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Representation
4th
November, 2010
To,
The Chairman,
Central Board of Excise & Customs,
Department of Revenue,
Ministry of Finance & Company Affairs,
North Block,
New Delhi-110001.
Dear
Sir,
Subject
: Suggestions on the draft Point of Taxation (for services provided or received
in India) Rules, 2010
The Bombay Chartered Accountants’ Society (BCAS) is a voluntary organisation established on 6th July 1949. BCAS has about 8,000 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean and efficient administration and governance. We make representations regularly on Direct and Indirect Taxes.
Please find attached suggestions on the draft Point of Taxation (for services provided or received in India) Rules, 2010 (‘Rules’).
Thanking you,
Yours truly,
For Bombay Chartered Accountants’ Society
Mayur B. Nayak
President
Govind G. Goyal
Chairman Indirect Taxes & Allied Laws Committee
Encl : Suggestions
Bombay Chartered Accountants’
Society
Suggestions on the draft
Point of Taxation (for services provided or received in India) Rules, 2010
(‘Rules’)
Rules to be restricted only
for the purpose of ascertaining the date for determination of rate of service
tax and not for altering the time for payment of service tax from the present
receipt basis to accrual/invoice basis/receipt whichever is earlier.
1. The Point of Taxation
(for Services Provided or Received in India) Rules, 2010 (‘Rules’) are sought to
be issued in exercise of the powers conferred on the Government of India u/s.
94(2)(hhh) of the Chapter V of Finance Act, 1994 (hereinafter referred to as the
‘Act’), which is the law governing service tax.
2. The purposes of the draft
rules as stated in the preamble are :
(i) To introduce clarity and certainty as to the date from which a new service would become payable
(ii) To provide for the above in the context of continuous supply of services
(iii) To link the liability to pay tax to provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is the earliest
(iv) To bring the service tax law in line with Central Excise Laws and VAT laws; and
(v) To smoothen transition to GST.
3. However, an important
point to be noted is that the Point of Taxation (for Services Provided or
Received in India) Rules, 2010 are sought to be issued pursuant to S. 94(2)(hhh)
which is dealing with ‘the date for determination of rate of service tax and the
place of provision of taxable services’. Hence in the present context, the Rules
must confine themselves primarily to prescribing the date for determination of
the rate of service tax whenever there are changes in the rate of service tax.
It cannot legally entrench
into other areas such as linking the liability to pay tax to provision of
service, raising of the invoice or receipt of payment for service provided or to
be provided, whichever is earliest or imposition of service tax on new services.
These areas would be outside the legal scope of S. 94(2)(hhh) of the Act.
4. Secondly, the charge of
service tax is on the value of ‘taxable services’. S. 65(105) defines ‘taxable
service’ as ‘any service provided or to be provided’ to ‘any person’, ‘client’,
‘customer’, etc. Thus, S. 65(105) which defines ‘taxable services’ covers — (a)
services ‘provided’; and (b) services agreed ‘to be provided’ within the ambit
of service tax. The intention is to collect tax when advance payments are
received for services to be provided. Thus, service tax would be payable even on
advances received. Thus, the taxable events would be two :
(a) a service provided;
and
(b) a service agreed to be
provided.
‘Taxable event’ with regard to services ‘provided’ is identified by the time of provision of the service and with regard to services ‘to be provided’ is identified by time of payment towards value of service to be provided. This has a significant bearing on the rate of tax. Thus where there has been a provision of services but no monies towards the value of services have been received, the rate of tax prevailing at the time of provision of services would apply. Similarly, in cases where monies have been received towards the value of services but the services are yet to be provided, the rate of tax prevailing at the time of receipt of payment towards the value of services would apply. These propositions are implicit in the law [S. 65(105), S. 66 & S. 67] and the Service Tax Rules, 1994 (Rule 6). The Rules sought to be notified must not alter these provisions but must make them explicit. Thus the relevant date for the purpose of determination of rate of tax would be the ‘date of provision of service’ or ‘the date of receipt of money, whichever is earlier. This is the present understanding.
5. Thirdly, it would be better not to disturb the existing arrangement of paying service tax when monies for taxable services provided or to be provided are received. The changeover from the present dispensation which allows payment of tax on receipt of the payment (including advances) to a system where tax is paid to the Central Govern-ment on provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is earliest would involve several issues :
(i) Changes in the Act to provide for the taxable event at the time of supply as in the UK. VAT law.
(ii) Change in Rule 6 of the Service Tax Rules, 1994.
(iii) Changes in Cenvat Credit Rules,2004 which allow credit of input services only when they are paid.
(iv) Further, there are no provisions relating to bad debt adjustment or reduction in the invoices in case monies are not received or monies are received less as compared to the invoice amount. Hence the service providers would have to pay tax even on monies not received. Thus, the service provider would be out of pocket if they have to pay service tax on invoices issued but the monies for the service are not received.
(v) The payment of tax upon issue of invoices without having received the payment would mean that the tax would have to be financed by internal accruals or borrowings which in most cases would be difficult for service providers.
(vi) The provision of service is quite different compared to sale/manufacture of a product. Firstly, services are intangible unlike goods where the sale/clearance of a product is verifiable physically by delivery challans, transport documents, etc. In case of services the delivery of a service cannot be verified. Out of the three events — (i) provision of services; (ii) issue of invoice and (iii) receipt of payment, the last event viz., receipt of payment is historically and factually verifiable by the Department with a greater degree of certainty. Secondly, the service provider may not have a lien on the service unlike in case of goods.
