AUGUST 30, 2016

By K Srinivasan

THE taxable event and its determination has been always a struggle in Service Tax matters. In Excise, it is neat and simple.

Taxation and valuation of services have always run into rough weather. The main intention of creation of the POT rules,2011 was to define the time of payment of tax and also to ensure transition from cash system to accrual system like Central Excise and Sales Tax/VAT.

POT as defined under Rule 2(e) means the point in time when a service shall be deemed to have been provided. The intent is to provide for the point when service shall be deemed to be provided for the purpose of Rule 6 of Service Tax Rules, 1994 which provides for the liability to pay Service Tax.

Rule 3 is general rule, which identifies three events either of which may be defined as POT as per the provided Rules. The said three events are: - Issuance of Invoice - Rendering of Service if the invoice is not issued within 30 days of completion of provision of service - Receipt of Payment. The thumb rule is that POT shall coincide with the event occurring earliest.

Rule 4 states that point of taxation as stated in Rule 3 shall not be applicable for determination of date (point of taxation) in cases where there is change of rate of tax in respect of a particular service. The change of rate means not only the change of rate by amendment in the Act, but also covers change of rate by amendment in exemption notification. Further, it also covers a change in abatement rate or value on which the tax needs to be computed. As of now, in service tax where there is a rate change for a service, there are three plus three, six permutations discussed under Rule 4 of the said Rules which are as under -

Rule 4 provides for determination of POT in such cases in the following manner;

4(a)(i) Services rendered Invoice issued and payment received, Issuance of Invoice or receipt of payment, whichever is earlier.

4(a)(ii) Services rendered and invoice issued Payment received, Issuance of Invoice

4(a)(iii) Services rendered and payment received Invoice issued,Receipt of Payment

4(b)(i) Invoice issued Payment received and Services rendered, Receipt of payment

4(b)(ii) Invoice issued and payment received Service, Issuance of Invoice or receipt of payment, whichever is earlier

4(b)(iii) Payment received Invoice issued and services rendered, Issuance of Invoice

Rule 5 states about the taxability of a transaction being chargeable to Service tax for the first time. It provides that if the invoice has been issued & payment has been received before the service became taxable, then service tax need not be paid. If payment has been received before the service became taxable & invoice has been issued within 14 days of the date when the service is taxed for the first time, then service tax need not be paid.

But, unfortunately in the case of a new levy, it is non-speaking at certain crucial points. The rule that deals with it is Rule 5 ibid which principally states that in the case of a new levy if invoices and provision of service precedes the new levy and payment is received afterwards, the rate applicable shall be the new rate . Only recently a bunch of issues came up at the time of introduction of the SBC and KKC which are equivalent to new levies. The trade bombarded the Department with a simple query for which it had no answer in the said Rules. The simple question was that what happens when trade had been providing services continuously and raising invoices/bills too when the new cess/levies have intervened and payments are due from the customers? This is a perfect real time situation in business where there is always certain amount of trade debtors. Will you let the new levy jump out of ambush for some old services received and invoiced for which payment is being made as and when the debtors find the money which is regardless of the intervention of the new levies? Well, the government had to issue a notification No.35/2016-ST dated 23/6/2016 as late as June 2016 to demystify that in case of KKC, if provision of service and invoice precedes levy and payment is received after, the KKC will not be applicable. What a pity the same logic in the above Notification though answers the questions squarely, cannot be made applicable to a general new levy since it is KKC specific.

Now the question that hangs again to be answered is what happens to general new levies, when invoice and service precedes it and payment is received after? The answer available in terms of the existing Rule 5 of Point of Taxation Rules is that the new levy will be attracted for payments received after the new impost. But the reality is that it is meaningless to demand service tax on a service that is already provided for which invoice had also been cut but only payment is received after the introduction of the new levy of service tax? Will the Government look into this urgently and provide a quick remedy to amend the Rule 5 ibid to provide for the above situation?

Let us hope that this kind of legacy issues are sooner nailed to the coffin and deep interred before the rollout of GST and more importantly before the Model GST Law goes critical.

(The author is an Assistant Commissioner of Service Tax and a faculty on GST at NACEN, Chennai. The views of the author are strictly personal.)