Anshul Jain

Indirect Taxation

SERVICE TAXPOINT OF TAXATION

Background Since its inception in 1994, Service tax was to be deposited to the credit of the central government by the

5th/6th of the month immediately following the calendar month in which the payments are received towards the value of the taxable service provided or to be provided.

In other words the person liable to pay service tax had to remit his liability on a cash basis, without any reference to the amount receivable as per the invoice issued by such person.

With this methodology the tax although became due but did not reach the government’s credit i.e. it either got delayed or it never reached.

To plug this lacuna, in 2011 (i.e. w.e.f 01-04-2011)the finance minister proposed the adoption of“ Point of Taxation rules (POTR)” to achieve a fit between the present Service tax regime and the proposed GST regime.

The expression “Point of taxation” means the point in time when a service shall be deemed to have been provided i.e. the time when the tax becomes due to be paid.

The POTR shifted the basis of tax collection from “cash” to “accrual basis” like the other tax laws. In other words the remittance of Service tax by the person liable to pay Service tax need not depend on

whether he has actually received the payment for the services provided, It shall depend upon the date of completion of the provision of service or at the best the date of issuance of invoice since such date marks the day on which the payment accrues.

The Rules:

Rule 3: Rule 3 is the general rule or the residual rule i.e. when any of the following specific rules are not

applicable in a given scenario, Rule 3 shall be attracted. Though numbered as rule 3, but it is to be read at last.

It says that when none of the specific rules are applicable, the POT shall be:◦ The time when invoice is issued for the service. ( provided or agreed to be provided). BUT, if the invoice

is not issued as per rules ( within 30 days from provision of service or 45 days in case of banking concerns) then the POT shall go back to the day of completion of service.

◦ If the person providing the service receives any advance i.e. before the service is completed, then the POT ( to the extent of such payment) will be the date of such advance.

In case of continuous supply (services which are provided regularly for a period exceeding 3 months like telecommunication service, construction service under works contract etc) of service where the provision of the whole or part of the service is determined periodically on the completion of an event as per the terms of a contract ( for e.g. laying foundation or flooring or any other milestone event as per the contract), which requires the receiver of service to make any payment to the service provider, the date of completion of provision of service.

CBEC vide Circular No.144/13/2011-ST dated 18th July, 2011 has clarified the term “Completion of Service” to mean that all the other auxiliary activities such as measurement, quality testing etc. besides the physical part of providing prime service also to be completed, which enable the service provider to be in a position to issue an invoice. However, such auxiliary activities shall not be flimsy or irrelevant grounds for delay in issuance of invoice

S.No

Date ofcompletionof service

Date ofinvoice

Date onwhich

paymentreceived

Point oftaxation

Remarks

1 April 10,2012

April 20,2012

April 30,2012

April 20,2012

Invoice issued in 30 days of completion of service and before receipt of payment

2 April 10,2012

May 26,2012

April 30,2012

April 10,2012

Invoice not issued within 30 days and payment received after completion of service

3 April 10,2012

April 20,2012

April 15,2012

April 15,2012

Invoice issued in 30 days but payment received before invoice

4 April 10,2012

May 26,2012

April 5, 2012(part) andApril 25,2012(remaining)

April 5, 2012And April 10,2012 for respectiveAmounts

Invoice not issued in 30 days. Part payment before completion, remaining later

A few examples have been illustrated as follows.Note: w.e.f 1st April, 2012, the time period for issuance of an invoice specified in Rule 4A of the Service Tax Rules, 1994 has been increased from 14 days to 30 days from the date of completion of service or receipt of any payment towards the value of such taxable service, whichever is earlier. In case service provider is banking company or a financial institution including NBFC, the time period has to be read as 45 days.

Rule 4: Determination of point of taxation in case of change in effective rate of tax

Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax (to include a change in rate of abatement or any other notification issued, altered, or amended and which has the effect of change in taxability, if any, of the service will also be construed as change in effective rate of tax.) in respect of a service, shall be determined in the following manner, namely:—

Provisionof Service

Issuanceof Invoice

Payment Point ofTaxation

ApplicableRate ofService Tax

Beforechange ofRate (Prior to 01.04.2012)

After change ofrate

After change of rate Date of invoice or payment, whichever is earlier

12%

Before change of rate

After change of rate Date of invoice 10%

After change ofRate

Before change of rate Date of payment 10%

Afterchange ofRate ( After 01.04.2012)

Before change ofrate

After change of rate Date of payment 12%

Before change ofrate

Before change of rate Date of invoice or payment, whichever is earlier

10%

After change ofrate

Before change of rate Date of invoice 12%

Rule 5: In case Of service taxed for the first time

When a service is taxed for the first time, no service tax is payable:• In case invoice as well as payment are received against such invoice before such service became taxable;• In case payment is received before such service became taxable & the service provider has issued invoice

within the period of 30/45 days of the date when such service is taxed for the first time. The provisions of Rule 5 are explained with an example here below.

