1. Background:
1.1 Point of Taxation Rules, 2011 (POT Rules) were notified vide Notification No. 18/2011-ST, dated 1-3-2011 and were amended before they came into force vide Notification No. 25/2011-ST, dated 31-3-2011. Therefore, in order to avoid confusion, only the amended rules are analysed and discussed. In all, there is a set of nine rules. While introducing the POT Rules, the Ministry of Finance, in its Instruction D.O.F. No. 334/3/2011-TRU, dated 28-2-2011 stated as under:
“These rules determine the point in time when the services shall be deemed to be provided.
The general rule will be that the time of provision of service will be the earliest of the following dates:
- Date on which service is provided or to be provided
- Date of invoice
- Date of payment.”
The Service Tax Rules, 1994 (ST Rules) are also correspondingly amended consequent upon introduction of POT Rules to align the provisions and to alter the payment from receipt to the point when services are deemed to be provided.
1.2 Hitherto, Service tax was payable into the Government treasury only at the point of time and to the extent of actual receipt towards value of taxable service. There is a paradigm shift in this well-settled modus operandi of collection of the levy vide the introduction of the POT Rules and accrual is expected to be the new order of the levy with the exception of tax payable on advances also. At the outset, it may be noted that although POT Rules came into force from 1-4-2011, an option is provided in Rule 9 of POT Rules to pay Service tax on receipt basis till 30-6-2011. Essentially, the introduction of POT Rules is claimed as a transitionary action to align the system of payment of taxes on goods and services in the forthcoming GST Regime.
2. Whether POT Rules determine ‘taxable event’ or point of time for manner of collection?
2.1 Prelude to the POT Rules provides that the said rules have been made for the purpose of collection of Service tax and determination of rate of Service tax. However, Rule 2 defining a few terms, its clause (e) defines point of taxation as; “ ‘Point of taxation’ means the point in time when a service shall be deemed to have been provided”. Thus a deeming fiction is created and different times have been laid down when a service shall be deemed to be provided. Does this mean that this set of rules determines the ‘taxable event’? In any law, the charging section determines the taxable event. Section 66 of the Finance Act, 1994 (Act) reads as under:
“there shall be levied a tax (hereinafter referred to as Service tax) at the rate of . . . percent of the value of taxable services referred to in section 65(105) . . . and collected in such manner as may be prescribed.”
2.2 The Supreme Court in the case of Association of Leasing and Financial Services Companies v. UOI, (2010) 20 STR 417 (SC) observed that the taxable event is the rendition of service. The Gujarat High Court in the case of CCE&C v. Reliance Industries Ltd., (2010) 19 STR 807 (Guj.) held that “in our view, substantive provision of the Act would clearly indicate the relevant date is the date of entry in service and not the date of billing.” The Tribunal in the case of CCE v. Krishna Coaching Institute, (2009) 14 STR 18 (Tri.-Del.) held that even though value has been received prior to the date of levy of Service tax, Service tax shall be leviable once the service has been rendered after the date of levy of Service tax. Similarly, in the case of Hindustan Colas Ltd. v. CCE, (2010) 19 STR 845 (Tri.-Mum.) it was held that levy of Service tax is with reference to taxable event and if that has taken place prior to the introduction of levy of a particular service, Service tax cannot be levied on the amount/consideration received for the said service. In the context of excise law in the case of Wallace Flour Mills Company Ltd. v. CCE, (1989) 44 ELT 598 (SC), the goods were exempted from duty at the time of manufacture. However, at the time of clearance after the budget, the duty was levied. The Court held that although when taxable event of manufacture occurred, the goods were exempt, the duty is collected at a later date for administrative convenience. The authorities were competent to collect the duty at the rate applicable at the time of clearance on the goods excisable at Nil rate at the time of taxable event of manufacture. Later in the case of CCE, v. Vazir Sultan Tobacco Co. Ltd., (1996) 83 ELT 3 (SC), the Court held that once the levy is not there at the time of manufacture, it cannot be levied at the time of removal of goods. Thus the law laid down through the above cases is that under the central excise law, the taxable event is manufacture or production of goods and collection of duty is at the point of removal and exempted goods under a notification are excisable goods. However, when they are outside the purview of the excise law at the time of manufacture, no duty can be levied at the time of clearance on the goods manufactured before the introduction of levy and removed after the imposition of levy.
