POINT OF TAXATION RULES2011 – (SERVICE TAX)

Analysis of

(For internal circulation only)

Contents• Introduction

•Point of taxation Rules

•Normal Case

• Change in effective rate

•New Service

• Continuous Supply

• Specified Services

• Intellectual Property Services

• Transitional Provisions

•Cenvat Credit Rules

•Service Tax Rules

INTRODUCTION

Introduction

Notified Vides Notification No. 18/2011 dated 1-3-2011 & Notification 25/2011 dated. 31-3-2011

Move from Cash basis of taxation to an Accrual based system

Point of taxation is defined as the “Point in time when a service shall be ‘deemed to have been provided’[Rule 2(e)].

The point of taxation (POT) determines Rate of service tax and Due date of payment of service tax.

Under new rules, liability to pay shall be determined on the date when services are deemed to be provided

DETERMINATION OF POINT OF TAXATION

Determination of Point of Taxation [Rule 3]

Point of Taxation

Normal Situation

Date of Issue of Invoice

or

Date of receipt of Payment

Whichever is earlier

In case invoice has not been issued within 14 days of the completion of provision of service, the point of taxation shall be the date of such completion.

Special Cases

Export of service

Continuous Services

Associated Enterprises

Change in Rate of Tax

New Service

Specified Services

Reverse ChargeIntellectual

Property

Transitional provisions

Point of Taxation [Rule 3] – Normal Case

Situation Point of Taxation

Invoice is issued before completion of service and receipt of payment

Time of issue of invoice

Service is completed and invoice is issued within 14 days

Time of issue of invoice

Service is completed and invoice is not issued within 14 days

Date of completion of service

Payment is received in advance before issue of invoice or completion of service

Date of receipt of payment, to the extent of such payment

Scenarios:

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

Change in Effective Rate [Rule 4]

While the rule does not define “change in effective rate” it means that any event which has the effect of reducing or enhancing the amount of tax liability

Change in effective rate of tax may arise out of the following:

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

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

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

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

Change in effective Rate of Tax includes:

Change in portion of Value on which Tax is payable in terms of Notification issued under the provisions of Finance Act, 1994 or Rules made there under.

Change in rate of abatement or rates under composition scheme.

Change in Effective Rate [Rule 4]

Situation Service provided before change in effective rate

of tax

Service provided after change in effective rate

of taxInvoice raised after change

in rate Payment made after change

in rate

Date of payment/ date of invoice, whichever is earlier

Date of payment/ date of invoice, whichever is earlier

Invoice raised before change in rate

Payment made after change in rate

Date of issue of invoice Date of payment

Invoice raised after change in rate

Payment made before change in rate

Date of payment Date of issue of invoice

Invoice raised before change in rate

Payment made before change in rate

Date of payment/ date of invoice, whichever is earlier

Date of payment/ date of invoice, whichever is earlier

Scenarios:

Introduction of New Service [Rule 5]

New Service brought

under gamut of Service

Tax

ScenarioPoint of TaxationEvent 1 Event 2

Invoice issued & Payment received

before Service became Taxable

NA No Service Tax Payable

Payment received before Service

became Taxable

Invoice issued within 14 days of

Completion of Service

No Service Tax Payable

Service provided before tax became

applicable

Invoice issued within 14 days of

Completion of Service and

payment received after Service

became taxable

No Service Tax Payable

Scenarios:

Continuous Supply of Services [Rule 6]

Continuous Services

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

• Any other service if provided under a contract for a period exceeding three months.

The point of taxation in the case of continuous supply of services shall be as follows:

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

Date of completion of the provision of service or receipt of payment, if the invoice not issued within the prescribed period as above.

Continuous Supply of Services [Rule 6]

Situation Point of Taxation

Invoice is issued before completion of service and receipt of payment

Time of issue of invoice

Service is completed and invoice is issued within 14 days

Time of issue of invoice

Service is completed and invoice is not issued within 14 days

Date of completion of service

Payment is received in advance before issue of invoice or completion of service

Date of receipt of payment, to the extent of such payment

Illustration:

Specified Services [Rule 7]Nature of Service Point of Taxation (POT) When Cenvat Credit available

to Service Recipient Conditions

Export of serviceDate of Receipt of

PaymentNA

If payment is not received within time, prescribed (6

Months) by RBI, POT as per normal provisions

Persons required to pay service tax as recipient of service (Reverse Charge

Mechanism)

Date of PaymentDate of payment of Value & Service tax mentioned

on Invoice

If payment is not made within 6 months from the

date of invoice, POT would be as per normal provisions. Therefore, if after six months payment for invoice has not

been made, then there would be liability to pay

service tax but no corresponding credit would

be allowed

Individuals/ Proprietorship/ Partnership firms

providing specified Services

Date of Receipt of Payment

Date of Receipt of Invoice

A) Specified Services: - Architect, Interior Decorator,

Chartered Accountant/ Company Secretary/ Cost Accountants/Scientific &

Technical consulting/ Legal Service

B) Credit is available to the Service Recipient on receipt of invoice though no amount

has been paid

Intellectual Property Services[Rule 8] Intellectual property service means a service where consideration is

not ascertainable at the time of service being rendered.

Examples include Copy rights, trade marks, design and patents etc.

Point of Taxation is deemed to be when earlier of the following events occur:

Payment is received by the provider, or

Invoice is issued by the provider, whichever is earlier

First Event Subsequent Event Point of Taxation

Receipt of payment or benefit is received by service provider

Issue of Invoice Receipt of payment or benefit is received by service provider

Issue of Invoice Receipt of payment or benefit is received by service provider

Issue of Invoice

Transitional Provisions [9] Keeping in mind the transitional phase, the aforementioned rules not

to apply to

Provision of services completed, or

Invoices issued Prior to 1.4.2011

Service Providers have the option of continuing on Cash basis till 30/06/2011

CENVAT CREDIT RULES

Cenvat Credit Rule Changes Credit is also now available on Accrual basis

Credit available on receipt of invoice provided

In case of Non-payment within 3 months of date of invoice Credit availed needs to be reversed

Such reversed credit can be re-availed on payment of value of service and service tax

For reverse charge , Credit available on payment of Value of service and service tax within 6 months of invoice.

For invoices issued prior to 1/4/2011 , Credit is available on payment.

Supplementary invoice by service provider can be used as document for availing credit

For Proportionate credit or payment of 5%, the value of exempted service will be difference between the sale price and the cost of goods sold or 10% of the cost of goods sold, whichever is more

SERVICE TAX RULES

Service Tax Rules Invoice to be issued:

Within 14 days of “completion of service”

For continuous supply – within 14 days of completion of each specified event

In case of invoice renegotiated due to deficiency of service or change in terms of contract Service provider can refund the amount to Service receiver with service tax or issue a Credit Note to service receiver except Bad debts/ Discounts/ Reduction in Charges.

Then assessee can himself adjust the excess service tax paid by him against his service tax liability for the subsequent period.

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