CA. Pradip R Shah

e-mail: pradip@pradiprshah.com

[Note: This analysis incorporates amendments carried out by Notification No. 25/2011, 26/2011 of Service Tax and 13/2011 Central Excise (NT) dt. 31st March, 2011]

Introduction

1.0     In the arena of Central Excise (CE) and Value Added Tax (VAT), principles regarding levy of tax has been settled since long. This has been due to subject of taxation being the commodities dealt with which is tangible. However, in the case of Service Tax (ST) it is not so easy. This is for the reason that the process of providing service is not tangible.  Throughout the world it has been posing a challenge to the tax authorities in terms of determining the time element. Till date, in India, this has not been a major source of problem as the payment of tax was linked with receipt of payment. The event of receipt of consideration, being easily identifiable, did not raise any issue. However, it is in deviation to the principles applied in the case of CE and VAT. Since all the taxes levied under indirect taxation viz. CE, VAT and ST are proposed to be brought under single umbrella of Goods and Service Tax (GST), it has become necessary to have the common base for levy and collection of tax in respect of all the cases. This requires formulation of rules regarding determination of point of time when a service can be said to have been provided.

Levy of Tax and Point of Taxation

2.0     Before making an attempt to understand provisions of Point of Taxation Rules, 2011 (PoTR), it will be necessary to explore the meaning of certain terminology used. In the process of taxation, the first step is levy of tax. Levy is linked with certain event. On triggering of the certain event, the transaction becomes taxable. It is known as Taxable Event. In the second stage, once an event has become taxable, the question of collection of tax will arise. The statute will provide for the event or time whereat it will become point of taxation. In the third step, the statute will provide for the time period or another event on occurring of which tax will have to be paid. Thus, as can be seen, the concept of levy, collection and payment of tax are fundamental aspects of any fiscal law. For example, in case of CE, under the Central Excise Act, 1944 duty is levied on excisable goods produced or manufactured in India. Under Central Excise Rule, 2002 CE duty is required to be paid on removal of goods from factory or warehouse. Thus, levy of duty is on manufacture or production of goods which is the taxable event and point of taxation is the removal of goods. Actual payment of duty is governed by the Excise Rules which is generally the 5th or 6th date of the month following the month in which goods are removed.

2.1     Section 66 of the Finance Act (FA) provides for levy of ST on provision of various services. Section 65(105) defines various services which are subject to tax. However, unlike in the case of CE, the FA does not provide for point of taxation. Since, the payment of tax was linked with receipt of payment; it did not pose any problem. However, as it is proposed to be aligned with the provisions of CE and VAT, the question of determining Point of Taxation (PoT) has arisen.

Background of POTR, 2011

3.0     During August, 2010, the Central Board of Excise and Customs (CBEC), published draft rules in this respect for comments from the tax payers. Originally, it was proposed to be implemented from January, 2011. However, it was postponed and has been proposed in the Budget, 2011 under the name and style of “Point of Taxation Rules, 2011” to be effective from 1st April, 2011. This is a major change in the area of Service Tax (ST) as it amends the very basis of determining taxable event.

3.1     The objectives of the whole exercise, as set out in the draft published by the CBEC in August, 2010, reads as follow:

The Government of India proposes to issue Point of Taxation (for Services Provided or Received in India) Rules, 2010 in exercise of the powers conferred on it under Sec. 94 (2)(hhh) of the Finance Act, 1994.

The purpose of these rules is to introduce clarity and certainty in the matter of levy and collection of Service Tax particularly in situations of change of rate of service tax or imposition of service tax on new services. At present there is lack of clarity as to the date from which the changed rate or a new levy of service tax become payable and tax payers as well as tax officials face uncertainty in this regard as the provisions are not explicit. Similar uncertainty prevails in regard to cases of continuous supply of services. So far these issues have been addressed by CBEC through clarificatory circulars that accompany such changes. A need has been felt to put the regulatory frame work on a transparent, clear and durable basis and hence these rules.

The other major change proposed to be brought about through these rules is to link the payment of tax to provision of service, raising of the invoice or payment for service provided or to be provided, whichever is the earliest. Currently the payment of service tax is linked to receipt of payment for the service, which is at odds with regime in force in Central Excise and VAT laws implemented by the states. In both Central Excise and VAT, tax payment is required on accrual basis – upon manufacture and clearance of goods in the former and issue of invoice in the latter. In neither case is the tax payment linked actual receipt of payment for the goods. The GST regime is likely to follow this practice and it is necessary to align the service tax regime with it so that transition to GST will be smooth. The change in the point of payment of tax will also simplify accounting for the taxpayers.

The proposed changes are broadly on lines of best international practices. (emphasis supplied)

To what extent the objectives have been achieved, and the hardship that will be caused to the tax payers, shall be examined in the second part of the article.

Amendments in PoTR, 2011 (APoTR)

3.2     Even before the PoTR, 2011 see the light of the day, a major surgery was carried out wherein the whole focus for the events determining PoT was shifted to issue of invoice. Notification No. 25/2011 dt. 31st March, 2011 made many changes in the PoTR making it necessary for the SP to sit down and re-do the whole exercise once again. As if the confusions were not enough, Notification No. 26/2011 dt. 31st March, 2011 added few more. This analysis incorporates these amendments. CBEC has been silent on the objectives of making so many amendments so frequently. In order to get the clear picture and deciphering the objectives, an attempt has been made here to analyse Draft PoTR of August, 2010, PoTR before amendment and PoTR after Notification No. 25/2011 together.

Consequential Amendments in ST Rules

4.0     In consequence of applicability of PoTR, certain amendments have been carried out in Service Tax Rules (STR) as well. Notification No. 3/2011 dt. 1-3-2011 and 26/2011 dt. 31st March, 2011 made major amendments in the following Rules.

4.1     In Rule 4A i.e. Issue of Invoice, the words “provision of” in Rule 4A(1) has been replaced with the words “completion of”. As the PoT is proposed to be linked with various events which are based on completion of service, it becomes necessary to amend the provisions relating to issue of invoice based on such events. Henceforth, the SP will be required to issue invoice within 14 days of completion of the services. Rule 4A, after amendment, will look like as follow:

4A. (1) Every person providing taxable service, not later than fourteen days from the date of completion of / provision of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier, shall issue an invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him in respect of such taxable service provided or to be provided and such invoice, bill or, as the case may be, challan shall be serially numbered and shall contain the following, namely:—

(i)           the name, address and the registration number of such person;

(ii)          the name and address of the person receiving taxable service;

(iii)         description, classification and value of taxable service provided or to be provided; and

(iv)         the service tax payable thereon :

Provided that in case the provider of taxable service is a banking company or a financial institution including a non-banking financial company, or any other body corporate or any other person, providing service to a customer, in relation to banking and other financial services, an invoice, a bill or, as the case may be, challan shall include any document, by whatever name called, whether or not serially numbered, and whether or not containing address of the person receiving taxable service but containing other information in such documents as required under this sub-rule :

Provided further that in case the provider of taxable service is a goods transport agency, providing service to a customer, in relation to transport of goods by road in a goods carriage, an invoice, a bill or, as the case may be, a challan shall include any document, by whatever name called, which shall contain the details of the consignment note number and date, gross weight of the consignment and also contain other information as required under this sub-rule:

Provided also that where any payment towards the value of taxable service is not received and such taxable service is provided continuously for successive periods of time and the value of such taxable service is determined or payable periodically, an invoice, a bill, or as the case may be, a challan shall be issued by a person providing such taxable service, not later than fourteen days from the last day of the said period.

Another amendment is deletion of third proviso in Rule 4A. In view of separate provision for determining PoT in the case of CSoS, it is not required.

Insertion of Rule 5B

4.2     Another major amendment is insertion of clause 5B. It reads as follow:

Date for determination of rate.-

The rate of tax in case of services provided, or to be provided, shall be the rate prevailing at the time when the services are deemed to have been provided under the rules made in this regard.