2.3 Thus the charging section levies a tax at prescribed rate on the value of taxable service and specifies that the manner of collection shall be as prescribed. Accordingly, the amended Rule 6 of the ST Rules prescribes that Service tax is to be paid by 6th/5th of the month as the case may be immediately following the calendar month in which the service is deemed to be provided as per POT Rules. In other words, ST Rules read with POT Rules determine the manner of collection of Service tax. Therefore POT Rules do not determine the ‘taxable event’ viz. the provision of service, on the happening of which, the levy of Service tax is triggered. In the backdrop of this analysis, a question arises as to whether Rule 2(e) of the POT Rules defining point of taxation as point in time when service is deemed to be provided is appropriate? The object and purpose laid down while introducing POT Rules indicate that POT Rules are prescribed to provide a deeming fiction for the point in time to determine the manner of collection of Service tax and not taxable event of provision of service. In effect, Rule 6 of the Rules read with POT Rules determines the manner of collection of Service tax. Amidst this legal controversy, the provisions of POT Rules, are discussed hereafter.
3. Determination of point of taxation:
Rule 3 to Rule 8 deal with different situations for determining point of taxation.
3.1 General Rule (Rule 3):
The basic rule set out in Rule 3 is that earlier of the following three events is the point at which Service tax is required to be paid:
- The date on which an invoice is issued for a service provided or to be provided.
- If no invoice is issued within 14 days of completion of service, the date on which provision of a service is completed.
- The date on which any advance by whatever name known is received.
The Government’s letter F. No. 341/34/2010-TRU, dated 31-3-2011 in para 2 has provided a following illustrative table:
The above indicates that point of taxation is hybrid or multiple with a condition of whichever is earlier. If the stated objective is mere alignment with GST, then whether resorting to multiple points was required is a question. Further, and as it also exists since 2005, if advance payment is also a point of taxation under deeming fiction, there is another question arising as to whether or not uniformity will be achieved in the indirect tax system. Under the excise law, the time of manufacture is the taxable event, but the duty is levied at the point of clearance and thus there is a single taxation point. Under the VAT laws, the tax is payable when sale is made.
3.2 When effective rate of Service tax is changed (Rule 4):
Notwithstanding anything in Rule 3 of POT Rules as discussed in para 3.1 above when the effective rate of Service tax changes, provision of this Rule 4 relating to change in effective rate of Service tax is applicable. The rate of Service tax for this purpose also includes abated rate under any exemption or a specific rate under any rule. For instance, there is a lower effective rate of tax by virtue of exemption of 75% in value in case of service of transportation of goods by road, exempted value on various services vide Notification No. 1/06-ST, dated 1-3-2006 or there is a composition rate prescribed in case of works contract service or options available of specific rates for services of air travel agents, life insurance business, purchase or sale of foreign currency including money changing, etc. under Rule 6(7), (7A) and (7B), respectively of ST Rules. Determination of point of taxation under the said Rule 4 for services provided before the change in rate and after the said change is provided as follows:
(a) When taxable service is provided before the change in effective rate of tax:
- If both, issuing invoice and receipt of payment are after the date of change of effective rate of tax, whichever accrues earlier is the point of taxation. The changed rate would apply here.
- However, when the invoice is issued prior to the change in effective rate of tax, but the payment is received after the said change, the date of invoice is the point at which tax is payable and accordingly the old rate would apply.
- As against the above, when the payment is received prior to the change in effective rate of tax, but the invoice is issued after the date of change of the rate, the date of payment is the point of taxation. As such, in this case also the old rate of tax would be applicable.
(b) When a taxable service is provided after the change in effective rate of Service tax:
- If the invoice is issued prior to the change in the effective rate of tax, but the payment is received after the said change, the date of receipt of payment is the point of taxation and despite the issue of invoice earlier, in deviation from the general rule, the changed rate would be applicable.
