Such an option is given in Australia and New Zealand.
The rules in the draft form cover only rate change or withdrawal of exemption situation, but there is a need to codify these rules to cover all business situations such as forfeiture of deposits, consideration received in kind, ascertainable future payments (contingency-based service fee arrangements) or grant of a new exemption. Also, with introduction of these rules corresponding changes in other rules to allow input tax credits on accrual basis, self adjustment of excess tax payments, provisions for dealing with bad debts on account of payment defaults by customers should also be provided for.
Once the rules seek to levy tax on accrual basis and the basis for taxing a service is set out, whether a specific or exception rule is needed for taxing “continuous supply of services” and “advance receipts” is worth evaluating. These rules define “continuous supply” based on the term of the contract being over six months. Often you encounter businesses having a master service agreement, which sets out the terms and an intention to provide services, but where services are not actually provided on a continuous basis. As per the present draft rules, one may need to pay service tax on the agreed dates of payment based on a mere intention of the business to provide a service even if no service is eventually rendered. Internationally, most GST laws do not define “continuous supply” based on the term of contract, like six months as under these draft rules. If the point of taxation is based on the date of invoice or receipt of payment, a separate rule for “continuous supplies” should not be required. Nearly, 39% of the respondents felt the need of having a separate rule for “continuous supplies” with 43% of the respondents agreeing that levying tax based on an agreed date of invoice over the actual date of invoice, was fair.
Lastly, one unanimous outcome of the survey was clearly the industry’s preference to have these rules deferred until the introduction of GST to avoid having unaddressed transition issues.
However, with uncertainty looming large over introduction of GST, the government may well choose to go ahead with these rules hopefully after considering the comments received from various stakeholders before the final Point of Taxation Rules are notified.