4.3     This Rule provides for the rate as prevailing on the date on which the services were provided or deemed to have been provided. This put an end to controversy regarding the applicability of the rate of tax.

Amendments in Rule 6

4.4     Rule 6 regarding payment of tax is also proposed to be amended. A Table showing comparative position is given here below.

Existing Provision of Service Tax Rules (STR) Proposed Amendments in ST Rules
Payment of service tax Payment of service tax
6. (1) The service tax shall be paid to the credit of the Central Government,— 6. (1) The service tax shall be paid to the credit of the Central Government,—
(i)  by the 6th day of the month, if the duty is deposited electronically through internet banking; and (i)  by the 6th day of the month, if the duty is deposited electronically through internet banking; and
(ii)  by the 5th day of the month, in any other case, (ii)  by the 5th day of the month, in any other case,
immediately following the calendar month in which the payments are received, towards the value of taxable services: immediately following the calendar month in which the service is deemed to be provided as per the rules framed in this regard

 

Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 6th day of the month if the duty is deposited electronically through internet banking, or, in any other case, the 5th day of the month, as the case may be, immediately following the quarter in which the payments are received, towards the value of taxable services : Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 6th day of the month if the duty is deposited electronically through internet banking, or, in any other case, the 5th day of the month, as the case may be, immediately following the quarter in which the service is deemed to be provided as per the rules framed in this regard

4.5     Amendments, as highlighted above, are consequent to PoTR under which tax liability will be determined with reference to deeming provisions.

 

Provided further that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable : Proposed to be omitted

 

4.6     In view of Rule 5 of PoTR this clause is not relevant and, hence, proposed to be omitted.

 

Provided also that the service tax on the value of taxable services received during the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year. Provided also that the service tax on the services deemed to be provided in the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year.

 

4.7     Amendments in this clause take care of payment of tax liability which is deemed to arise in the month of March.

 

Explanation.—For the removal of doubts, it is hereby declared that where the transaction of taxable service is with any associated enterprise, any payment received towards the value of taxable service, in such case shall include any amount credited or debited, as the case may be, to any account, whether called ‘Suspense account’ or by any other name, in the books of account of a person liable to pay service tax. Proposed to be omitted

In view of PoTR aligned with issue of invoice this clause is proposed to be omitted.

 

Amendment in Rule 6

4.8     Amended Rule 6(3) will read as follow:

(3) Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason, the assessee may take the credit of such excess service tax paid by him, if the assessee,—

(a)       has refunded the payment or part thereof, so received alongwith the service tax payable thereon for the service to be provided by him to the person from whom it was received; or

(b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.

4.9     This clause provides for adjustment arising due to issue of credit note issued or refund of the amount received due to non-provision of service. It is provided that SP is permitted to take credit for ST paid earlier on such services. However, there is no clarity about mechanism for claiming credit for tax paid in the past. Perhaps Form ST-3 will take care of it.

4.10   It should be noted that the above Rule covers the case of non-provision of services only and not any other cases. Therefore, adjustment for other reasons are not covered here.

Amendments in CENVAT Credit Rules

4.11   Consequent to introduction of PoTR it had become necessary to carry out appropriate amendments in CENVAT Credit Rules as well. As declared by CBEC, the Rules in this regard were required to be aligned with the provisions of Excise Duty and VAT. Both ED and VAT provisions contain provision for tax credit on the basis of Gate Pass or Invoice and payment in respect thereof is not a pre-condition. Initially the Government was reluctant to provide for credit on the basis of invoice received. However, Notification No. 13/2011 Central Excise (NT) dt. 31st March, 2011 has made certain changes. Relevant Rules after amendments read as follow:

Amendment in Rule 4(7)

4.12   Major amendment is in Rule 4(7) relating to claiming of tax credit on the basis of receipt of invoice and not on the basis of payment of such invoice. Amended clause reads as follow.

(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:

Provided that in case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:

Provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules:

Provided also that if any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited:

Provided also that CENVAT credit in respect of an invoice, bill or, as the case may be, challan referred to in rule 9, issued before the 1st day of April, 2011 shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9.

Explanation I.- The amount mentioned in this sub-rule, unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

Explanation II. – If the manufacturer of goods or the provider of output service fails to pay the amount payable under this sub-rule, it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken.

Explanation III.- In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, “following month” and “month of March” occurring in sub-rule (7) shall be read respectively as “following quarter” and “quarter ending with the month of March”.’

4.13   Although the above clause permits credit on the basis of invoice received, it comes with a rider. The SR will have to make payment of the said invoice within period of three months. If not done so, tax credit availed will have to be reversed and tax will have to be paid. A question that may arise here is what will happen if a small part of the bill has not been paid due to, say, deficiency in service. Will it make the entire tax credit availed disentitled? The Rule is silent about such eventuality. One would have expected appropriate provisions for such cases as well.

Amendment in Rule 9 of CENVAT Credit Rules

4.14   At present Rule 9(b) provides for claiming CENVAT Credit on the basis of supplementary bill or invoices issued by a manufacturer. Since tax credit is proposed to be permitted on receipt of invoice, it is necessary that appropriate provision be made for providing tax credit on the basis of supplementary bills issued by the SP as well. Newly inserted Rule (bb) reads as follow:

(bb) a supplementary invoice, bill or challan issued by a provider of output service, in terms of the provisions of Service Tax Rules, 1994 except where the additional amount of tax became recoverable from the provider of service on account of non-levy or non-payment or short-levy or short-payment by reason of fraud or collusion or wilful misstatement or suppression of facts or contravention of any of the provisions of the Finance Act or of the rules made there under with the intent to evade payment of service tax.

Learning Nuances of PoTR

4.15   Amended PoTR lays emphasis on three events viz. Provision of Service, Issue of Invoice and Completion of Service. These terms have different implications under ST as against what we understand in our day-to-day life. It will be, therefore, advantageous to know about it more particularly from tax angle.

Provision of Service

4.16   ST is levied on provision of service.  However, there are various aspects of provisions of services viz. commencement of services, continuation of provision of services and completion of services. Unfortunately, the law is silent about specific aspect of the service on which point tax will be levied. Even under APoTR, it is not clear at which stage tax will be levied of provisioning of service. Rule 3(a) refers to invoice being raised for provisioning of service. In the same manner, Rule 6 regarding CSoS also refers to invoice being raised while service is being provided. Thus, it can be seen that provisioning of service is an important aspect of taxation of services. Despite it being so, there is no clarity about exact demarcation in point of time at which one can say that provision of service has commenced and is still going on. It should be appreciated that services are being of varied nature, it is not possible to provide a definition in a statute which can cover all the cases. It is for these reasons drafting of the contract between SP and SR assumes importance. Lack of clarity in this respect can lead to dispute with the assessing authority.

Issue of Invoice

4.17   Second important event determining levy of taxation under ST is issue (or rather non-issue) of invoice. As we shall see in the course of discussion, APoTR expects SP to issue invoice within stipulated time period. Failure to do so may lead to serious tax implication. Secondly, tax liability has been linked to amount shown in the invoice, any amount received short will require SP to make adjustment in ST Returns. Such cases are bound to draw attention of ST Department leading to detailed scrutiny and issue of show-cause notices. Despite use of computers at large scale in private sector, in many cases, issue of invoice gets delayed for a long period of time. Apart from that amount approved by the SR also deviates significantly from the billed amount. Under APoTR all such cases will get highlighted.

Completion of Service

4.18   Proviso to Rule 3(a) and 6(a) gets invoked on completion of service. As explained under 4.16 above, there is no clarity about the point of time when one can say that provision of service has come to an end.  As in the case of commencement of service, it is not possible to define end point of provision of service. In view of this, specific provision in the contract entered into between the SP and SR will assume importance. It is for this reason the contract will have to be specific about end point of service, otherwise the Assessing Officer may interpret it as favourable to ST Department.

