Service Tax : Amendments in Point of Taxation Rules, 2011 and other related provisions

LETTER [F.NO.341/34/2010-TRU], DATED 31-3-2011

As you are aware, the Point of Taxation Rules (PTR) were formulated vide Notification No.18/2011-ST dated 01.03.2011.  Based on the feedback, certain amendments are being carried out in these rules vide Notification No. 25/2011-ST dated 31.03.2011.   The highlights of the changes are discussed in the following paragraphs.

2. While the rules shall come into force from 01.04.2011, an option has been given in rule 9 to pay tax on payment basis, as at present, till 30.06.2011.

3. Rule 3 has been amended to provide that the point of taxation shall be as follows:

(a)  Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.

(b)  Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above.

The applicability of the rule will be clear from the illustrations in the following table:

S. No.
Date of completion of service
Date of invoice
Date on which payment recd.
Point of Taxation
Remarks
1.
April 10, 2011
April 20, 2011
April 30, 2011
April 20, 2011
Invoice issued in 14 days and before receipt of payment
2.
April 10, 2011
April 26, 2011
April 30, 2011
April 10, 2011
Invoice not issued within 14 days and payment received after completion of service
3.
April 10, 2011
April 20, 2011
April 15, 2011
April 15, 2011
Invoice issued in 14 days but payment received before invoice
4.
April 10, 2011
April 26, 2011
April 5, 2011 (part) and April 25, 2011 (remaining)
April 5, 2011 and April 10, 2011 for respective amounts
Invoice not issued in 14 days. Part payment before completion, remaining later

5. Rule 6 relating to continuous supply of service has been aligned with the revised rule 3 and the date of completion of continuous service has been defined within the rule.   This date shall be the date of completion of the specified event stated in the contract which obligates payment in part or whole for the contract.  For example, in the case of construction services if the payments are linked to stage-by-stage completion of construction, the provision of service shall be deemed to be completed in part when each such stage of construction is completed.  Moreover, it has been provided that this rule will have primacy over rules 3, 4 and 8.

6. Moreover, the following services have been notified as “continuous supply of services” in terms of clause 2(c) of the rules vide notification No. 28/ST-2011 dated 01.04.2011:

(a)  Telecommunication service [65(105)(zzzx)]

(b)  Commercial or industrial construction [65(105)(zzq)]

(c)  Construction of residential complex [65(105)(zzzh)]

(d)  Internet Telecommunication Service [65(105)(zzzu)]

(e)  Works contract service [65(105)(zzzza)]

Thus these services will constitute “continuous supply of services” irrespective of the period for which they are provided or agreed to be provided.  Other services will be considered continuous supply only if they are provided or agreed to be provided continuously for a period exceeding three months.

7. Rule 7 relating to associated enterprises has been deleted.   Now that the date of completion of the provision of service is an important criterion in the determination of point of taxation, it shall take care of most of the dealings between the associated enterprises.   Thus in case of failure to issue the invoice within the prescribed period, the date of completion of provision of service shall come into effect even if payment is not made.

8. Rule 7 has thus been replaced by a new provision whereby the point of taxation shall be the date of making or receiving the payment, as the case may be.  This provision shall apply to the following:

(i)  Export of services;

(ii)  Persons, where the obligation to pay tax is on the service recipient in terms of rule 2(1)(d) of the Service Tax Rules, 1994 in respect of services notified under section 68(2) of the Finance Act, 1994.

(iii)  Individuals, proprietorships and partnership firms providing specified services (Chartered Accountant, Cost Accountant, Company Secretary, Architect, Interior Decorator, Legal, Scientific and Technical consultancy services).  The benefit shall not be available in case of any other service also supplied by the person concerned along with the specified services.

9. Export of services is exempt subject, inter alia, to the condition that the payment should be received in convertible foreign exchange.  Until the payment is received, the provision of service, even if all other conditions are met, would not constitute export.  In order to remove the hardship that will be caused due to accrual method, the point of taxation has been changed to the date of payment.   However, if the payment is not received within the period prescribed by RBI, the point of taxation shall be determined in the absence of this rule.

10. In the case of services where the recipient is obligated to pay service tax under rule 2 (1)(d) of Service Tax Rules i.e. on reverse charge basis, the point of taxation shall be the date of making the payment.  However, if the payment is not made within six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.  Moreover, in the case of associated enterprises, when the service provider is outside India, the point of taxation will be the earlier of the date of credit in the books of account of the service receiver or the date of making the payment.

11. Changes have also been made in the Service Tax Rules, 1994 vide notification No. 26/2011-ST dated 31.03.2011 and have a close relationship with the Point of Taxation Rules as follows:

(i)  The obligation to issue invoice shall be within 14 days of completion of service and not provision of service.

(ii)  If the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver.  However, concession is not available for bad debts.

12. The credit of input services under rule 4 (7) of the Cenvat Credit Rules has also been liberalized vide notification No. 13/2011-CE (NT) dated 31.03.2011 and the same shall be available on receipt of invoice (except in cases of reverse charge) as long as the payment is made within three months.  Even specified persons required to pay tax on cash basis will be able to avail credit on receipt of invoice.  Suitable changes have also been made for reversal of credit or payment when the value of service is renegotiated or altered for any reason by refund or issue of a credit note by the service provider.  Amendment has also been made in Rule 9 of Cenvat Credit Rules, 2004 by allowing credit on supplementary invoice, except in non-bonafide cases, which may become necessary in certain situations e.g. where the point of tax is the date of payment while the invoice had already been issued e.g. rule 4(b)(i) of Point of Taxation Rules.

13. It is further clarified that the transitional provisions will apply to all invoices issued before 31.03.2011 in so far as taxpayers who switch over to the new rules on 01.04.2011.  Those assessees who like to shift to the new rules on 01.07.2011 would have similar protection in respect of invoices issued before the date they switch over to the new rules.  The benefit has also been extended to services when provision has been completed before 01.04.2011 or 01.07.2011, as the case may be. It is also clarified that the payments received before the new rules come into force do not require any transitional provisions as they are already required to pay tax on payment basis.

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0 responses to “Service Tax – Clarifications on amendments in Point of Taxation Rules, 2011”

  1. Kaival Mehta says:

    How the point of taxation will apply to Coaching institute, because they are not issuing any bill to their students, they only gives the receipt for the fees received from student.

    Will ST liability arise on the installment received or on full amount of fees?

  2. Dennis says:

    Clarification is required for applicability of “point of taxation” for renting of immovable property. Whetehr Letter [F.No.341/34/2010-TRU], dated 31-3-2011 applicable for renting of immovable property considering the fact that “Delhi high court’s decision Service tax not applicable on renting of immovable property..

    Kindly clarify..

    Thanks
    Dennis
    9886697947

  3. Ashok Kumar says:

    Pls see point no.9(last two line) as written as under:-

    “However, if the payment is not received within the period prescribed by RBI, the point of taxation shall be determined in the absence of this rule.”

    Here I w’d like to know that in case if service provider do not receive payment at all either due to dispute or any other reason, then even after service provider is liable to pay service tax which he is going not to receive it for export of service?

    Thanks in advance for answer.

    Ashok Kumar
    9311440516

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