The previous articles in this column had examined the various proposals relating to indirect taxes in Budget 2011, ranging from changes in excise duties to the major changes proposed in the CENVAT Credit Rules as well as those proposed in service taxes, including on the point of taxation of services. The articles had highlighted the several inconsistencies and ambiguities inherent in these proposals. This article examines the various recent amendments to these proposals and their implications.
On the excise front, several changes have been effected to the Budget proposals. The effective rate of duty of 1% has been reinstated on mobile phones. The MRP based scheme of taxation has been extended to several new products, which form part of the list of 130 items which attract the concessional rate of 1%, without the benefit of CENVAT facility. At the same time, an abatement of 35% from the MRP value has been provided for such products. Similarly, a quarterly excise return filing facility has been introduced for those manufacturers claiming the benefit of the 1% duty rate under relevant notifications, provided that only such goods are manufactured by the entity in question.
As regards the CENVAT Credit Rules, amendments have been made to provide that the credit in respect of input services can be availed on or after the day on which the invoice, bill or challan is received except in cases where the service tax is paid under reverse charge mechanism, where it will be eligible upon payment of the tax. In case the payment of the value of input service and the service tax is not made within three months from the date of invoice, then the credit availed on the basis of invoice or bill is required to be reversed. Further, in cases where the service tax is paid under the reverse charge mechanism, the CENVAT credit in respect of such services shall be allowed once payment is made of the value of the input service, without the requirement for an invoice to be issued in that regard, on the basis of which the credit could be availed. The CENVAT Rules have also been modified to remove ambiguities with respect to arriving at the value of trading activity for the purpose of computing turnover of an exempted service.
Coming now to service taxes, the hugely unpopular proposal to levy a tax on specified services provided by hospitals as well as on diagnostic tests has been withdrawn. Interestingly, the Finance Minister, while granting the numerous requests to not impose the service tax on such services, has nevertheless stated that the intent behind the proposal was to broadbase the service tax, ahead of the introduction of the GST but that he would abide by the sentiments expressed in the matter. This is clearly a pointer to the fact that under the GST dispensation, such services would most likely be brought within the ambit of the tax.
Another interesting change is with respect to the Service Tax Rules, 1994. The amendment now provides an option to a service provider to adjust the excess service tax paid in a situation where the amount of invoice is renegotiated due to a deficient provision of service or for a variation in the terms of a contract. This is very welcome.
As regards the Point of Taxation Rules, (the Rules) several important amendments are proposed. These Rules have been brought into force with effect from 1st April, 2011 but with an option for tax payers to determine the point of taxation as the date on which the payment is received, in case of all services that are completed on or before 30th June, 2011 or in regard to which the invoices are issued upto that date. Thus, the present scheme of service taxation will continue to be in force for another three months, at the option of the service provider. It may be recalled that the Rules had introduced the concept of "point of taxation", which was defined as 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. Previously, the relevant Rule 3 of the rules had defined the point of taxation as the earliest of the actual provision of a service, the raising of an invoice or the receipt of consideration.
As per the amendment, the point of taxation shall be the earlier of the time when the invoice for the service provided or to be provided is issued or the time of receipt of payment, to the extent of such payment. However, where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be the date of such completion of service. This amendment would mean that the challenge of determination of the time of rendition of the services has been addressed but the continuing ambiguity is with respect to the determination of the date of completion of a service. Of course, if the payment is received before rendition of service, the time of receipt of payment will be the point of taxation.
As per the earlier proposal on taxation of continuous services, the taxable event was the date of provision of service as per the contract between the parties or the actual date of payment or the date of an invoice, whichever was earlier.
As per the amendment, the point of taxation for continuous services will now be the date when the invoice for the service provided or to be provided is issued or the date of receipt of payment, whichever is earlier. However, where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be date of such completion of service.
Further, the notification states that where the provision of the whole or a part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to the service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of the service.
The amendments have also laid down separate points of taxation for exports of services and for persons who pay service taxes on a reverse charge basis.
To conclude, the amendments to the indirect tax proposals introduced in the Budget 2011 are welcome and have resolved, to a large extent, the concerns and apprehensions on many of these proposals.
However, several challenges do remain and it is hoped that the Government issues the necessary clarifications to address these at the earliest.
The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd.
Supported by Rahul Renavikar and Abhishek A. Rastogi