4.19   A question may arise in the cases of contracts which have already been entered into and will be completed after 30th June, 2011. Is it possible to amend the terms and conditions in this respect? There is nothing in APoTR prohibiting such an amendment. It will be in the interest of SP and SR to impart clarity in this respect at an early date.

Events Occurring in the Process of Provision of Service

5.0     Before understanding the PoTR, it will be necessary to understand various events which occur in the process of provision of service. Let us see the whole process as it occurs.

Sr. Event
1.0 SR approaches SP for provision of services
2.0 SP provides details of services to be provided
3.0 SP and SR negotiates and finalises terms of services to be provided, amount of consideration, time of payment and other conditions
4.0 SP and SR enters in to a contract
5.1 If so required in the contract, SP issues invoice for services to be provided as agreed upon in the contract.
5.2 If so required in the contract, SR makes payment of advance as provided in the contract, if any
6.0 SP commences providing of services
6.1 While provisioning of service is in progress, if so required in the contract, SR issues invoice as provided in the contract, if any
6.2 While provisioning of service is in progress, if so required in the contract, SR makes payment of advance as provided in the contract, if any
7.1 On a specified date as agreed upon, SP completes providing of services either fully or in part.
7.2 It may so happen that SP may not be in a position to provide the services fully as agreed upon
8.0 SP issues invoice for services provided till date
9.0 SR makes the payment to SP against the bill received after deducting certain amount as retention money or deposit as provided in the contract
10.0 SR makes payment of retention money
11.0 SP writes off balance amount of the invoice raised which has not been received.
12.0 In the eventuality of failure of provision of services and non-recoverability of advance paid, SR writes off the amount of advance paid.

5.1     It should be noted that all the transactions may not have the sequence of events as indicated above. However, generally, it follows the above said sequence. Essentially, the question is – at what point of time tax should be levied? APoTR attempts, though not stated specifically in the Rules, to determine taxable event with reference to earliest occurrence of some of the events as indicated above. APoTR also attempts to determine taxability of the transactions when there is a change in rate of tax. The issue becomes complex as the rate of tax also get changed periodically. Moreover, at times, some of the services become taxable when certain events as shown above have already taken place.

5.2     There are four situations as follow:

a)      Static Level i.e. where there is neither the change in effective rate of tax or no levy of tax for the first time

b)     Where there is a change in effective rate of tax

c)      Where the tax is being levied for the first time

d)     Quantification of value of service (applicable in the case of Intellectual Property Rights Service)

As proposed, the system of levy of service tax will revolve around four events as follow:

a)      Provision of Service

b)     Issue of Invoice

c)      Completion of Service

d)     Receipt of Payment

 

Structure of PoTR

5.3     PoTR tries to make provision for various eventualities. It can be tabulated as follow

Rule 2 Definitions
Rule 3 Determination of PoT in the cases where there is no change in rate or the service is not falling into Continuous Supply of Service (CSoS)
Rule 3(a) Determination of PoT where invoice has been issued for service provided or to be provided
Rule 3(b) Determination of PoT where payment has been received before the time provided in Rule 3(a)
Rule 4(a) Determination of PoT where service has been provided before the change in effective rate of tax
Rule 4(b) Determination of PoT where service has been provided after the change in effective rate of tax
Rule 5: Determination of PoT where tax is being levied on the service for the first time
Rule 6: Determination of PoT where service is being provided continuously beyond specified period
Rule 7: Determination of PoT in case of specified services or persons
Rule 8: Determination of PoT where service in the case of copyright, trademarks, designs or patents
Rule 9: Transitional Provisions

Definitions

Continuous Supply of service

6.0     Clause 2(c) defines it as follow:

“continuous supply of service” means any service which is provided, or to be provided continuously, under a contract, for a period exceeding three months, or where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

6.1     Draft rules of August, 2010 in this respect read as follow:

“continuous supply of service” means any service which is provided, or to be provided, under a contract, for a period exceeding six months, or where the Central Government, by a notification, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

6.2     There are two major changes here viz. insertion of the word “continuously” and reducing the period of contract from six months to three months. Under the proposed draft emphasis was on the period of a contract. However, it has been restricted to the cases wherein the services are provided continuously. Thus, the cases of provisions of services intermittently have been excluded as only the cases wherein the service is provided continuously will be governed by this definition.

6.3     As far as period of three months is concerned, it has been reduced from six months to three months. This will bring in its ambit large numbers of cases under Rule 6 preponing the liability to pay the tax.

6.4     On 1-4-2011 CBEC declared following services as CSoS.

  • Commercial or industrial construction service
  • Construction of complex;
  • Telecommunication service;
  • Internet telecommunication service and
  • Works contract service.

6.5     In view of the above, a contract falling into the category of above services, even though of being less than three months, will be considered as CSoS and will be governed by the provisions of Rule 6.

6.6     Some of the features of the above clause are as under:

a)      Rendering of services will be divided into two broad categories viz. one-time and Continuous Supply Service.

b)     The definition is based on terms of the contract rather than nature of service to be provided. It means that each contract has to be evaluated separately on the basis of period laid down in the contract.

c)      If, as per the agreement, time-frame for providing of service is less than three months, it will fall into the category of One-Time. However, if it extends to more than three months, it will fall into the category of CSoS.

d)     This rule will have tax implication in the sense that, in the case of One-time service, it will be governed by Rule 3 while CSoS will be governed by Rule 6.

e)      It should be noted that the differentiation is based on the terms of the contract. It is not clear what will happen if there is no written contract.

f)       It is also not clear what will happen if provision of service, as against the original contract, extends beyond the period of three months.

g)     PoTR has inserted the word “continuously”. This is going to be a controversial issue as no definition is available about norms for determining continuity.

h)     At times, the parties enter into the agreement wherein various terms and conditions are laid down. Period for providing of service may be, say, two or three years. Services are provided as and when requisitioned. Such cases will pose problems.

6.7     On plain reading of the clause, two scenarios emerges viz. (a) provisioning of service has exceeded the period of three months and (b) as per the contract itself the length of service is more than three months.

service provided, for a period exceeding three months

6.8     In view of use of the word “provided”, it appears that this part of the clause takes care of the situation wherein originally, the services was required to be completed within period of three month. However, due to some reasons, it has exceeded the said period. In view of this, provisions of the Rule 3 will not apply but Rule 6 will prevail. What implications it can have on SP shall be examined while discussing the provisions of Rule 6.

6.9     Provisioning of service can be divided into two parts. Under the first case, there will be an agreement which is known as “Master Agreement” (MA), between two parties laying down broad terms and conditions. Actual services shall be provided over a period of time as per the MA as and when required. In such cases, actual provisioning of service may be of less than three months. Since the focus here is on provisioning of the service over a certain length of time, execution of MA covering the period of more than three months should not invoke provisions of clause 2(c).

service to be provided continuously, under a contract,  for a period exceeding three months

6.10   Second scenario visualised is wherein, under a contract, it is known that the length of provision of service will take more than three months.

6.11   Reading it together, it means that if the period of provisioning of the service as laid down under the contract is more than three months, Rule 6 will apply. However, if it was less than three months but it has exceeded it, instead of Rule 3, Rule 6 will apply. In view of this, there may be overlapping leading to confusion and disputes.

Service provided

6.12   A question that may arise here is whether clause 2(c) refers to completion of service or the case where it is still going on beyond the period of three months? Clause 2(c) refers to the term “provided”. It is obvious that if the service has already been provided within the period of three months, Rule 3 will apply. However, if it is extended beyond the period of three months, the question of invoking Rule 6 will arise. It means that if from the date of commencement of provisioning of services, it is not completed within the period of three months Rule 6 will come into operations automatically.

under a contract

6.13   It is expressly provided that provisioning of service for more than three months should be under a contract. Whether a formal contract is necessary for invoking the provision? To what extent conduct of the parties will invoke these provisions? It should be noted that in the case of provisioning of service there will be a contract though not necessarily in writing. Clause 2(c) does not provide for the contract in question to be in writing. Therefore, it will cover all the cases even where there is informal understanding between the parties.