For example: The services of cricket commentators are made liable to service tax w.e.f. 1st July, 2012. In a case where payment is made to the commentator on or before 30th June, 2012 for which invoice is raised on or before 30th July, 2012, no service tax would be payable in view of Rule 5 of POTR, 2011 inspite of the fact that the match for which the commentator is giving his services is scheduled on or after 1st July, 2012 i.e., at the time when the services are liable for service tax.

Rule 5 covers only two issues which are specifically mentioned above. Any other situation shall be covered under the general rule, i.e., rule 3.

For example, in case where the date of invoice and the date of completion of service is before the service became taxable but the payment has been received after the date the service became taxable then as per rule 3, the POT shall be the date of issuance of invoice or receipt of payment, whichever is earlier.

Rule 6: In case of continuous supply of services

Rule 2(c) defines “continuous supply of service” to mean any service which is provided, or agreed to be provided continuously or on recurrent basis, under a contract, for a period exceeding 3 months with the obligation for payment periodically or from time to time 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.

Central Government vide Notification No. 28/2011-ST dated 1st April, 2011 had notified following services as “continuous supply of service” for the purpose of Point of Taxation Rules, 2011.

• Commercial or Industrial Construction • Construction of Residential Complex• Internet telecommunication Services• Telecommunication Services• Works Contract Service

Rule 6 has been omitted w.e.f 1st April, 2012. For determining POT in case of continuous supply of services, Rule 3,4,5 as the case may be will be applicable with effect from 1st April, 2012

Rule 7: In case of specified services

Rule 7 provides that notwithstanding anything contained in these Rules, POT shall be the date on which payment is received or made, as the case may be, in respect of persons required to pay tax as recipients of service in respect of services notified under section 68(2) for reverse charge mechanism ( Old rule 7)

CBEC vide Notification No.4/2012 changed the erstwhile rule 7 as follows: In respect of services notified under section 68(2) where payment is not made within a period of 6

months of the date of invoice, the point of taxation shall be the◦ Time when invoice for service provided or agreed to be provided is issued.◦ In case the invoice is not issued within the time period specified in Rule 4A of the Service Tax Rules,

1994, point of taxation shall be the date of the completion of such service

For example : We have received the Taxable invoice under Reverse Charge in the month of say August 1, 2012, however the payment made to the party in the month of March 01, 2012.Accounting Treatment in the Month of August 2012: -

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

Expense Account .DrTo PartyTo TDS Payable

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

Rule 7: In case of specified services

Accounting Treatment in the Month of February 2013 – In the month of February 2013, service tax liability needs to be provided as the payment has not been

made within the prescribed period as per Rule 7 ( i.e. 6 months), so the transaction will shift under Rule 3 and the service tax liability needs to be paid with interest from the due date as per Rule 3 of the point of Taxation Rules, 2011

Service Tax Input DrInterest on Service Tax Dr

To Service Tax PayableTo Interest on Service Tax Payable

Accounting Treatment at the time of payment of Service Tax -Input Credit for the Service Tax payable is available only after the payment of Service Tax on the basis of Challan evidencing the payment of Service Tax. (Credit under reverse charge is available only on payment basis)

Service Tax Payable DrInterest on Service Tax Payable DrService Tax Input Dr

To BankTo Service Tax Input

Accounting Treatment in the Month of March 2013 Party Dr

To Bank

Rule 7: In case of specified services

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.

CBEC vide Circular No.154/5/2012-ST dated 28th March, 2012 has clarified that in respect of invoices issued on or before 31st March, 2012, the point of taxation in respect of specified taxable services rendered by individuals/proprietary firms/partnership firms shall be the date of receipt of payment as provided by erstwhile Rule 7 of the Point of Taxation Rules, 2011. The specified taxable services are:

i) Architects ii) Interior Decoratorsiii) Practicing Chartered Accountantsiv) Practicing Cost & Works Accountantsv) Practicing Company Secretaries vi) Scientific & Technical Consultancy vii) Legal Services viii) Consulting Engineer Services

CBEC vide Circular No.158/9/2012-ST dated 8th May, 2012 has clarified that since the point of taxation in respect of 8 specified taxable services rendered by individuals/proprietary firms/partnership firms shall be the date of receipt of payment, service tax is required to be paid @12.36% in respect of invoices raised before 1st April, 2012 for which payment is received after 1st April, 2012. The service provider may issue supplementary invoice to recover the differential amount of service tax which would be eligible as CENVAT credit to service recipient subject to fulfillment of various conditions prescribed under the CENVAT Credit Rules, 2004.