- However, when both, issuing invoice and receipt of payment have occurred prior to the change in the effective rate of tax, the earlier event out of the two occurrences is the point of taxation. The old rate would be applicable in this situation.
- When the payment is received prior to the change in the effective rate of Service tax, but the invoice is issued after the said change, the date of invoice is the point of taxation. The changed rate would be applicable here again in deviation from the general rule.
The broad principle in the above six situations is that the tax rate is determined based on when two events have occurred at a point of time i.e., either provision of service and issue of invoice or provision of service and payment.
3.3 When a new service is introduced in the law:
(Rule 5):
3.3.1 When any service (other than a service which is considered in continuous supply and accordingly covered by Rule 6) which was not taxable earlier and for the first time it is made taxable from a specific date, Service tax is not payable:
(a) when the invoice is issued and payment is received for such service before such service became taxable;
(b) when the payment is received prior to the service becoming taxable, but the invoice is issued after the service becoming taxable, if the invoice is issued within fourteen days from the date of completion of service as laid down in Rule 4A of the ST Rules.
3.3.2 This rule appears to defy the basic legality that when there is no ‘taxable event’ under the law, there cannot be levied Service tax as emerging from the provision of section 66 of the Act as well as various rulings, some of which are cited in para 2 earlier. From the conditions laid in (a) above, it appears that in a case when both, issue of invoice and payment have occurred prior to the date of introduction of the levy, but if a service as a matter of fact is provided after the introduction of levy, no Service tax is payable. Conversely, in terms of (b) above, if the service is provided prior to the effective date of the new levy, payment also is received prior to such date, but if no invoice is issued within 14 days, Service tax liability would arise. The question arises is whether the condition of issuing invoice within 14 days in terms of Rule 4A of the ST Rules can be applied to the period prior to the effective date of the levy? Does such rule get authority of law? It appears that if the Rule is not amended, considerable litigation may surface on this issue in addition to the hardship expected to be faced by a large number of service providers.
3.4 Continuous supply of service: (Rule 6):
3.4.1 Continuous supply of service as defined by Rule 2(c) of POT Rules means any service provided or to be provided continuously under a contract for a period exceeding three months or where the Central Government notifies a particular service to be a continuous supply of service with or without any condition.
The Government in accordance with the provisions of the said Rule 2(c) of POT Rules vide Notification 28/11-ST, dated 1-4-2011 notified the following services to be constituted in the nature of continuous supply, notwithstanding the period for which they are provided or agreed to be provided:
- Telecommunication service [65(105)(zzzx)]
- Commercial or industrial construction [65(105)(zzq)]
- Construction of residential complex [65(105)(zzzh)]
- Internet telecommunication service [65(105)(zzzu)]
- Works contract service [65(105)(zzzza)]
3.4.2 The conditions mentioned in sub-clauses (a) and(b) of Rule 6 are aligned with Rule 3, viz. the general rule discussed in para 3.1 earlier. Nevertheless, Rule 6 for services held to be in continuous supply is in primacy over Rules 3 and 4 discussed in paras 3.1 and 3.2 earlier and Rule 8 discussed in 3.9 hereafter. The earlier event of the date of invoice or the date of receipt of advance is the point of taxation. Like the general rule, in case of continuous supply of service also, if the invoice is issued within 14 days of completion of service, the date of completion of service would be the point of taxation. However, in case where the terms of the contract for the service provided that on the completion of a specific event or a milestone, certain payment is required to be made by the recipient of the service to the provider thereof, the date of completion of each such event or milestone as provided in the contract would be deemed to be completion of part or whole of such service, as the case may be. In this context, the following clarification of the Finance Ministry made vide para 5 of letter F. No. 341/34/2011-TRU of 31-3-2011 is relevant:
“5. Rule 6 relating to continuous supply of service has been aligned with the revised Rule 3 and the date of completion of continuous service has been defined within the rule. This date shall be the date of completion of the specified event stated in the contract which obligates payment in part or whole for the contract. For example, in the case of construction services if the payments are linked to stage-by-stage completion of construction, the provision of service shall be deemed to be completed in part when each such stage of construction is completed. Moreover, it has been provided that this rule will have primacy over Rules 3, 4 and 8.”