Invoice

7.0     Clause 2(d) defines the word “Invoice” as follow:

“invoice” means the invoice referred to in rule 4A of the Service Tax Rules, 1994 and shall include any document as referred to in the said rule;

7.1     Draft rules of August, 2010 in this respect read as follow:

“Invoice” shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan as prescribed therein;

7.2     Draft Rules had kept the definition restricted to the provisions of Rule 4A. However, the provision in PoTR encompasses “any document”. Rule 4A provides for the following types of documents viz.

a)    Invoice

b)    Bill and

c)     Challan

d)    In the case of NBFC or a bank, any document containing details of service provided

e)    In the case of Goods Transport Agency, Consignment Note

f)     In the case of Aircraft Operator, ticket issued in any form

7.3     Neither the Service Tax Rules (STR) nor CENVAT Credit Rules define the term “Invoice”. Rule 9 of CENVAT Credit Rules lists following kinds of documents on the basis of which CENVAT Credit can be claimed.

a) Invoice

b) Supplementary Invoice

c) Bill of Entry

d) Certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office

e) In the case of payment of ST under sub-clauses (iii),(iv),(v) and of clause (d) of sub-rule (1) of rule 2 of the ST Rules

g) an invoice, bill or challan issued by an input service distributor under rule 4A of the ST Rules

APoTR relies on documents as mentioned in Rule 4A for the purpose of determining the PoT.

7.4     It should be remembered that the objective of having this clause is to ensure that any document showing commitment by the SP for providing of or actual provision of service be considered for invoking the deeming provision. In view of this, SP will have to keep records for the following types of transactions.

a)      Issue of Invoice without providing of Services

b)     Actual provision of Services

c)      Receipt of consideration as advance

d)     Receipt of consideration after providing of services in part

e)      Receipt of consideration after providing of services fully

f)       Writing off of value of services for non-receipt of consideration

Point of Taxation:

8.0     Clause 2(e) defines the term PoT as follow:

“point of taxation” means the point in time when a service shall be deemed to have been provided;

8.1     Draft rules of August, 2010 in this respect read as follow:

“Point of taxation” means the point of time when the tax becomes payable to the Government;

8.2     This is a major change in the definition. The definition in the Draft went far ahead as it tried to determine the period of time when the liability to pay the tax arises as it refers to “tax becoming payable” rather than determining the point of time when the services has been or deemed to have been provided. As we know, Rule 6 of ST Rules lays down the period during which ST is required to be paid. Had this provision been continued, it would have created havoc. In fact, it would have been a clear case of overriding the provisions of Rule 6 of ST Rules. Mark the following important aspects of this definition:

a)      It is a deeming provision – it is not necessary that the SP should have provided the service.

b)     It gets invoked the moment event as provided for in Rule 3, 4, 5 and 6 occurs.

c)      Point of time when the provision of service commenced is not important.

Taxable Service

9.0     Clause 2(f) reads as follow:

“taxable service” means a service which is subjected to service tax, whether or not the same is fully exempt by the Central Government under Section 93 of the Act;

9.1     Draft rules of August, 2010 in this respect read as follow:

“taxable service” means a service which is subjected to service tax, whether or not the same is fully exempt by the Central Government vide powers conferred under Section 93 of the Act;

9.2     Section 93 of the Finance Act gives power to the Central Government for exempting a particular service. Therefore, reference to these three words was not warranted.

9.3     S. 65(105) of the Finance Act defines the term “taxable service” as “any service provided or to be provided …..” and lists various services which have been brought within the net of taxation. Section 66 levying charge of ST provides “there shall be levied a tax ……..on the value of taxable service referred to in sub-clause …..”. Thus, it keeps out of levy the services which have not been made subject to charge. Broadly speaking there are two types of services viz. (1) the one which has been subject to ST and (2) the one which has not been subject to tax. In the first type of case, it is not necessary that tax will have to be paid on such services. The Government has been empowered to make certain services exempt i.e. the cases wherein tax will not be required to be paid. In such cases, though tax is not required to be paid, still it will be called “taxable service”. It means that all the services as listed under section 65(105) of the Finance Act are taxable even though the same may be exempt for any reason.

Taxable Event:

10.0   PoTR has dropped the definition of this term.  Draft rules of August, 2010 in this respect read as follow:

“taxable event” means an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or the receipt of payment.

10.1   In any statute levying tax, provision of taxable event is important. For example, in the case of Income Tax, tax is levied on income which has been accrued or received by the assessee. In the same manner, in the case of Sales Tax or VAT, taxable event is transfer of property in the goods. In the case of Service Tax, the Finance Act does not provide so explicitly. Section 66 provides for levy of ST on provision of various services and provision of section 65(105) defines various services. Draft Rules of August, 2010 proposed the same. However, clause in this respect has been deleted in the PoTR. Instead, clause 2(e), while defining the term “Point of taxation”, does so partially as it refers to the cases of deeming services only. Hence, even after the PoTR, there is no clarity about taxable event in the normal course of transaction.

Determination of Provision of Service in the normal course

11.0   Comparative position of PoTR and Amended PoTR is as follow:

PoTR, 2011 Amended PoTR
3 For the purposes of these rules, unless otherwise stated, point of taxation shall be determined in the following manner, namely: For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be
3(a) a provision of service shall be treated as having taken place at the time when service is provided or to be provided; and 

 

(a)           The time when the invoice for the service provided or to be provided is issued: 

 

Inserted

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.

3(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. (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.
Explanation 

For the purposes of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Explanation 

For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Explanation 2.- For the purposes of this rule, in respect of services taxable under section 66A of the Act, the point of taxation under clause (b) shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier. Dropped

As can be seen from clause 3(a) above, there is a marked change in focus in determining the PoT. Earlier, it was “service is provided or to be provided” as against issue of invoice for service provided or to be provided. Wordings of PoTR were vague and were bound to lead serious complications. Amendment has substantially diluted the impact of Rule 3(a).

11.1   Following points be noted here:

1)      It covers the cases of services wherein service is not of CSoS type.

2)      It is not applicable to the Specified Persons and Services as mentioned in Rule 7.

3)      It covers the case wherein provision of service has begun but not completed and invoice has been issued.

4)      It also covers the cases wherein provision of service has not begun but invoice has been issued.

5)      Starting point for determining tax liability will be with reference to issue of invoice.

6)      Generally, invoices are issued after completion of services. Hence, Rule 3(a) takes into account ground reality.

7)      It may so happen that, in certain cases, SP is required to issue invoice even before commencement of provision or completion of service. This may be for seeking an advance. Such cases are also covered here.

8)      It may also happen that having completed provisioning of the service, for some reason, invoice has not been issued. In such cases, clause 3(a) will not get invoked. However, in order to plug the loophole, it has been provided that if the invoice has not been issued within the period of 14 days of the completion of service, date of PoT will relate back to the date on which service was completed. Moreover, Rule 4A of ST Rules makes it compulsory to issue invoice within 14 days of completion of services.

Implications for Business

11.2   To a large extent, Clause 3(a) will bring determination of tax liability at par with the provisions of VAT and Generally Accepted Accounting Standards followed. Barring the cases of tax liability on advances received, value of service disclosed in ST Returns will match with the amount appearing in Profit & Loss Account.

A Problematic Area

11.3   A Problem will arise in the cases where provision of service has been completed but invoice has not been issued and time for payment of tax and / or filing of ST Return has expired. According to Proviso, provision of service will relate back to the date of completion of service. Since, during the intervening period, time for payment of tax and filing of ST Return might have elapsed, the question of payment of tax with interest and filing of Revised Return will arise. This will be clear from the following example.

