AUGUST 31, 2015

By Lakshmi Ratna K

EVERY taxing statute is required to incorporate provisions pertaining to the taxable event, the rate of tax payable and the time when tax is payable.

Insofar as Service Tax is concerned, the aforementioned requirements are encompassed in Section 66B, Section 67A and Section 68 of the Finance Act, 1994 (hereinafter referred to as 'Finance Act') read with Rule 6 of the Service Tax Rules, 1994 (hereinafter referred to as 'STR') and Point of Taxation Rules, 2011 (hereinafter referred to as 'POTR').

With effect from 01.04.2011, POTR had been enacted under the powers conferred under Section 94(a) and Section 94 (hhh) of the Finance Act. The preamble of the POTR provides that the Rules were introduced for the purpose of collection of service tax and determination of rate of service tax.

Section 67A of the Finance Act (with effect from 28.05.2012) was inserted to determine the rate of service tax which has to be in accordance with the time when the service was provided. Section 67A indicates two things viz. (i) POTR is to be used to determine when the service is deemed to have been provided (which would give an answer as to when service tax is payable) and (ii) Section 67A is to determine the rate of service tax based on when the service is provided or to be provided.

In the present article an attempt has been made to address the complexities and anomalies which have arisen due to the interplay of Section 67A and POTR. The anomalies have become predominant due to the increase in the rate of service tax from 12.36% to 14%. The analysis is elaborated as follows.

Rate of Tax vis-a-vis POTR

Point of taxation is defined under Rule 2(e) of the POTR to mean the time when the service is deemed to have been provided. This in turn determines when service tax becomes payable.

In terms of Rule 3 of the POTR, the point of taxation is to be determined based on the occurrence of the following events viz.,

•  Time when the invoice for the service provided or agreed to be provided is issued (wherein invoice should have been issued within 30 days)

•  Completion of Service

•  Receipt of money

Change in effective rate of tax-Point of Taxation

Rule 4 of the POTR lays down provisions to determine the point of taxation in case of change in the effective rate of service tax. Under Rule 4 of the POTR, the point of taxation is determined based on whether the following events are being provided before change/ after change in the rate of tax in various permutations and combinations, viz.,

i. Provision of service

ii. Time when the invoice raised

iii. Time of receipt of payment

In terms of Rule 4 of POTR, where any two events have taken place before the change in the effective rate of tax, then the point of taxation will be before the change. Similarly, the point of taxation is to be determined for events completed after the change in the effective rate of tax.

Rate of Tax-Advance and Continuous Supply

Rule 4 of the POTR being notwithstanding Rule 3 of the POTR, is applicable in case of advances and continuous supply of services when there is a change in the rate of Service Tax.

*Point of taxation has been determined by applying Rule 4 of the POTR.

**Rate of tax is based on the application of Section 67A

An application of Section 67A to Serial No 2 is peculiar. How can the rate of tax be determined where the service is to be provided at a point in time in the future?

• A reading of Rule 4 presupposes that taxable service is provided either before or after change in the rate of tax and hence Rule 4 of the POTR cannot be used to determine when the service itself has not been provided as such.

• Application of Section 67A to determine the rate of tax seems to postpone the point of taxation. In effect, does it mean that point of taxation for advance is altered because service is provided at a later date? Does this imply that for services to be provided POTR is applicable only the extent the liability arises at the given point in time?

• Does this imply that supplementary invoice may have to be raised at a later point of time once the rate increases? If the supplementary invoice is raised should interest be paid in the absence default or delay on the part of the assessee?

Continuous Supply

In case of continuous supply, generally the point of taxation is to be determined according to Rule 3 of the POTR. Proviso to Rule 3 of the POTR, stipulates that in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to 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 service.

Section 67A of the Finance Act does not provide any means to ascertain when the service is provided or to be provided in case of continuous supply of service. Going by the nature of the activity, it would be difficult to pin point when the service has been provided/completed in the first instance which in turn makes it complicated to determine the rate of tax applicable. The only possible solution would be to resort to POTR.

Services Taxed for the First Time - Rate of Tax

In case of services taxed for the first time where the service has already been provided before the change in the effective rate of tax, then no Service Tax is payable. Therefore, applying Section 67A of the Finance Act for newly introduced services provides some respite. However, in case the service is taxed for the first time which is in the nature of a continuous service then again there would be a problem to determine the rate of tax payable.

Associated Enterprises and Reverse Charge Payments-Rate of Tax vis a vis Point of Taxation

In terms of Rule 7 of the POTR, where the payment for the services is to be made on reverse charge basis, the point of taxation arises at the time of payment. For transactions between associated enterprises, the point of taxation is time when there is a debit in the books of account or the date of payment. Since Rule 7 of the POTR starts with a non-obstante clause, even in case of change in effective rate of tax Rule 4 of the POTR would not be applicable. Similarly, clarity is required on applicability of rate of tax on services to be provided and those services which are being provided.

Probable Position & Clarity Required!

Advance

Application of Rule 4 of the POTR is questionable because Rule 4 of the POTR pre-supposes that taxable service should have been provided in the first place. Even though Rule 4 of the POTR begins with 'notwithstanding' it cannot be applied in the situation for advance because the service would not have been provided at the time of payment of such advance. Hence, applicability of Rule 4 of the POTR in the situation there is a change in the rate of service tax is questionable.

Since Rule 4 of the POTR cannot be applied in the first place, we are required to resort to the Explanation to Rule 3 of the POTR even during the change in the rate of tax. In terms of the Explanation to Rule 3 of the POTR, the receipt of advance is the point of taxation.

Section 67A of the Finance Act should be read in a manner so as to arrive/ascertain the rate of tax applicable in case of advance. In terms of Section 67A of the Finance Act, we should be able to conclude that the rate of tax which is applicable on the 'date when the taxable service was agreed to be provided'. In other words, where the advance is received on 25.05.2015 for service to be provided at a later date then the rate of tax applicable would be as existing on 25.05.2015 (12.36%). The assessee cannot be asked to again ascertain when the service was provided at a later date and pay differential tax.

Reverse Charge Payments and transaction between associated enterprises

To determine the rate of tax in case of reverse charge payments and transaction between associated enterprises for services to be provided the assessee has to discharge the service tax at the rate as on date of payment. The rate has to be determined in the manner similar to the treatment of advance.

Continuous Supply

In case of continuous supply of services the service provider can only determine rate of tax can at best be determined /ascertained based on the guidelines specified under POTR itself because Section 67A does not provide any mechanism to determine the rate of tax payable in case of continuous supply or for services to be provided at a future date. The service provider can draw reference from the preamble to the POTR which reads 'rules to determine the rate of tax applicable' and determine the rate of tax applicable.

Clarifications should be issued to the effect that the….

•  Rate of tax applicable in case of advance would be the rate on the receipt of the advance irrespective of the rate change.

•  Rate of tax applicable for services agreed to be provided in case of payments on reverse charge payments would be the rate as on the date of payment.

•  Rate of tax applicable in case of continuous supply should be as per the principles in the POTR itself.

Bigger Picture…

Considering the above analysis, it is advisable if a clarification is issued to the effect that the rate of tax should be as determined in terms of POTR itself. This position will give certainty and will not allow any mischief to be played by the assessee and the Department.

(The author is Senior Associate, Lakshmi Kumaran & Sridharan, Bangalore.)