Service tax Payable on billing basis from July 1 2011

The Finance Act, 2011 has introduced with effect from April 1, 2011, Point of Taxation Rules in which, these rules will determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates:

i. Date on which service is provided or to be provided

ii. Date of invoice

iii. Date of payment

Consequential changes have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided.

Determination of point of taxation: For the purposes of these rules, unless otherwise stated, ‘point of taxation’ shall be determined in the following manner, namely:-

(a) A provision of service shall be treated as having taken place at the time when service is provided or to be provided, and
(b) if, before the time specified in clause (a), the person providing the service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

What these rules basically mean is that from April 1, 2011, service tax will have to be paid on accrual basis. Service tax will be due when the invoice is raised or date of payment or provision of service which ever is earlier. Till March 31, 2011 service tax is payable on collection or receipt basis, that is when you realise your dues you pay to the government but from April 1, 2011 now service tax will have to be paid irrespective of the fact whether the payment of service is received or not.

Vide notification no.18/2011, these rules were made applicable from April 1, 2011, but these rules were amended vide notification no.25/2011 where in the tax payer was given an option to pay service tax on receipt basis till June 30, 2011 or pay service tax on billing basis from April 1, 2011. The option to pay service tax on receipt basis is only till June 30, 2011 hence all the assesses, except professionals, will have to pay service tax on billing basis from July 1, 2011.

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.

Determination of point of taxation in case of associated enterprises- The point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or invoice under rule 4A of the Service Tax Rules, 1994 has been issued, or the date of debit or credit in books of account of the person liable to pay service tax, whichever is earlier.

Determination of point of taxation in case of copyrights, etc. – In respect of royalties and payments pertaining to copyrights, trademarks, designs or patents, where the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed, and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration, the service shall be treated as having been provided each time when a payment in respect of such use or the benefit is received by the provider in respect thereof, or an invoice is issued by the provider, whichever is earlier.

Service Tax – Clarifications on amendments in Point of Taxation Rules, 2011