Point of Taxation Rules 2011 - Part 1

Hello Friends,

This is my first article on this plat form. Please go through it and let me know if there is any mistakes or areas to be improved.

Are you able to guess which tax it relates to? Excise duty? , Income Tax? or Service Tax? Yes It relates to Service Tax! In this article I take each one of you to the nitty gritty of the rule. Obviously I just cannot stop this in one go.

As you know that we do not have any Act with the Title “Service Tax Act”. The Finance Act 1994 rules the “kingdom” of Service Tax. Section 67A of the Act says that “the rate of service tax shall be the rate of service tax in force as applicable at the time when the taxable service has been provided or agreed to be provided”.

This rule clarifies at what point, provision of service attracts service tax. Is it on the date of bill or on the date of receipt of the payment from his client or on the date of provision of Service or else any other date.

This rule came into force on 1-4-2011. Obviously it doesn’t attract the service provided before this date. This rule is compulsorily effective from 1st JULY 2011.

Rule 3 - We will call this rule as Default Rule. As this denotes, this is a general rule which shall be applicable only when other rules doesn’t get attracted to identify the point of taxation of a services.

The Rule 3 clarifies the point of taxation of services in the following case.

(a)- When the invoice is issued within the statutory time limit

(b)-When the invoice is not issued within the statutory time limit.

(c)- When the advance is received by the Service provider.

When the Invoice is issued within the Statutory time limit

What is the statutory time limit to issue the invoice for the provision of services?

For banking company and NBFC s the statutory time limit is 45 days and for others it is 30 days from the date of completion of services.

When the invoices are issued within the time limit, the point of taxation shall be the earlier of :

(i)- Date of issuance of invoice.

(ii)-Date of receipt of the payment.

Since you adhere to the time limit, Govt doesn’t bother about your date of completion of service.Is there any advantage for the service provider who stick to the statutory time limit ?. We will see that in the later part of the article.

When the Invoice is not issued within the statutory time limit

Rule 3 says in such cases the point of Taxation shall be the earlier of

(i)- Receipt of payment

(ii)-Completion of services

Is there any penalty for tax payers who doesn’t issue the invoices within the statutory time limit ?Directly no penalty under this rule. However we will see indirectly how it penalizes the tax payer.

When the advance is received by the Service provider

Can anyone guess what is the point of taxation here? Yes it is on the date of receipt of such advances. You cannot say you do not have cash to pay the service tax because your client has given you the cash!

Now let us understand Rule 3 with an example.

Example -1 – Invoice is issued within the statutory time limit of 30 days

Example -2 – Invoice is not issued within the Statutory time limit of 30 days

Here the Payment denotes amount received by the Service provider from his client.

** Point of taxation for advance payment always be on the date of payment.

You would have noted that point of taxation shall be always earlier when the invoices are not issued within the Statutory time limit because here the date of invoice are not considered only the date of payment and the date of completion is looked upon. The Service Tax rule (not the Point of Taxation Rules) set the due date as on or before the 6 th of every succeeding month. In the first case payment of service tax to the govt could be extended to one more month however it is not practically possible in the second cases. Now you understood How does it benefit the service provider when he issue invoices within the Statutory time limit ? and how it penalizes a service provider when he doesn’t issue invoices within the time limit

With this, we are done with the Rule 3 of Point of Taxation. I will continue other provision of the Point of Taxation Rule in my next article.

Thanking You.

CA AMEER SHA PALORAMMAL