CA Gaurav Arora

Dear Members, In view of the queries received on my email Id on Rule 7 of the Point of Taxation Rules, 2011, regarding the Accounting Treatment under Reverse Charge, that if Service Receiver has not made the payment to the service provider within the period of six months from the date of Invoice, as prescribed under Rule 7 of Point of Taxation Rules.

So, In continuation of my earlier article of Service Tax Reverse Charge (Accounting Treatment) dated September 15, 2012, I am providing the suggested Accounting Treatment in case the Service Receiver has not made the payment to Service provider within the period of six months.

As the Article is based on the Rule 7 of Point of Taxation, 2011, so it is necessary to mention the Rule 7 first: –

Rule 7: – Determination of point of taxation in case of specified services or persons: –

Notwithstanding anything contained in these rules, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made:

Provided that, where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.

Provided further that in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be the date of debit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

This is clear from the above Rule 7 of Point of Taxation Rules, 2011 is that in case of Reverse Charge the Point of Taxation is when the payment is made.

However, as stated in the above rule, it has been made clear that this rule apply only in case the payment has been made within the period of six months from the date of Invoice, otherwise the Point of Taxation shall be determined as if this rule does not exist.

So the question arises, what if the payment has not been made within the period of six months by the service receiver to the service provider??

In this case Rule 3 of Point of Taxation Rules, 2011 will come into the picture. The relevant extract of the said rule as follows: –

Determination of point of taxation (Rule 3): – For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be,-

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

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

So, this can be understood with the above rules that in case under Reverse Charge, the service receiver has not made the payment within the period of six months from the date of invoice, then the transaction will get shift from Rule 7 to Rule 3 of the Point of Taxation Rules, 2011 i.e. the point of taxation will be the date of invoice instead of date of payment.

Let us understand this with the help on example: –

We have received the Taxable invoice under Reverse Charge in the month of say August 1, 2012, however the payment made to the party in the month of March 01, 2012.

Accounting Treatment in the Month of August 2012: –

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

Expense Account………………………………..Dr

To Party

To TDS Payable

Note: –

TDS will be deducted on the payment made to the party i.e. Service Tax need not be considered.

Accounting Treatment in the Month of February 2013 –

  • In the month of February 2013, service tax liability needs to be provided as the payment has not been made within the prescribed period as per Rule 7, so the transaction will shift under Rule 3 and the service tax liability needs to be paid with interest from the due date as per Rule 3 of the point of Taxation Rules, 2011.

Service Tax Input but not due………..Dr

Interest on Service Tax………………..Dr

To Service Tax Payable

To Interest on Service Tax Payable

Accounting Treatment at the time of payment of Service Tax –

  • Now when the Input Credit of the service tax paid above will be taken. The relevant extract of Rule 9 regarding this is as follows:

Rule 9 (1)(e), a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii), (iv), (v) and (vii) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994;

As from the above extract is clear that the Input Credit for the Service Tax payable is available only after the payment of Service Tax on the basis of Challan evidencing the payment of Service Tax.

Service Tax Payable…………………Dr

Interest on Service Tax Payable….Dr

Service Tax Input…………………..Dr

To Bank

To Service Tax Input bur not due 

Accounting Treatment in the Month of March 2013 –

Party………………………………………Dr

To Bank

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 cagauravvarora@yahoo.in)

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0 responses to “Rule 7 of Point of Taxation Rules, 2011 (Accounting Treatment)”

  1. Daxesh Soni says:

    I have received invoice from out of country regarding management fees. i want to know that when service tax of such invoice is due 1) immediately after receipt of invoice 2) after making a payment to service provider

  2. abhijeet mulay says:

    Thanks for growing our Knowledge.

  3. subh says:

    thank you , nicely explained service tax

  4. CA. Sandeep Ladha says:

    Dear Mr. Gaurav,

    As u mention that TDS will be deducted on Basic Amount i.e. Excluding Service Tax.

    But TDS is also to be deducted when payment was made.

    And in normal practice TDS is to be deducted on entire amount including Service Tax.

    Kindly Clear the same if possible.

  5. CA Hardik Shah says:

    Thanks

  6. hemant says:

    Thanks a lot for providing valuable information….

    but what will be the accounting entry in case such service receiver is not having any service tax liability apart from reverse charge

    then the entry should be

    party……………..dr
    Expenses…………..dr
    To bank
    To S. Tax Payable

  7. siva sankar says:

    Thanks…. good information.

  8. CA Pankaj Gabra says:

    Thanks for info

  9. guruprasad says:

    well explained sir

  10. Sarat Patnaik says:

    1. will you please clarify why interest is payable by the service receiver
    2. is it not correct to read 2012 march as 2013 march as payment for the bill in your example?

  11. Sekar says:

    Thanks a Ton…….Well Explained….

  12. Nitin Singhal says:

    You have mentioned in the article that proviso to Rule 3 says: “Provided that where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be date of such completion.”

    Time limit for raising of invoice has been raised to 30 days. So please amend it suitably.

  13. CA Mintu Kumar Sahu says:

    Thank You very much sir absolutly right answer and very important information from your side.

    Thanks once again!!!

  14. Deepak Agarwal says:

    Thanks for the update…

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