JANUARY 24, 2017

By Sanjay K Jha, MD & CEO, Omni Infoword Private Limited

TILL 2011, service tax was deposited with the government on cash basis i.e. liability on the assessee arose when he (service provider) received payment from the service recipient. Tax was to be calculated on the amount received where entire invoiced amount was not paid due to deductions by payee.

The Finance Act 2011, sought to replace this regime by accrual basis of taxation w.e.f. 01/07/2011.

Rule 2(e) of the Point of Taxation Rules 2011 states that "point of taxation" means the point in time when a service shall be deemed to have been provided.

Provisions of Rule 3(a) and 3(b) may be summarized to define ‘The point of taxation' as:

a) Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.

b) Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above.

Hence, obligation was cast on the assessee to pay service tax based on service rendered.

The assessee is required by law to deposit tax by the 5th/6th of next month but usually its collection may take 2-3 months in the future. So, cash flows out without the inflow leading to working capital deficiency. 

Also, where full payment is not received or where no recovery is made i.e. bad debts, the assessee had deposited full tax but has not collected the same and the working capital gets impacted. In case of Government customer these are practical problems as there is no definitive/obligatory date of release of payment of such bills.

In this backdrop, we suggest the following:

Either make such payments on cash basis i.e. same as before 2011 situation

OR

Make it obligatory upon the government customer to release the payment within 10 days else impose fine/penalty on stakeholder concerned (recorded in his/her Annual Confidential Report) equivalent to interest cost.