3.4.3 Briefly stated, so far as this Rule 6 is concerned, ordinarily, once a service is determined as one in continuous supply, the date of the completion of the event stated in the contract is the point of taxation. However, if an invoice is raised or payment is received before this date, point of taxation shifts accordingly.
3.5 When services are exported: Rule 7(a):
When the services are held as exported in terms of the Export of Services Rules, 2005, there does not arise a liability to pay Service tax. However, technically until the payment for the service is received in convertible foreign exchange, the service would not constitute export, because the condition of receipt in foreign exchange does not stand fulfilled. Rule 7(a) and the proviso in this regard provide that if payment for exported service is made within the period specified by the Reserve Bank of India (RBI) which is usually 12 months (except in certain cases, a longer period is allowable), the date of payment is considered the point of taxation. However, if it is not received within the period specified by RBI, the point of taxation would be determined as if this rule is absent and therefore in accordance with Rules 4, 5 or 6 discussed above or Rule 8 discussed hereafter in para 3.9, as the case may be. To summarise, if the payment for the exported service is not made within the time prescribed by RBI, the Service tax liability would emerge and the liability would arise from the point of taxation as determinable under the rules without having benefit of considering the date of receipt and therefore the interest for delayed payment also would arise as the point of taxation would shift to a much earlier date like the date of invoice or the date of completion of service, or as the case may be. The clarification of the Finance Ministry in para 9 of the letter F. No. 341/34/11-TRU of 31-3-2011 is reproduced below:
“9. Export of services is exempt subject, inter alia, to the condition that the payment should be received in convertible foreign exchange. Until the payment is received, the provision of service, even if all other conditions are met, would not constitute export. In order to remove the hard-ship that will be caused due to accrual method, the point of taxation has been changed to the date of payment. However, if the payment is not received within the period prescribed by RBI, the point of taxation shall be determined in the absence of this rule.”
3.6 When Service tax is payable under reverse charge mechanism: Rule 7(b):
In case of services like insurance agents and mutual fund agents, goods transport agencies or when taxable services are provided from outside India, the liability of Service tax is on recipient of the services u/s.68(2) of the Act. In such cases, like in case of exported services, the Rule 7(b) provides for point of taxation on the date of actual payment to the service provider. However, this is subject to the condition that the payment is made within six months of the date of the invoice. If the payment is not made within 6 months of the date of invoice, point of taxation is determined in the absence of this rule i.e., in accordance with the applicable rule, be it Rule 3, 4, 5, 6 or 8, as the case may be. Like in the case of export of services discussed in 3.5 earlier, interest for the delayed payment would arise as the point of taxation would shift to the date of invoice or the date of completion of service, etc. The clarification of the Finance Ministry vide para 10 of the letter dated 31-3-2011 is as follows:
“10. In case of services where the recipient is obligated to pay Service tax under Rule 2 (1)(d) of the Service Tax Rules i.e., on reverse charge basis, the point of taxation shall be the date of making the payment. However, if the payment is not made within six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist. Moreover, in case of associated enterprises, when the service provider is outside India, the point of taxation will be the earlier of the date of credit in the books of account of the service receiver or the date of making the payment.”
3.7 Certain professionals to continue to pay Service tax on receipt basis: Rule 7(c):
Rule 7(c) has carved out an exception for the following professional service providers when services are provided as individuals, proprietary firms or partnership firms and provided for the date on which payment for a service is received or made as the point of taxation and accordingly has maintained a status quo for these assessees. The list is as follows:
- Architect [Section 65(105) (p)]
- Chartered Accountant [Section 65(105) (s)]
- Cost Accountant [Section 65(105) (t)]
- Company Secretary [Section 65(105) (u)]
- Interior Decorator [Section 65(105) (q)
- Legal Consultant [Section 65(105) (zzzzm)]
- Scientific and Technical Consultant [Section 65 (105) (za)]
Thus, the above categories of persons continue to pay Service tax on receipt basis even after 1-7-2011. In this list, professions of consulting engineers and management consultants are conspicuously missing. In this context, the clarification vide para 8(iii) of the Finance Ministry letter of 31-3-2011 is relevant to note:
“8(iii) Individuals, proprietorships and partnership firms providing specified services (Chartered Accountant, Cost Accountant, Company Secretary, Architect, Interior Decorator, Legal, Scientific and Technical consultancy services). The benefit shall not be available in case of any other service also supplied by the person concerned along with the specified services.” (emphasis supplied)
It is required to note here that the above rider is not mentioned in the applicable rule, but finds place in the Government clarification in the above words.
