Amendment effective from April 01, 2015 Notification No.7/2015-ST has amended the reverse charge provisions to come into effect from 1st April, 2015. In case of manpower supply services and security agency services, under specified circumstances [viz. when services are provided by any individual, HUF or partnership firm including an AOP to a business entity registered as body corporate] service tax is payable by the service provider on 25% of taxable value and service recipient on the balance 75% of taxable value. However, as per the amended provisions effective from 01-04-2015, service receiver is required to pay under reverse charge on 100% of the taxable value. In such cases, if payment is made after 3 months and there is a rate change as on the date of payment, the tax payment on the same taxable value could exceed the effective tax rate. This is because rule 7 of Point of Taxation Rules, 2011 (“POT Rules”) is applicable in cases where a person required to pay tax is recipient of service. In such cases, if invoices are not paid within 3 months from the date of invoice issued by the service provider, the point of taxation is the date immediately following the said period of 3 months.
For example, assuming that the proposed rate of service tax @ 14% is made effective 01-06-2015 and payment is made to the manpower supply/security service providers after 3 months for the invoices raised prior to 01-04-2015, the increase in aggregate effective tax rate at the time of payment will be higher than the prescribed rate of 14% as illustrated below:
The above clearly shows that, due to provisions under POT Rules, transitional issues would arise. It is felt that appropriate amendment needs to be carried out or CBEC needs to issue a clarification to the effect that, in case of invoices raised prior to 31-03-2015 which are governed under dual reverse charge for manpower supply or security services, the service recipient would be required to make payment only for the balance amount of service tax which cumulatively in no case should exceed the proposed increased rate of 14%.
Proposed increase in rate of service tax from 12.36% to 14%.
Presently the rate of service tax is 12.36% consisting of service tax of 12% and education cess of 2% on service tax and secondary and higher education cess of 1% on service tax. The Finance Bill, 2015 (FB 2015) has proposed to abolish both the cesses and increase the service tax rate to 14%. The increased rate of service tax shall be effective from a date to be notified after the enactment of FB 2015 (“notified date”).
Pursuant to the above stated increase, the rate of tax that would be applicable in certain situations, as per the PoT Rules would be as under:-
The following transitional issues merit attention:
In case of situations stated in (c) & (e) above, in accordance with Rule 2A of POT Rules if the payment is not credited in the bank within 4 working days from the notified date, the new rate of 14% would apply.
In case of situations stated in (d) & (f) above, service tax would have already been paid at the old rate (12.36%) when the invoice was issued or payment received before the change of rate of tax applying Rule 3 of POT Rules. However, due to subsequent increase in rate, there would be a short payment which the assessee may have to deposit. However, no interest would apply if the assessee deposits the differential amount within the due date reckoned from the point of taxation [i.e. date of payment in case of (d) and date of issue of invoice in case of (f) above.]
The above anomalies are inherent in the POT Rules which prescribes multiple points of taxation. This poses practical issues more particularly in respect of certain services (for example annual membership fees, annual maintenance contracts, etc.). It is understood that many service providers have already started collecting Service tax at 14% (though not legally correct) to avoid situations of differential payments and recovery issues from customers subsequent to the increased rate becoming effective.
