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Dr. Sanjiv Agarwal

It is barely a month since we had a new Budget wherein substantial changes were made in service tax and new Notifications issued. Within a month, we have yet another set of amendments, amendments to amendments and hopes  for further amendments.

Levy of service tax on railway freight which was supposed to be effective from April 1 has been deferred once again by three more months to July 1, 2011- thanks to our Railways Minister.

The historic amendment in levy of service tax by moving from cash  basis of taxing services to accrual basis has come into force from April 1, 2011 against all hopes of it getting deferred by three months to July 2011, as announced by the Finance Minister. However , it has come into force but some flexibility has now been provided to taxpayers. All tax payers have been given an option to switch over to accrual basis either form April or July this year, thus offering three months of breathing time to adjust to such system,  understand it and make suitable modification in software and accounting methods. It will become mandatory for all taxpayers from July, 2011.  Under the new system, service tax would be payable on earliest happening of the three events- completion of provision of service or date of invoicing or date of payment. Till 31st March, it was date of payment which was reckoned to be the date on which service tax became due.

The taxpayers would be required to issue an invoice within 14 days of the completion of service failing which date of completion of service will be considered as point of taxation. Where any advance is received, the date of receipt of advance will be the point of taxation.

In a major relief to certain service providers, it has been said  that those can continue to pay service on receipt basis as per the erstwhile system. Accordingly, architects, interior decorators, chartered accountants, cost accountants, company secretary, scientific & technical consultants and legal consultants who provide taxable services in the capacity of individuals,   proprietary firms or partnership firms may make payment of service tax on receipt basis. This would however, not apply to other organization forms of such service providers- corporates, LLPs etc. Also, in case of exports, if the export proceeds are realized within the date prescribed by Reserve Bank, it will be on receipt basis. In case of imports , if payment is made within six months of invoice, tax would be collected on receipt basis only.

Another major relief on this count is the transition time allowed to taxpayers. The new rules will not apply to taxable services provided or invoiced before 1 April 2011. The same will apply in June 2011 as three months transition time has been given. Thus, for the services provided or invoice raised before 30th June 2011, service providers at their option can continue to follow the existing system of payment of service tax on receipt basis.

What happens if tax is paid but later payment of invoice is not made or made partly due to deficiency in service? In such cases, it was has been provided that if the amount of invoice is negotiated due to deficient service or change in terms of contract, the service tax would be payable on revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver. The concession would not be available for bad debts  implying that service provider will be out of pocket on two counts – amount turning  bad and the tax being paid from own account . Why not, taxes are paid to buy peace.


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  1. Nagabhushanam says:

    Can you please let me know where it is mentioned in the Point of Taxation Rules regarding Import Of Services.

    “In case of imports , if payment is made within six months of invoice, tax would be collected on receipt basis only”.

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July 2024