The last article in this column had examined in detail the changes announced in Budget 2011 pertaining to the CENVAT Credit Rules. Another major ann-ouncement in Budget 2011 has been with regard to the introduction of the Point of Taxation (for services provided or received in India) Rules, 2011 (the Rules), which will be effective from 1st April. These Rules are very important and signal a paradigm shift in the manner of taxation of services. These Rules also lay down the principles of service taxation relating to several situations. Effectively, they are a precursor to how these principles will apply in the forthcoming GST.
The Rules define the “point of taxation” to mean the point in time when a service shall be deemed to have been provided, thereby creating a deeming fiction for imposing the tax even prior to receipt of consideration for services, as is the case presently. The relevant Rule 3 defines the point of taxation as the earliest of the actual provision of a service, the raising of an invoice or the receipt of consideration, thus effectively switching the tax from a cash to an accrual base. It also states that if an advance is received, ahead of the provision of services, the tax will be payable at the time of such receipt. On the other hand, in case of services received from abroad, where the reverse charge mechanism applies, the point of taxation will be the date on which the invoice is received or the payment is made, whichever is earlier.
Since the levy and collection of service tax would now revolve around the provision of the service or the raising of the invoice or the receipt of consideration and since these three events could transpire at different points of time, the applicable rate of service tax could possibly change in between these events. To address this situation, Rule 4 lays down the following principles. In case a taxable ser-vice has been provided before the change of rate, the taxable event shall be determined as follows: a. where the invoice is issued and the payment received after the change of rate, the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or b. where the invoice is issued prior to change in rate of tax but the payment is received after the change, the point of taxation shall be the date of issuing of invoice; or c. where the payment is recei-ved before the change of rate, but the invoice is issued after the change, the point of taxation shall be the date of payment; In case a taxable service has been provided after the change of rate, the taxable event will be determined as follows:
a. where the payment is received after the change in rate of tax, but the invoice is issued before the change, the point of taxation shall be the date of payment; or
b. where the invoice is issued and the payment is received before the change rate of tax, the point of taxation shall be the date of issuance of invoice or the date of receipt of payment, whichever is earlier; or
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c. where the invoice is raised after the change of rate but the payment received before the change of rate, the point of taxation shall be date of issuing of invoice.
Thus, the broad principle is that the tax rate is based on when two of the three events have occurred in points of time. Therefore, out of six situations envisaged above, there should not be a problem in four situations as the taxable event is the earlier of receipt of payment or the raising of an invoice. In the two other situations, difficulties could arise in the manner of complying with the provisions.
The Rules also prescribe the point of taxation in case of introduction of new ser-vices. As per Rule 5 thereof, no service tax shall be pay-able on any new taxable ser-vice, if the invoice is issued and payment is received aga-inst such an invoice before the introduction of such service. This means that if two of the events have occurred before the introduction of the new service, then the date of provision of service should be ignored.
Further, even if the pay-ment is received against such new service before its introduction and subsequently the invoice has been issued within 14 days as prescribed in rule 4A of the Service Tax Rules, 1994, no service tax shall be payable. This seems to be a very logical rule.
Further, the Rules deal with the provision of a ‘continuous supply of service’ which has been defined to mean any service which is provided, or to be provided, under a contract, for a period exceeding three months, or any service notified by the Central Government to be such a service.
The taxable event in such cases will fundamentally depend on the contract bet-ween the parties, as the tax-able event will be the date of payment for the service, as provided in the contract. However, if the payment is received or an invoice is issued prior to the above date, the point of taxation will be the date of payment or date of invoice, whichever is earlier. A similar provision applies to receipt of advances.
Rule 7 determines the taxable event in case of transactions between associated enterprises and there is broadly no change from the existing provisions, which are already based on the accrual principle. Finally, as per Rule 8, payments relating to use of copyrights, trade marks etc, such as royalties, will be taxable at the time of each such payment, regardless of whether the service was provided only once at a single point of time. This is a major amendment to the present regime.
In conclusion, while the introduction of the Rules is a welcome move, the various situational complexities envisaged thereunder could complicate matters and make compliance very troublesome indeed. Further, the Rules do not contain explicit provisions relating to various matters such as bad debts, outstanding invoices, debit and credit notes, return of advances/monies received etc. There is an urgent need to address these issues expeditiously, as there is very little time left for industry to gear up to these significant changes and suitably amend its accounting and other systems so as to ensure compliance from April 1. Clearly however, these Rules are a major portent of things to come in the promised GST.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers Pvt. Ltd. Email: pwctls.nd@in.pwc.com
Supported by Rahul Renavikar and Abhishek A Rastogi