There are no documents of title to services which can be put through the bank and hence the recoverability is suspect. The rights of an unpaid seller of goods are well guarded and recognised in law as against the rights of an unpaid service provider. Hence it may not be correct to equate goods and services. Thirdly, in case of Central Excise law and VAT law, the tax is not payable on advances. Thus, the purpose of the Rules viz., to bring the service tax law in line with Excise law and VAT law is not achieved nor is it necessary.
(vii) Further there will be several issues when there is a transition from payment of service tax on receipt basis to/payment of service tax on provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is earliest. There would be several system and software issues. This needs to be avoided.
In this regard, it has to be appreciated that the payment of service tax on receipt of money towards provision of services was in vogue since 1998 and has worked quite well mainly due to its simplicity and more importantly, since it provides a more factually verifiable basis for the Department to collect service tax.
6. In view of the above, it is submitted that the Rules must confine themselves only to provide for the date for determination of rate of service tax.
7. Accordingly, a suggested draft of the Rules centred around carrying out the objective viz. prescribing the date for determination of rate of service tax is attached herewith marked Annexure A. Basically, the suggested draft revolves around an important maxim that the rate of service tax would be the ‘date of provision of service or receipt of payment of money for services, whichever is earlier’.
Other suggestions:
8. In Rule 6 of the draft Rules, it has been provided that where the payment has been made before the date of introduction of service tax on a service, no tax shall be payable to the extent of payment received. In our view, this provision must be made by way of an exemption notification and cannot find place in the proposed Rules.
9. A closely related issue is with regard to determination of value where invoiced amount is in foreign currency. In such cases, the Service tax (Determination of Value) Rules, 2006 must be amended to provide that the rate of exchange applicable shall be the rate prevailing on the ‘date of provision of service or receipt of payment of money for services, whichever is earlier’.
Draft of Service Tax (Determination of the Rate of Tax) Rules, 2010
In exercise of the powers conferred by clause (hhh) of Ss.(2) of S. 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:
Short-title and commencement:
1. (1) These Rules shall be called the Service Tax (Determination of the rate of tax) Rules, 2010.
(2) They shall come into force on the date of their publication in the Official Gazette.
Definitions:
2. In these Rules, unless the context otherwise requires:
(a) ‘Act’ means the Finance Act, 1994 (32 of 1994);
(b) ‘continuous supply of service’ means any service which is provided, or to be provided, under a contract, for a period exceeding one year and for a consideration the whole or part of which is determined periodically and includes any service which the Central Government, by a Notification, prescribes to be a continuous supply of service, whether or not subject to any condition;
(c) ‘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;
(d) Words and expressions not defined in these Rules but defined in the Act or the Rules made thereunder shall have the meanings, in-sofar as maybe, assigned to them in the Act or the Rules made thereunder.
Date for determining the rate of service tax:
3. For the purposes of ascertaining the date for determining the rate of service tax, the following provisions shall apply, namely:
(a) where the service has been provided and no payment has been received, the rate of service tax shall be the rate prevailing on the date when the services are provided and if for any reason date of provision of services is not determinable, the date of receipt of money towards the service provided or to be provided shall be date for determining the rate of service tax.
(b) If, before the provision of service, the service provider receives a payment in respect of the service to be provided, the rate of service tax shall be the rate prevailing on the date of payment to the extent covered by the payment.
Explanation: An interest-free refundable deposit shall not be considered as a ‘receipt of payment in respect of the service to be provided’. However, if the terms of the contract provide that such interest-free refundable deposit is adjustable against the consideration payable by the service receiver, then the date of adjustment shall be considered as the date of receipt of payment.
Continuous supply of service:
4. In case of continuous supply of services, where the whole or part of the value is determined or payable periodically or from time to time, the rate of service tax shall be the rate prevailing at the following times:
(i) If the date of payment is prescribed in the contract, the date on which the payment is liable to be made by the service receiver, irrespective of whether or not any invoice has been raised or any payment received by the service provider;
(ii) If the payment is to be made on the completion of an event, the time of completion of that event;
(iii) If the date of payment is not prescribed in the contract, each time when the service provider receives the payment, or issues an invoice, whichever is earlier.
Provided that the clauses (i) to (iii) shall be applied sequentially for the purposes of this rule.
Explanation: Where service tax is payable as a service recipient the date of issue of invoice has to be understood as date of receipt of invoice by the service recipient.
Associated enterprises:
5. The rate of tax in respect of transactions between associated enterprises shall be the rate prevailing on the date on which the payment has been made, or the date of debit or credit in books of accounts, or issuance of invoice, whichever is earlier.
Explanation: Where service tax is payable as a service recipient the date of ‘issuance of invoice’ has to be understood as date of receipt of invoice by the service recipient.
Royalties and similar payments:
6. In respect of royalties and similar payments, where the whole amount of the consideration for the provision of service was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of this service by a person other than the supplier gives rise to any payment of consideration, the rate of service tax shall be the rate prevailing:
(i) each time that a payment in respect of such use or the benefit is received by the provider; or
(ii) an invoice is issued by the provider, whichever is earlier.
BCAS/MBN/40 November 9, 2010
To
The Concerned Officer,
Foreign Investment Promotion Board (FIPB),
Government of India,
New Delhi-110001
Dear Sir,
Subject : Submission of Representation on Issue of Shares for Consideration other than Cash
We are pleased to submit our considered represen-tation on the aspects of Foreign Direct Investments with regard to Issue of shares for Consideration other than Cash.
We hope that the same would be useful and would find your favour.
Please feel free to contact us for any further clarification or explanation in the matter.
We shall be pleased to assist you in framing a pragmatic policy on Foreign Direct Investment.
Thanking you,
Yours faithfully,
Mayur B. Nayak
President