Rule 7: In case of specified services

The above circular has been quashed as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011 by the Delhi High Court in the case of Delhi Chartered Accountants Society (Regd) v. Union of India and ors. W.P. (C) 4456/2012 & C.M. No. 9237/201. The Delhi High Court has held that the Point of Taxation Rules, 2011 have the force of law and the circulars have to be in conformity with the Act and the Rules and if they are not, they cannot be allowed to govern the controversy. It is well-settled that a Circular which is contrary to the Act and the Rules cannot be enforced.

Therefore since the point of taxation in respect of 8 specified taxable services rendered by individuals/proprietary firms/partnership firms shall be the date of receipt of payment, service tax is required to be paid @10.3 % in respect of invoices raised before 1st April, 2012 for which payment is received after 1st April, 2012

Rule 8: In case of royalties

In respect of royalties & 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 deemed to have been provided each time when a payment in respect of such use or the benefit is received by the provider or an invoice is issued by the provider, whichever is earlier.

Rule 8A: Point of Taxation to the Best of Judgment

Rule 8A gives powers to the Central Excise Officer to determine the point of taxation to the best of his judgment in cases where the point of taxation cannot be determined as per POT Rules, 2011 as the date of invoice or the date of payment or both are not available. In such cases, the Central Excise Officer is required to give the concerned person opportunity of being heard before passing such order in writing.

Rule 9: Transitional provision

The provisions of these rules are not applicable in case where provision of services is completed or invoices are issued prior to 1st April, 2011. In case where provision of services is completed or the invoices are issued prior to 30th June, 2011, the point of taxation, at the option of taxpayer, shall be the date on which the payment is received or made, as the case may.

FAQ’sQ 1: The service was provided in August 2010 when the rate was 10%, however the payments are

received in January 2013 when the rate was 12%. What should be the rate applicable and what are the related consequences?

Ans: Rule 3 read with Rule 4 of POTR read with section 66B of the Finance act 1994, since the payment for consideration was made years after provision of service, rate of tax prevalent at the time of provision of service will be applicable. Hence tax will be payable at 10% plus cess. (European Court of Justice, Impresa Cotruzioni comm. Quirino Mazzalai v/ Ferrovia del Renon (2013) 39 STT (ECJ)

Q 2: A person makes advance payments to one of its vendors for supply of services, in general, in future. The nature/description of services to be received could be altered at any time by the person and even the contract can be cancelled by the person leading to refund of balance advance. The vendor company charges service tax on the invoice. Can the person avail CENVAT credit on such invoice?

Ans: Tax is leviable on advance payments for services only if all the relevant information concerning chargeable event, namely future delivery or future performance is already known and the services are precisely identified. Since the advance payments in this case, were made prior to identification of services themselves, such general payments cannot be subject to service tax ( Since the assessee has the right to alter the nature of the services to be rendered. Accordingly no service tax shall be leviable and therefore no question of allowing CENVAT credit to the vendor. (ECJ 2013, 39 STT 733, BUPA hospitals ltd v/s commissioner of customs and excise)

FAQ’sQ 3: A CA firm performs the following audit functions like, preparation of audit programme,

performing audit, preparing draft reports, discussing issues, finalizing the audit report and affixing signatures on the report. What event can be regarded as the completion of provision of service?

Ans: It was clarified in a board circular 144/13/2011 ST that service is complete when not only service is complete physically but all auxiliary activities that are required for issuing invoice are complete like measurement, quality etc. But flimsy or irrelevant grounds for delay are not admissible. In view of the above, date of finalization of audit report is the date of completion of provision of service. It is generally followed by affixing of signature.However, delay in affixation of signatures may be due to some activity remaining undone. In that case date of affixation of signature would be POT.

Q 4: As chartered accountants we send reminder letters to our existing clients, so that no important due date is missed. In that reminder we also mention fees relating to each work. Can such activity be regarded as issuing invoice for the purpose of POTR.

Ans: A similar issue arose in insurance sector. It was clarified in circular no 166/1/2013 that In terms of practice followed, reminder/notices/letters are issued by life insurance companies to policy holders to pay renewal premiums. Under POTR the point of taxation is date of issuance of invoice or receipt whichever is earlier. An invoice means invoices as described under Rule 4A of service tax rules 1994. Therefore reminders cannot be construed as invoices for the purposes of POTR.

FAQ’sQ 5: An airline company has agents to issue tickets on their behalf. The rate of service tax was

increased from 10.3% to 12.36% w.e.f. 01/04/2012. Now what would be the rate applicable in case the ticket is issued on 31/03/2012 on receipt of payment by agent from client but the journey is performed on 10/04/2012. The agent remits the money to the airline company on 30/04/2012.