Example: 1

11.4   M/s A Pvt. Ltd. has commenced provisioning of service for a contract, which is not CSoS, on 1st August, 2011 and completed it on 20th September, 2011. However, invoice for the same has been issued on 31st October, 2011 and paid tax thereon 5th November, 2011. Determine tax implications this can have on A Pvt. Ltd.

11.5     Firstly, since it is of duration of less than three months, it will not be governed by Rule 6 i.e.  CSoS. However, it will be governed by Rule 3.

11.6     As per Rule 3(a) since provision of service has been completed but invoice has not been issued, it will not be governed by the main part of said clause instead, it will be governed by Proviso clause.

11.7     As per the Proviso clause, A Pvt. Ltd. should have issued the invoice by 4th October, 2011. Since it has not been done, liability of tax will relate back to the month of September, 2011.

11.8     In view of this, tax liability will date back to the tax rate as prevailing on 20th September, 2011 and not 31st October, 2011.

11.9     Accordingly, A Pvt. Ltd. should have paid the tax by 5th October, 2011. Instead, it has been paid on 5th November, 2011. Therefore, interest will have to be paid for the period from 5th October to 4th November, 2011.

11.10   Meanwhile, A Pvt. Ltd. must have filed its half-yearly return by 25th October, 2011. As the invoice was not issued in Sept., 2011, ST-3 filed will not be correct to that extent. Therefore, A Pvt. Ltd. will have to file revise return containing value of service on the contract which was completed on 20th Sept. 2011.

Example 2

11.11   In the above example, if A Pvt. Ltd. issues invoice on 1st October, 2011 at what point of time tax liability will arise?

11.12   Since, invoice has been issued within the stipulated period of 14 days, it will be subject to tax in the month of October, 2011. Due date of payment of tax will be 5th November, 2011. In view of this, there will not be any question of payment of interest for late payment of tax or revising ST-3 filed.

Service Not Provided

11.13   It may so happen that for some reasons the time for provisioning of service has already expired but service has not been provided. Since the service has not been provided, invoice has not been raised. What will happen in such cases? Clause 3(a) provides for the cases wherein the invoice for the service provided has been issued. It is also provided that issue of invoice for service to be provided will also lead to taxation. Therefore, if the invoice has not been issued, the question of paying tax does not arise. It can be seen that tax liability is determined with reference to issue of invoice. Hence, the question of levying tax on notional transaction does not arise.

PoT on the Basis of Payment Received

12.0   Rule 3 also provides for the contingency wherein payment is received before providing of service. Clause 3(b) reads as follow:

(b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Time Specified in Clause (a)

12.1   Clause (b) provides for taxation of amount received before the time specified in clause (a). As we have seen, clause (a) does not specifically lay down any fixed time-frame but defines it relatively i.e. with reference to issue of invoice. In view of this, following scenario emerges:

a)      Receipt of payment before commencement of service

b)     Receipt of payment after commencement of service but before its completion

c)      Receipt of payment after completion of service but before issue of invoice

12.2   Clause 3(b) takes the care of cases wherein advance has been received before providing of service, issue of invoice before completion of service. The moment provision of service comes to an end, Proviso to clause Rule 3(a) will get invoked.

Quantification of Value of Service

12.3   The clause provide for quantification of value of service in such cases as well. Value of service for tax purposes will be to the extent covered by the invoice or payment. Therefore, payment received for part of a pro-forma invoice will make total amount of pro-forma invoice taxable.

Payment of Deposit

12.4   At times, the SR is required to make payment of security deposit. Although it is not part of the consideration for services to be provided, its valuation has raised disputes. Explanation to Rule 3 provides for such cases.

Explanation.-For the purposes of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

12.5   At times, SR insists for security deposit and other sum of money which are not in proportion of value of service provided. However, such transactions emanates from the contract to provide service. In order to plug the loophole, Explanation to Rule 3(b) provides that any amount of advance received by whatever name called will be considered as payment received for services and will be subject to tax accordingly. The ST Department has taken a view that payment made by SR as security deposit to the SP is the payment and, therefore, is subject to tax. In order to avoid legal issues arising in this respect, the Draft Rules contained following provision:

Provided that no tax shall be payable on an interest free refundable deposit.

However, the above provision has been dropped in PoTR. It means the dispute in this respect will survive.

12.6     Clause 3(a) and (b) read together following scenario emerges:

Event Taxable at the point of
1 Service is provided and invoice is issued on the same date Completion of provision of service
2 Services is provided and invoice issued within 14 days thereof Date of issue of invoice
Services is provided but invoice issued after 14 days thereof Date of completion of service
3 Issue of Invoice before provision of service Issue of invoice
4 Receipt of payment before provision of service Receipt of payment
5 Issue of invoice before the time agreed upon for provision of service Issue of invoice
6 Receipt of payment before the time agreed upon for provision of service Receipt of payment

Various scenarios emerging out of the above can be summarised as follow:

Point of taxation where there is no change of rate of tax

Provision of Service Issue of Invoice Payment Point of Taxation
Yes At the time of completion of service After provision of service When service is provided – 3(a)
After issue of Invoice Before providing of service At the time of issue of invoice – 3(a)
Yes After 14 days of completion of service Date on which service was completed – Proviso to Rule 3(a)
Yes Before 14 days of completion of service Date on which invoice is issued – Proviso to Rule 3(a)
After payment After payment Before providing of service At the time of receipt of payment –  Rule 3(b)

Change in Rate of tax

13.0   Frequent changes in the rate of tax, has been cause of hardship and disputes. Draft Rule of August, 2010 has following to say about its justification.

Rule 5 determines the point of taxation where there is a change in rate of tax. In other words, it prescribes the applicable of rate of tax in the cases where the tax rate changes between the occurrence of different events, viz., provision of service, issuance of invoice, and receipt of payment. This Rule only covers the change in rate of tax, including any service which was exempt and becomes taxable, and does not cover the services which become taxable for the first time. The provisions of this rule can be summarized in tabular form as shown below (Please note that the words ‘Before’ and ‘After’ mean “before the change in tax rates” or “after the change in tax rates”, as the case may be).

[Note: PoTR did not contain the words highlighted. However, Notification No. 25/2011 further introduced it in a different way]

13.1   Rule 4 of PoTR laid down rules for such cases.

4. Determination of point of taxation in case of change of rate of tax.

Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change of rate of tax in respect of a service, shall be determined in the following manner, namely:

Notification No. 25/2011 amended the above clause by replacing the words “change of rate of tax” / “change in tax” with the words “change in effective rate of tax” (CERT). The clause prior to amendment was prone to dispute. Notification No. 25 has made an attempt to impart clarity to it.

13.2   There has been considerable controversy regarding rate of tax to be applied when it is changed. This is particularly for the reason that, in large number of cases, the process of provisioning of service is going on when the rate of tax is changed. There may also be the cases wherein advance was already paid and the SP has paid the tax thereon. However, at the time of rendering of the service, the rate of tax is changed. In order to avoid such controversies, clause 4 of the PoTR provides for various contingencies. Provisions in this respect have been classified keeping the focus point of provision of service. Clause (a) deals with the cases wherein the service has been provided before the rate has been changed while clause (b) deals with the cases wherein the service has been provided after the change of rate. The problem becomes complex as there are three events viz. providing of service, issue of invoice and receipt of payment which affect the point of taxation depending upon the time of its occurrence.

Provision of service before CERT

13.3   Clause (a) provides for the cases wherein service has been provided before the change in rate of tax. It reads as follow:

in case a taxable service has been provided before change in effective rate of tax

13.4   However, the question that will arise is whether the provision of service should have been completed at the point of time? What will happen if the providing of service is going on at the time of change in rate of tax?  Such questions remain unanswered.