3.8 Associated enterprises:
In case of associated enterprises, when the service provider is outside India and the Service tax is pay-able in respect thereof under reverse charge, the earlier of the date of credit in the books of account of the receiver of service or the date of payment is considered the point of taxation. When any associated enterprise is situated in India, no provision is made for it in POT Rules. The earlier proviso in this regard in Rule 6 of the ST Rules is also omitted with effect from 1-4-2011. The clarification in para 7 of the Finance Ministry letter of 31-3-2011 explains this point as follows:
“7. Rule 7 relating to associated enterprises has been deleted. Now that the date of completion of the provision of service is an important criterion in the determination of point of taxation, it shall take care of most of the dealings between the associated enterprises. Thus in case of failure to issue the invoice within the prescribed period, the date of completion of provision of service shall come into effect even if payment is not made.”
3.9 Royalty payments: Intellectual property rights:
(Rule 8):
It is provided that in respect of royalties and payments towards copyrights, trademarks, designs or patents, when the whole amount of consideration is not ascertainable at the time of provision of service, the service shall be deemed to have been provided each time the payment in respect of the use or the benefit is received by the provider of trademark, copyright, patent, etc. or at the time the invoice is issued by the service provider, whichever is earlier.
4. Services completed or invoice issued before POT Rules became effective:
Transitional provision is made in the POT Rules whereby for the service provision completed prior to 30-6-2011 or invoices issued till 30-6-2011, an assessee at his option can pay Service tax at the point when payment is received or made, as the case may be. In short, an assessee can continue to pay service tax on receipt basis for the invoices issued till 30-6-2011 or he may pay on accrual if so opts from 1-4-2011.
5. When invoice is not paid partly or wholly by the recipient of service:
Most assessees under the Service tax law, except the seven categories of professionals as discussed in para 3.7 earlier, face the challenge of payment of service tax based on the invoice in the post — July 01, 2011 scenario and not receiving full/part payment towards the service, leave aside non-receipt of amount of service tax charged in the said invoice. Therefore, non-payment or short payment may occur on account of various reasons such as dispute as to delayed service, quality of deliverables, cash-flow difficulty of the recipient of service, breach of terms of service, etc. With the onset of POT Rules, corresponding changes are made in the ST Rules. The amended Rule 6(3) of the ST Rules provides that:
- If the service is wholly or partly not provided for any reason; or
- Where the amount of invoice is renegotiated due to inadequate or poor quality of service, the service provider or the assessee can refund the amount to the receiver of service with Service tax or issue a credit note suitably.
After such refund of amount or issue of credit note, the assessee may himself adjust the excess payment of Service tax against his Service tax li-ability for the subsequent period. However, when no invoice is paid for at all by the service receiver and if the assessee does not issue a credit note, no provision is made in the POT Rules or ST Rules for adjustment of bad debts. Refer to para 11(ii) of the Finance Ministry letter of 31-3-2011 explaining the position as follows:
“11(ii) If the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions of the contract (e.g., con-tingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver. However, concession is not available for bad debts.”
6. CENVAT credit available on receipt of invoice:
Rule 4(7) of the CENVAT Credit Rules, 2004 is simultaneously amended to align with POT Rules to provide that CENVAT credit of Service tax is available immediately on receipt of invoice issued on or after 1-4-2011, except when service tax is payable under reverse charge mechanism. However, if the invoice is not paid within three months of the date of invoice, the credit is required to be reversed. The credit can be taken again after the invoice is paid. (Readers may refer to Service tax feature in May 2011 Issue of BCAJ for detailed analysis of this at para 5 under ‘Significant Amendments in CENVAT Credit’).
