JULY 03, 2015

By K Srinivasan

GENERALLY taxable event in Excise is date of clearance of goods whether there is rate change or not. But in Service Tax also, in the days of payment of tax on mercantile/collection basis, the date of provision of service was the taxable event regardless of change in rates. However, the problem started when the payment of tax was changed to accrual/billing basis. Initially, a simple prescription that either the date of billing or the date of collection, whichever is earlier was thought to be the taxable event. But again there were other complexities like reverse charge and partial reverse charge mechanisms for payment of tax, adding to the problem of fixing the taxable event. In the above background of circumstances, let us visit the Service Tax Law to see what it says about this issue.

Service Tax Laws introduced the Point of Taxation Rules in 2011 where a general Rule 3 was introduced providing for the old principle of date of invoice or date of payment whichever is early as the taxable event. It had to provide at the same time for certain exceptions to the above general Rule by introducing Rule 4 which provided for the point of taxation for certain situations to be different from the said rule situation. In the mean while the negative list regime came in 2012 when the Government had to introduced the general principle of date of rendition of service as the taxable event in the Finance Act,which is the parent legislation. Therefore Section 67A was introduced to this effect. In all good faith, the same principle was sought to be incorporated in the Service Tax Rules under Rule 5B which is after all the subordinate legislation to the parent Act. But, again it was thought to run counter to the exceptions provided under Rule4 of the POT. Therefore, the said Rule 5B was withdrawn subsequent to the introduction of Section 67A of the Finance Act carrying the negative list regime.

In the above background of the above legislative history, let us see what are the conflicts that we face in a scenario of a rate change in service Tax from 12.36% to 14% introduced w.e.f 1/6/2015 through Finance Act, 2015. The applicability of the new rate assumes importance especially in the wake of the ambiguities it has possibly given rise to unwittingly.

Rule 4 of the POT provides for applicability of Service Tax Rate, depending on the timing of invoicing or payment of service tax. It does not speak of the date on which service is considered as provided for the purpose of calculating the rate prevalent at that time. It provides as follows;

1) Where service provided before the rate change, new rate is applicable if invoice is issued or payment is received after the change in service tax. Otherwise, old rate is applicable.

2) Where service provided after the rate change, old rate is applicable, if invoice is issued or payment is received before the change in service tax. Otherwise, new rate is applicable.

It would be worthwhile to consider the following to have a conceptual understanding of the correct definition of taxable event that would be desirable at this juncture.

Rendering of service after rate change but payment received before is tantamount to rendering of service before rate change.However, if payment and provision of service both take place after the rate change,then undoubtedly the taxable event is the date of provision of service. In keeping with this, let us see some illustrations of a few situations and understand what would be the taxable event in those cases.

Case.A when payment precedes the rate change, then despite provision of service after rate change, by a deeming fiction , services are considered to have been provided before the rate change and hence the old rate will apply, regardless of the date of issue of invoice.

Case.B when payment is received after the rate change,but provision of service precedes the rate change and invoice is issued before rate change,then only old rate will be applicable regardless of the date of issue of invoice. This is simply in view of Rule 3 of POT that Invoice over payment has significance only under normal circumstances and not during a rate change.

Case.C When payment is received after the rate change and provision of service is also made after rate change but invoice is made before rate change, then the new rate will apply regardless of the invoice preceding the rate change and preceding payment as well. This is in view of Rule 3 of POT not working as it would normally when there is no rate change.

In respect of the ongoing transactions, it would appear right that the taxable event is the rendition of service which will be in line with the Apex court judgements already rendered in this regard as well as Section 67A of the Finance Act read with Rule 3 of the POT. Rule 4 of the POT may be suitably aligned to reflect the above position with regard to point of taxation. The above view point appears to go well with the law governing removal of excisable goods also. Even in case of a rate change, the rate prevailing at the time of removal post budget alone matters as per the much famed judgment of Wallace Flour Mills on the goods' side of taxation. We need to unify our taxing laws before it is too late for we are already facing upto the challenge of introducing a common New Goods and Services Act and Rules which should really prove to be common to both goods and services.

(The author is Assistant Commissioner, Service Tax & the views expressed are strictly personal.)