Scenario- I

13.5   First scenario takes care of issue of invoice and receipt of payment after CERT. It reads as follow:

(i) where the invoice for the same has been issued and the payment received after the CERT, the point of taxation shall be date of payment or issuing of invoice,  whichever is earlier; or

13.6   Clause (i) shifts the focus for levy of tax from providing of service to issue of invoice and payment which takes place after the CERT. It should be remembered that under this clause both the events viz. issue of invoice and payment should be after the date of CERT. A question that will arise what will happen if invoice has been issued before the CERT and payment has been received thereafter. Since, in this clause, both the events have been linked together with the word “and”, this clause will not apply. It will be governed by clause (ii).

Scenario – II

13.7   Second scenario covers the cases where invoice has been issued earlier but payment has been received subsequently. It reads as follow:

(ii) where the invoice has also been issued prior to change in effective rate of tax but the payment is received after the change in effective rate of tax, the point of taxation shall be the date of issuing of invoice; or

13.8   Under this clause, focus shifts to providing of service and issue of invoice with reference to payment received subsequently. Since, out of three events two events take place before the change of rate, point of taxation get shifted to the point that is before the change of rate.

Scenario – III

13.9   Under the third scenario payment has been received before but the invoice has been issued after the change of rate of tax. It reads as follow:

(iii) where the payment is also received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax, the point of taxation shall be the date of payment;

13.10 Under this clause, provision of service has been linked with payment which takes place before the change in rate of tax. Here, two events takes place before the change in rate of tax, hence, PoT will be before the change in rate of tax.

Point of taxation where there service is provided before CERT

Sr. 

No.

Provision of Service Issue of Invoice Payment Point of Taxation
1 Before – 4(a)(i) After – 4(a)(i) After – 4(a)(i) Date of issue of invoice or payment, whichever is earlier
2 Before – 4(a)(ii) Before – 4(a)(ii) After-4(a)(ii) Date of issue of invoice
3 Before -4(a)(iii) After – 4(a)(iii) Before – 4(a)(iii) Date of Payment

Increase / Reduction in Rate of Tax

13.11 Rule 4 refers to change in rate of tax. Hence, it is applicable to both the types of cases viz. increase in rate of tax and reduction in it.

Exemption / Withdrawal of Exemption

13.12 There was no clarity about exemption or withdrawal of exemption of services from taxation. Draft Rules of August, 2010 contained the provision which read as follow:

change in tax rate includes withdrawal of exemption

However, PoTR did not contain such provision. APoTR made things somewhat clear by applying the term “change in effective rate of tax”. Although there is no definition of the term CERT, one can say that it will cover change in rate of tax arising out of the following.

a)      Any amendment, insertion or deletion of a clause in the Act

b)     Any amendment, insertion or deletion of a clause in any Rules governing provisions of ST

c)      Issue or withdrawal of a Notification or amendment in any clause thereof

d)     Issue or withdrawal of a Circular or amendment in any clause thereof

Effective Rate of Tax

13.3   Rule 4 does not define this term. However, it means that any of the events as mentioned above which has the effect of reducing or enhancing the amount of tax liability. This can be done by comparing tax liability before and after amendment or insertion etc. For example, issue of a Notification whereby the SP is permitted to reduce the value of service for computation of tax purposes will be governed by Rule 4 of APOTR. This is for the reason that it will have the impact of reducing the tax liability.

Provision of Service after the CERT

14.0   Clause (b) of Rule 4 takes care of the cases wherein service has been provided after CERT. It reads as follow:

(b) in case a taxable service has been provided after the change in effective rate of tax,

14.1   As in the clause (a), the principle followed are the same. PoT is determined with reference to other two events viz. issue of invoice and payment.

Scenario – I

(i) where the payment for the invoice is also made after the change in effective rate of tax but the invoice has been issued prior to the change in effective rate of tax, the point of taxation shall be the date of payment; or

Here two events viz. provision of service and payment takes place after CERT, hence, PoT arises after the CERT.

Scenario – II

It reads as follow:

(ii) where the invoice has been issued and the payment for the invoice received before the change in effective rate of tax, the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or

Scenario – III

It reads as follow:

(iii) where the invoice has also been raised after the change of effective rate of tax but the payment has been received before the change of effective rate of tax, the point of taxation shall be date of issuing of invoice.

14.2   As in the case of (i) above, the principles followed in the case of (ii) and (iii) are the same. The above analysis may sound confusing. However, it can be better understood in tabular form.

Point of taxation where service is provided after CERT

Provision of Service Issue of Invoice Payment Point of Taxation
After – 4(b)(i) Before – 4(b)(i) After – 4(b)(i) Date of Payment
After – 4(b)(ii) Before – 4(b)(ii) Before-4(b)(ii) Date of receipt of Payment or issue of invoice whichever is earlier
After -4(b)(iii) After – 4(b)(iii) Before – 4(b)(iii) Date of Issue of Invoice

Payment of tax in cases of new services.

15.0   Extension of coverage of services has raised disputes regarding its applicability particularly where services were continuing at the point when it is brought under the taxation. Before reading the provision let us see what the Explanatory Note circulated in August, 2010 has to say in this respect.

Rule 6 is specifically provided for conditions where a service (which is not a continuous supply of service) is charged to tax for the first time i.e. becomes taxable for the first time. The rule provides that:-

(a)  If an invoice has been issued and payment received before a service becomes taxable, no tax would be charged even if the service is provided after the same has become taxable. This provision is consistent with the other similar provisions in these rules, and ensures that a financial transaction which has achieved finality before a service was taxable shall not be reopened for collection of tax.

(b) If any payment has been received prior to a service being chargeable to tax, no tax shall be chargeable if an invoice has been issued within 14 days of receipt of payment. The period of 14 days is the period also prescribed in Rule 4A of Service Tax Rules, 1994 and ensures that a payment is not shown as having been made earlier than it was actually made.

(c)The rule also clearly lays down that any service, which is a not a continuous supply of service, if provided before the service becomes chargeable to tax, shall not be subjected to tax.

15.1   Rule 5 in this respect reads as follow:

Where a service, not being a service covered by rule 6, is taxed for the first time, then, –

(b) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;

15.2   As per this clause, provision of service after it becomes taxable will not be subject to tax provided invoice has been issued and payment has been received.

(c) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within the period referred to in rule 4A of the Service Tax Rules, 1994.

15.3   Under this clause if the payment has been received in the first step but invoice has been issued after the service became taxable and service has been provided subsequent thereto, no tax will be payable provided invoice has been issued within the time as laid down under Rule 4A of ST Rules. As we have seen under 4.1, amended Rule 4A provides for issue of invoice within 14 days of provision of service or deeming service. It is interesting here to note that there is no reference to provision of service. In the case of Rule 4, the determining criteria are provision of service before and after change in rate of tax.

Point of taxation in the case of new services

Issue of Invoice Payment Point of Taxation
Before – 5(a) Before – 5(a) No tax to the extent   of invoice issued and payment received
Within the period provided in Rule 4A – 5(b) Before-5(b) No tax payable

Continuous Supply of Service

16.0   There are certain services which by its nature are such that it takes considerable time in its completion. In such cases, SP raises invoice or payment is made on an ad hoc basis. Generally, a provision of services is on a progressive basis when the contract or agreement provides for stages of its provision. A supply may also be a progressive supply where, under a contract, services are to be supplied on an ongoing basis. However, Rule 6 differs from the traditional concept and defines continuous supply with reference to length of service to be provided. Before understanding the provisions of Rule 6, it will be interesting to read the Explanation which was provided with the Draft Rules of August, 2010. It read as follow:

Rule 7 deals with the continuous supply of services (e.g., construction services, maintenance and repair services etc.), According to the proposed definition in rule 2 of these rules, ‘continuous supply of service’ refers to services that are supplied continuously for a period exceeding six months or services that are specified by the Govt. as continuous supply of services, subject to prescribed conditions, if any.

