The Point of Taxation rules, which will allow tax authorities to link the payment of service tax to provision of service, raising of invoice or payment for service — whichever is the earliest — may not be introduced in this financial year. The finance ministry is considering some changes in the rules and may introduce them next year to provide relief to small service providers.

Earlier, the ministry had planned to introduce the rules from October this year, but the industry has suggested some changes in the draft rules, besides seeking more time to upgrade their information technology (IT) infrastructure. Currently the payment of service tax is linked to receipt of payment for the service. In the proposed system, the service providers said, they would have to pay tax even if the service receiver failed to make the payment.

“Small service providers are asking what will happen if the payment is not made or if there is a renegotiation of the invoice. We are looking at how to provide relief to them in such cases. A few big services providers have asked for postponing the rules and align them with the introduction of the Goods and Services Tax (GST) next year. We are considering their proposals,” said a finance ministry official.

Some of the options being considered include allowing service providers to write off the amount in the balance sheet or issuance of a debit or credit note by the supplier, which is on lines of central excise where one can take the credit. Currently, there is no provision to write off the bad debts for taxation purposes.

“Initially, when the service tax law came, the point of collection was only on an accrual basis, but later in 1996-97 when more services were added, it was changed to the cash receipt basis. Issuance of invoice should be the point of taxation because it will be difficult for service providers to pay tax now and collect it later. Service providers should be given the benefit of bad debts,” said Bipin Sapra, tax partner, Ernst & Young.

Sapra said in case of excise one gets the credit if goods are not supplied (returned back) and no payment is made, but in service it would be difficult to return a service. He added there was no mechanism in the country to write off bad debts, and internationally this has not worked.

The Point of Taxation rules may give some boost to service tax collections, as currently a lot of tax payment is deferred and some is not even collected. The existing system of levying service tax at the receipt of payment is at odds with the point of taxation in central excise and VAT. In central excise payment is required upon manufacture and clearance of goods, while in VAT it is when invoice is issued.

Most other countries of the world, including the European Union follow the model of levying tax at the earliest of the three stages — provision of service, raising of invoice and payment. Some of the countries do not levy tax at the provision of service, but the other two stages are there. The finance ministry proposed all three stages for the purpose of levying service tax in India because in about 70 services out of total 114 services it was able to identify when the service was provided.

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