7. Some issues:
7.1 Mr. A, an assessee under the Service tax law received advance payment on 25th February for his services agreed to be provided 1st June onwards. The rate of Service tax was revised from 10.3% to 12.36% from May 2011. Considering the POT Rules in operation, on the receipt of advance payment, Service tax @10.3% was paid by Mr. A on 5th March i.e., in the following month of the receipt on the receipt of advance is the earliest event. Whether Mr. A would be required to pay service tax at higher rate of tax on the amount of advance received on 25th February, if:
(a) he issues an invoice on March 10 for the said advance
(b) he issues an invoice on June 01 when service commences
(c) he issues an invoice on 31st March.
Mr. A seeks advice.
7.1 (a) When the rate of Service tax changes, ordi-narily one is governed by the provisions of Rule 4 of POT Rules. Accordingly, when services are provided after the change in the rate, but if advance is received prior to such change and if the invoice is also issued prior to such change, the point of taxation is earlier event of the two occurrences, therefore payment on 5th March @10.3% is in order as the invoice is also issued prior to the date of change in the rate.
(b) If the invoice is not issued by Mr. A till June 01, he will be required to pay service tax @12.36% as his point of taxation would be June 01 in this case and the liability to pay Service tax arises on 5th July. (Here the default under Rule 4A of STR is also made as no invoice is issued within 14 days of the receipt of the advance.)
(c) In this situation also, the point of taxation would be 25th February and therefore the payment of tax on 5th March @10.3% was proper notwith-standing the default in issuing of invoice later than 14 days of the receipt of the advance.
Mr. A is advised to issue the invoice within 14 days of the receipt of advance as in (a) above in order to avoid a controversy.
7.2 Mr. X provides a service which was hitherto not taxable. However, the service is introduced in the law from a prospective date for the first time, say, from July 01. For certain services provided till 30th June, Mr. X had already issued two invoices, however no payment was received by Mr. X till 30th June. Whether Service tax would be payable in any case by Mr. X if he receives the payment for both the two invoices in August and December, respectively.
7.2 Rule 5 of POT Rules provides for point of taxation when a new service is introduced in the law for the first time. However, the above situation is not envisaged by the said rule. Therefore Rule 3(a) being a general rule would be applicable. Accordingly, no Service tax would be payable as the date of invoice is the point of taxation and at such time the service was not taxable. Further, in principle, in the absence of or prior to the introduction of POT Rules when the provisions of service occurred, the service was not taxable and therefore no Service tax would have to be paid. Taxable event under the service tax law is rendering of taxable service as discussed and decided in cases cited in para 2 earlier and also by the Gujarat High Court in CCE&C v. Schott Glass India (P) Ltd., (2009) 14 STR 146 (Guj) held that taxable event in relation to Service tax is admittedly the rendering of taxable service. Many disputes have arisen on the issue of whether Service tax is payable in respect of services provided prior to the introduction of levy on it and payment for which is received later. In the case of Lumax Samlip Industries
v. CST, (2007) 6 STR 417 (Tri.-Chennai) it was held that for determination of Service tax liability, the relevant date is the date on which the service was received by the appellant. If the service was received before the applicability of Service tax on that service, Service tax cannot be levied.
7.3 ABC & Co is a partnership firm of CAs which is registered with the Service Tax Dept. under the following service categories:
- Management or Business Consultant
They are in the process of converting into LLP in due course of time. ABC & Co seeks advice as to implications of POT Rules before/after conversion into LLP.
7.3A According to the provisions of Rule 7(b) of POT Rules, relaxation is applicable only in the following circumstances/situations:
- Service provider is an individual, proprietary firm or partnership firm
- Specified service is provided by a service provider.
Hence, the following position emerges:
(a) Prior to LLP conversion, relaxation under POT Rules, would be available only in regard to taxable Services provided under ‘Chartered Ac-countant’ category [Section 65(105) (s)]
(b) Post LLP conversion, relaxation under Rule 7(b) of POT Rules, would not be available to ABC & Co.