The proposed rule essentially prescribes that the rate of tax will be the rate applicable on the date the payment becomes due as per the contract, or, if the payment is linked to completion of certain events (milestones), when those milestones are completed. If none of the above two conditions is specified in a long term contract, then the service provider is required to pay the service tax at the time of raising of invoice, or receipt of payment, whichever is earlier.

This rule also provides that if any payment has been received in respect of non-taxable service, before it becomes taxable, the same would not be charged to tax, even if the service is provided subsequently

The only exception in this case pertains to the services in continuous supply of service a part of which is being provided before the service becomes taxable, (i.e the service becomes taxable during the currency of provision of service but payment for which is received after the service becomes taxable). Certain examples of this are

(a) The payment for construction services is made before the tax becomes applicable but the construction is started after the service becomes taxable.

(b)Part of the construction is done before the service becomes taxable but payment for the same is received after the service becomes taxable

(c) Water supply has been made in the month of March & April, the bill is raised in month of May, but the service has become taxable in the month of April

Similar situations can be interpolated in other services which are supplied continuously.

In such cases, tax is liable to be paid on the basis of raising of invoice or the date provided for payment in the contract or the actual payment, as the case may be.. This Rule is drafted keeping in view the fact that the extent of service provided during a particular period of time in continuous supply of the service is difficult to determine.

Further, alternatively, payment received in respect of payments received prior to service becoming taxable, but where the service may be provided subsequently, will also not be taxable.

It has been prescribed that the clauses of the rule shall be read sequentially. Thus, if there is a date of payment prescribed in the contract, the tax becomes due on that day irrespective of the fact if the payment has been received or not. In case, the date of payment is not prescribed in the contract, but payment is linked to achievement of milestones, then the tax becomes payable even if no payment has been received by the service provider. However, if no date of payment is prescribed in the contract, or if the payment is not linked to achievement of any milestones, then the tax would be payable whenever the service provider issues an invoice, or receives a payment (whichever is earlier).

Notification No. 25/2011 made a major change in this respect. Comparative position of both the clauses is given here below:

Clause PoTR Amended PoTR
6 Notwithstanding anything contained in rules 3,4 or 8, in case of continuous supply of service, the `point of taxation’ shall be,-
(1) In case of continuous supply of service, the whole or part of which is determined or payable periodically or from time to time, shall be treated as separately provided at the date on which the payment is liable to be made by the service receiver, if such date is specified in the contract. a) 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.

(2) If, before the time specified in sub-rule (1), 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. (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.
Explanation 1. 

For the purpose of this rule, where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service.

Explanation 

For the purposes of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Explanation 2 

For the purpose of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Explanation 2 

For the purposes of this rule, in respect of services taxable under section 66A of the Act, the point of taxation under sub-rule (2) shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

Dropped

16.1   As we have seen, in the case of Rule 3(a) service provided is subject to tax keeping provision of service and issue of invoice in focus. In view of this, provisions relating to CSoS should also be on the same logic. As can be seen from the above provisions in this respect have been made invoice centric.

16.2 Under the clause (a) liability for tax under CSoS will be triggered the moment invoice has been issued for the service which has been provided. It will also cover the cases where invoice has been issued without providing the service.

16.3   Another event which can trigger the tax liability is the date on which the payment has been received.

Identification of various supplies of services

16.4   In the case of contract of long term, it is normal to provide for stagewise payment whereby SP is permitted to claim payment by raising the invoice based on the quantum of work done. In such cases, the work done is not complete to the full extent. However, the contract contains certain milestones on achievement of which the SP is permitted to raise the invoice. As per the provisions of Explanation 1 to Rule 6 achievement of each milestone will be considered as supply of distinct identity and will be subject to taxation as provided under Rule 6(a).

Quantification of Value of Service

16.5   Value of service for tax purposes have been restricted to the amount covered in the invoice or payment received.

Implications for Business

16.6   Since clause 2(c) defines all the contracts extending beyond the period of three months as CSoS, large number of contracts will get covered under it and consequently be liable to tax on achievement of each milestone. Till now such contracts did not pose any problem as payment of tax was linked with receipt of payment. However, under the amended rule a serious issue will arise. The first and foremost is keeping track of various milestones falling due on various dates. In the case of SP, executing various contracts spread over a different period of time this is going to be a Herculean task. This is for the reason that care will have to be taken to see that all the cases covered are included for determining tax liability. It will also to be ensured that there is no duplication of payment. In the case of corporate bodies where payment of tax is required to be made on monthly basis, this will be a most complex exercise.

Generally, work done by the SP is subject to verification and checking by outside agencies and their approval. In such cases, payment will fall due and to the extent as determined by inspecting agency. In view of this, SP will have to be careful while entering into the contract.

Contract under Execution as on 1-4-2011

16.7   APoTR comes into operation w.e.f. 1-4-2011. There are number of contracts which are in the course of being executed. A question that will arise is whether these contracts will also be governed by APoTR. As per Rule 9 the SP has been provided option for following the existing method till 30th June, 2011. For the contracts extending beyond 30th June, 2011, provisions of APoTR will apply.

Associated Enterprises (AE)

17.0   PoTR made separate provisions for AE. However, since APoTR made provision with reference to issue of invoice, Notification No. 25/2011 has dropped it completely.

PoT for Specified Services (SS) or Specified Persons (SpP)

18.0   Notification No. 25/2011 has replaced the old Rule 7 relating to AE with a clause providing for some relief to certain specified class of services and persons. It reads as follow:

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,-

(a) the services covered by sub-rule (1) of rule 3 of Export of Services Rules, 2005;

(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

(c) individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994, shall be the date on which payment is received or made, as the case may be:

Provided that in case of services referred to in clause (a), where payment is not received within the period specified by the Reserve Bank of India, the point of taxation shall be determined, as if this rule does not exist.

Provided further that in case of services referred to in clause (b) 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 also 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 credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

18.1   Its salient features can be summarised as follow:

a)      It makes provisions of APoTR not applicable to three types of cases. In these cases PoT is determined on the basis of payment received or made.

b)     Non-applicability of APoTR is subject to compliance of certain conditions as laid down.

c)      Exclusion of services or persons is not based on any particular principle. Therefore, as we shall examine later on, at times, it is arbitrary.

d)     Non-compliance of the condition laid down will make APoTR applicable in the process preponing the tax liability with payment of interest etc.

e)      Since Rule 7 refers to specific types of SP, accounting system followed by them is not important. For example, a SP belonging to the category of persons as referred to in Rule 7 and following mercantile system of accounting will be governed by Rule 7.

Cases of SS / SpP exempt from APoTR

18.2   The first case covered is export of services. Second clause covers the cases where instead of SP the SR is liable to make the payment of ST.  Third case covers SP providing the following types of services.

a)      Architects

b)     Interior Decorators

c)      Chartered Accountants

d)     Cost Accountants

e)      Company Secretary

f)       Persons providing Scientific or Technical Consultancy services

g)     Advocates

Export of Services

18.3   All the exporter of services will be governed by Rule 7. However, the first proviso to Rule 7 lays down that if the payment of service provided is not received within the period laid down by the Reserve Bank of India, the provisions of APoTR will be applicable. It will have tax implications which will relate back to the point of time which has taken place long back. Here, the question payment of tax and interest will arise.

18.4   A issue that may also arise is whether this clause will be applicable with respect to a particular transaction or a SP. Whether, breach of condition in one case will lead to non-applicability of rule 7(a) in all the transactions of the said SP. If it is so, it can have serious implications on the business.