Ans: In case of change in rate of tax, Rule 4(b)(ii) of POTR provides that if service is provided after change in rate of tax but invoice is issued and payments are received prior to change in rate, the POT shall be the date of payment or date of invoice whichever is earlier.Here the issue of invoice i.e. the ticket is done by the agent and money is received by him on behalf of the company. Circular 155/6/2012 ST clarifies that acts done by agent on behalf of the principal shall be deemed to be done by the principal. Hence the date of payment in this case would be 31/03/2012 and the rate of 10.3% shall be applicable.

Q 6: A builder is in the process of constructing 20 units of flats of Rs 1.2 Cr each since 01/03/2013. A payment of Rs 50 lakh on each flat has been received upto 07/05/2013. corresponding bills were raised and construction was also done accordingly. A part of the construction would be carried after 08/05/2013 and bills would be raised accordingly. What would be the implication when abatement has been opted?

Ans: Construction of residential complex upto Rs 1 Cr before 07/05/2013 was eligible for a 75% abatement. However w.e.f 08/05/2013, the rate of abatement has been reduced to 70%. This would amount to change in rate of tax and Rule 4 of POTR shall apply.Under Rule 4, to the extent of invoice has been raised and payment received prior to change in rate, the rate of tax aplicable shall be the old one i.e. 75% abatenment. However in respect of bills raised and collections made after 08/05/2013 the rate of abatement shall be 70%.

FAQ’sIn certain cases where the service has been provided prior to 08/05/2013 and bills are raised before 08/05/2013 but the payments are received on or after 08/05/2013 the rate of abatement will continue to be 75%.

Q7: A school plans to organize a summer camp for its students. The services are covered under exemption upto 09/05/2013. Now in a case service is provided on say, 01/05/2013 (Value Rs 25,000) Invoice was issued on 09/05/1013 and the payment was also received on the same day. The cheque received for the payment was presented in bank on 14/05/2013 and cleared on 16/05/2013. Would the service be liable to service tax?

Ans: In this case since the payment is received by a banking instrument. Rule 2A, which says that since the payment is credited in bank on 16th I.e. after 4 working days from 10th being due date of charge of service tax on such service for the first time, hence the date of payment shall be considered to be the date of credit in the bank i.e. 16/05/2013.Rule 5(a) and 5(b) of POTR require that payment must have been received prior to charge of service tax for the first time which is not the case here. Therefore the services shall stand liable to tax here.

FAQ’sQ 8: An owner of a patent has hired it out to a commercial user on royalty basis at specific percent

of revenue earned by user on a half yearly basis i.e. 30th Sept and 31st March. For the period 31st march 2013 the bill is raised on 11-04-2013 and the payment is received on 13/04/2013. Now is the service tax payable on 31st Match 2013 or 6th July 2013 ( Q1 assuming a non corporate assessee)

Ans: As per Rule 8 of POTR where whole amount of consideration for services is not ascertainable when service is performed and subsequently the use or benefit of these services by a person other than the provider gives rise to any payment of consideration, then the service shall be treated as having been provided each time when:1) A payment in respect of such use or the benefit is received by the provider, or2) An invoice is issued by the providerwhichever is earlierHence like all other rules of POTR, this rule also works on the basis of accrual i.e. invocie or payment whichever is earlier i.e. 11/04/2013 in this case.Now since the date of POT falls in the month of April, the tax is payable at the end of quarter 1 ( for a non corporate assessee)

FAQ’sQ 9: A company in India receives service from USA on 18/08/2012. The relevant invoice of

$1,50,000/- was raised by American vendor on 20/09/2012. The payment was made on 15/04/2013 and the relevant service tax under reverse charge was paid on 6th of May (being a corporate assessee) . Was the service tax payable on 6th September 2012 since the service was received in August 2012?

Ans: As per Rule 7 of POTR, in case of reverse charge, POT=date of payment, but in case payment is not made within 6 months from the date of invoice, POT shall be determined as if this rule did not exist. The implication would be: POT shall be date of payment or date of invoice whichever is earlier nd if invoice is not raised within 30 days of provision of service then POT shall be date of provision of service.

Here payment is not made within 6 months from date of invoice hence rule 7 does not apply. Secondly the invoice is also raised after 30days of provision of service ( 30 days from 18/8 is 17/09 but invoice is raised on 20/09) hence the POT shall be the date of provision of service which is 18/08/2012.

Now because the assessee is a corporate, the service tax accruing in the month of August 2012 is payable in September 2012. Since the tax is deposited in May 2013, interest for delay shall also become payable.