Cases of Payment of Tax by SR

18.5   Generally, payment of tax is responsibility of SP. However, Section 68(2) of the Finance Act empowers the Government to shift the liability to SR. Notification No. 36/2004 and 24/2005 provides for such cases. Prominent amongst the same is payment for goods transport services. In this case, in view of Rule 7, tax liability will arise on payment of transport charges and not on the basis of receipt of invoices. It should be noted that CENVAT Credit, wherever eligible for such bills, can be taken on the receipt of invoice and not on payment.

18.6   Clause (b) permits SR to make payment of ST on the cash basis rather than mercantile i.e. issue or receipt of invoice. Here, a condition has been laid down that SR should make the payment within six months of the date of invoice. Failure to do so will invoke the provision of APoTR.

Provisions with respect to Intellectual Property Rights

19.0   Permitting use of Intellectual Property Rights (IPR) are taxable. By its nature, they belong to different category. Hence, provisions have been made in Rule 8. It reads as follow:

8. 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.

19.1   A typical nature of such service is that at the time of entering into the contract, value of service is not ascertainable. Secondly, value of service gets determined by the act of a person who is not SP. For such cases, two events have been provided for as follow:

a)      Payment in respect of IPR

b)     Issue of invoice by the service provider

19.2   For example, in the case of use of trademark, value of service may be linked with sales. Contract entered into in this respect will lay down the rate at which royalty will have to be paid. Sales effected by SR will give rise to right to payment to be made by SR. In such cases, quantification of value of service will depend on act of SR and not SP.

Transition Provision

20.0   Providing of service is an ongoing activity. A change in determining tax liability in between is bound to create serious issues. Rule 9 of PoTR tries to provide partial relief in this respect. It reads as follow:

9. Savings.- Nothing contained in these rules shall be applicable in case of invoices issued prior to the date from which these rules become effective.

Notification No. 25/2011 made major changes in this respect as well. It reads as follow:

PoTR Amended PoTR
9 Savings Transitional Provisions
Nothing contained in these rules shall be applicable Nothing contained in this sub-rule shall be applicable
(i) where the provision of service is completed; or
in case of invoices issued prior to the date from which these rules become effective (ii) where invoices are issued prior to the date on which these rules come into force. 

 

Provided that services for which provision is completed on or before 30th day of June, 2011 or where the invoices are issued upto the 30th day of June, 2011, the point of taxation shall, at the option of the taxpayer, be the date on which the payment is received or made as the case may be.

20.1   Following are the salient features of this clause.

a)      A question that may arise is whether the provisions of Rule will apply to SP or the transactions of each service separately. Since tax has to be determined separately on each transaction, SP will have an option of determining applicability of APoTR on a particular service.

b)     If the provision of service has already been completed before 1st April, 2011, APoTR will not be applicable to it. In such cases, tax will have to be paid in the month in which the payment has been received which may be subsequent to 31st March, 2011. Moreover, in these cases, issue of invoice can be subsequent to 31st March, 2011.

c)      In the second case, if the SP has already issued invoices before 31st March, 2011, such cases will not be governed by APoTR. It should be noted that issue of invoice is not attached with any condition like provision of service. Provision of service in such cases may extend beyond 30th June, 2011.

d)     Proviso to Rule 9 gives two options to SP. Under the first option, the SP can opt for the old system even in cases where provision of service has been completed after 1st April, 2011 but before 1st July, 2011. Issue of invoice and / or receipt of payment can be after 1st July, 2011. No time limit has been laid down in this respect.

e)      Under the second option, if the SP has issued invoice after 31st March, 2011 but before 1st July, 2011, APoTR will not be applicable. No condition has been attached with issue of invoice.

f)       An interesting issue here is availing of CENVAT Credit by SR. Under amended Rule 7 of CENVAT Credit Rules, a SR can claim tax credit on the basis of invoices received. Hence, in the cases of invoices issued which may be governed by erstwhile provisions, SR will be in a position to claim CENVAT Credit even without making the payment. It may so happen that during this period there may be large scale cases wherein SP will follow erstwhile Rule i.e. defer the liability to pay the tax while SR will be in a position to claim CENVAT Credit. This may pose problem to the Government in terms of revenue collection for the intervening period as there will be substantial amount of claim of the credit.

Conclusion

21.0   ST has been a taxing issue for the SP, at times, much more than providing of services. At least for the time being, with the introduction of new system, the problems are going to galore. For example, there is no clarity or rather there is no provision for bad debts written off. APoTR will affect the entire SPs to a major extent in various ways. Moreover, the most difficult part for SP will be how to start from 1st April, 2011? Should the SP exercise option as provided in Rule 9 or not? What changes are required to be made in Accounting System? What impact all these can have on working capital? A detailed analysis of all these and other issues with example of some of the SP, will be made in the second part of the article.

[To be concluded]

CA. Pradip R Shah

e-mail: pradip@pradiprshah.com

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0 responses to “Service Tax – Revised Point of Taxation Rules – Pain of Taxation? Part – I”

  1. Govind Agrawal says:

    Kindly answer the following query:

    1. Sec. 65(105)(zzzzm) – Services by Legal Professionals
    Clause 71(A)(5)(d) of the Finance Bill, 2011

    I. Partnership Firm of Tax Practitioner (not registered under Service
    Tax since Gross receipts below 9 lacs)

    • Nature of Services rendered:
    (i) Filing of Income Tax Returns
    (ii) Filing of VAT Returns
    (iii) Appearance before Tax Authorities in cases fixed before
    them.
    (iv) Aforesaid services rendered to:
    A. Individuals
    B. HUF
    C. Firms
    D. Companies

    QUERY:

    (1) Whether the aforesaid firm of Tax Practitioner will be liable for Service
    Tax w.e.f. 01/04/2011 (whether it was liable before 01/04/2011 also)?

    (2) If yes, on what type of services among (i), (ii), (iii) referred above?

    (3) If yes, on which category of client among (A), (B), (C) & (D) referred
    above?

    (4) If the Gross Professional Receipts during the F.Y. 2011-12 upto Feb., 2012 is 9 lacs and firm applies for Service Tax Registration in Feb., 2012, starts collecting Service Tax after getting registration on 15/02/2012. On what amount Service Tax will be payable, if?
    • Gross Receipts upto 1st Feb., 2012 – Rs. 9,00,000
    • Gross Receipts upto 15th Feb., 2012 – Rs. 9,50,000
    • Gross Receipts upto 31st March, 2012 – Rs.10,50,000

    II. For Chartered Accountants
    A Proprietorship concern of Chartered Accountants (not registered under Service Tax since Gross receipts below 9 lacs)

    • Nature of Services rendered:
    (i) Filing of Income Tax Returns
    (ii) Filing of VAT Returns
    (iii) Appearance before Tax Authorities in cases fixed before
    them.
    (iv) Audit Work
    (v) Aforesaid services rendered to:
    A. Individuals
    B. HUF
    C. Firms
    D. Companies

    QUERY:
    After Amendments in Finance Bill, 2011

    (1) Whether the aforesaid Proprietorship concern of Chartered Accountants will be liable for Service Tax w.e.f. 01/04/2011? On what type of services among (i), (ii), (iii) referred above?

    (2) If yes, on which category of client among (A), (B), (C) & (D) referred above?

    (3) If the Gross Professional Receipts during the F.Y. 2011-12 upto Feb., 2012 is 9 lacs and firm applies for Service Tax Registration in Feb., 2012, starts collecting Service Tax after getting registration on 15/02/2012. On what amount Service Tax will be payable, if?

    a. Gross Receipts upto 1st Feb., 2012 – ₹ 9,00,000
    b. Gross Receipts upto 15th Feb., 2012 – ₹ 9,50,000
    c. Gross Receipts upto 31st March, 2012 – ₹ 10,50,000

  2. CA. Macharla Rosaiah, Chatered Accountant says:

    Good Article by the Member of CA.

    Thanking you

    CA. Macharla Rosaiah.

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