Service tax rate had been proposed to increase from 12% to 14% effective from 1st June 2015 vide notification no.14/2015-ST. The Cesses are also subsumed in the rate of 14%. Additional revenue on account of this increase is estimated to be about Rs.20,000 crores for 15-16.
It is also clear that till 1.6.2015, service tax shall continue to be levied @ 12.36% comprising of Basic 12% and 0.36% as cess. In this backdrop, the paper writers have examined the service tax implications of rate change below.
Point of taxation and change in effective rate of tax
Rule 2 (ba) of Point of Taxation Rules (PoTR) sets out that "change in effective rate of tax" shall include a change in the portion of value on which tax is payable in terms of a notification issued in the Official Gazette under the provisions of the Act, or rules made thereunder;
Rule 2 (e) sets out that the “point of taxation” means the point in time when a service shall be deemed to have been provided.
Rule 3 of PoTR sets out that point of taxation is earliest of following:
- Date of invoice or
- Date of completion of service or
- Date of receipt of advance.
Rule 4 of PoTR, is used to determine point of taxation in case of change in effective rate of tax. In a nutshell, the applicable tax rate would be the prevalent rate during the period when 2 out of the following three events have taken place namely: date of invoice or date of completion of service or date of receipt of advance.
Services Provided Earlier to 1.6.2015:
Illustrations when old rate would apply
a. Invoice raised and payment received after 1.6.2015: The invoice raised on 15th May 2015, and service provided in May 2015. Payment received in June 2015. The service tax to be paid at 12.36%.
b. Where payment received before and invoice issued after 1.6.2015: The invoice raised on 15th June 2015, and service provided on 20th May 2015. Payment received on 30th May 2015. The service tax to be paid at 12.36% [old rate].
c. When the invoice issued before and payment received after 1.6.2015: The invoice raised on 15th May 2015, service provided on 4th May 2015 and payment received on 30th June 2015. The service tax to be paid at 12.36%.
Services Provided Post 1.6.2015:
Illustrations when old rate would apply
Invoice raised and payment received before 1.6.2015: If invoice raised on 5th May 2015, payment received on 15th May and service provided in June 2015. Then service tax to be paid at 12.36% [old rate].
Illustrations when new rate would apply:
a. When invoice raised after 1.6.2015 and payment received before rate change: If invoice is raised on 5th June 2015, payment received on 15th May and service provided in June 2015. Then service tax to be paid at 14% [New rate].
b. When invoice raised earlier to 1.6.2015 and payment made post change in rate: If invoice raised on 15th May 2015, payment made on 1.6.2015. Then service tax to be paid at 14%.
In view of paper writer, this rule may not be valid Section 66B specifies that the service tax is levied on the services provided or agreed to be provided. Section 67A specifies that the rate of service tax shall be the rate of service tax in force or as applicable at the time when the taxable service has been provided oragreed to be provided. On a conjoint reading, the service tax is leviable at rate applicable at the point of time at which
1. the services provided or
2. agreed to be provided-advance receipt.
The logic which can be inferred, is that if services were provided or advance was received, when the services were taxed to service tax at 12.36%, then service tax need not be paid thereafter at 14 or 16% either. It is to be paid at 12.36%.
Similarly in SC decision in Association of Leasing & Financial Service Companies vs UOI 2010 (20) S.T.R. 417 (S.C.) held that rendition of service is the taxable event for Service tax. it was held in Delhi Chartered Accountants Society (Regd.) vs UOI 2013 (31) S.T.R. 429 (Del.)that invoice issued prior to 1-4-2012, when rate of Service Tax was increased from 10% to 12%. Payment received after 1-4-2012. Circular stipulating that in such cases also Service Tax had to be paid at rate of 12%. Held: Prima facie, Circular was in violation of Rule 4 of Point of Taxation Rules, 2011. In that case, the invoices issued and service rendered prior to 01.04.2012.
The risk is that though services were provided earlier to 1.6.2015, service tax could be demanded at 14% citing as per Rule 4 of PoTR, 2 out of three events namely raising of invoice and receipt of monies took place after change in rate. The service tax would be demanded to be paid at 14% and not 12.36%.
In respect of services where liability arises as receiver of service, the ST liability arises as on date of payment or where payment is not made within 3 months of invoice date. Then ST liability arises on next succeeding day after expiry of 3 months. The rate applicable at the point of time, when ST liability arises is to be considered.
Impact of Change in Rate
The immediate impact of the change in rate would be increase in the service tax amount which is to be paid by the service provider post 1.6.2015. As per Section 68(1), service tax is a levy which is payable by the service provider. ST is a destination based levy, could be collected from the customer and paid to the Government.
Service provider has statutory right to pass on the burden of the service tax component to service receiver in absence of prescription by legislature that service tax burden should not be passed on. The Finance Act, 1994 does not contain any such restriction that service provider should not pass on the burden to the service receiver.
However it all depends on terms of contract between the parties. When the contracted price includes all taxes, then the increased service tax burden of 14% would go out of the pocket of the service provider.
When the terms are taxes including service tax extra as applicable, then the service provider could collect and pay the service tax. For all existing contracts as well as future contracts to be inked, care to be taken by service providers engaged in providing taxable services, to renegotiate and put in clause that ‘all taxes including service tax as applicable, to be collected extra from the customer’.
The ideal alternatives for on going contracts are as under:
a. Service Completed before 1.6.2015: All the services provided upto end of May 2015 need to be billed. These would include those bills not raised which have been postponed, missed, other reasons. These are to be identified and bill raised by end of May 2015. Otherwise the 14% rate may have to be applied in future.
b. Part services provided before 1.6.2015: The part bill to extent of completed service, could be raised before 1.6.2015 and service tax paid thereon by 5th/6th of June 2015 at 12.36%.
c. Advances received before 1.6.2015 for future services: Even on advances received towards services to be provided in future, invoices to be raised by 30th May 2015 and ST could be paid at 12.36%.
d. Where the invoices are issued before 1.6.2015: When the invoices are raised before 1.6.15 for services to be provided in future [post June 2015], service tax rate is 14%.
Impact of subsuming cess
FA 2015 has done away with the Cess, both under central excise and service tax. The provisions of Rule 3 of the CENVAT Rules permit utilisation of CENVAT credit of Excise duty/ Service tax for payment of Cess but not vice versa. With no Cess on Excise duty/service tax, the manufacturer/service provider will merely accumulate such credit.
There has been a notification no.12/2015-CE(NT) where it has clarified that the ED/SHE cess on inputs/input services/capital goods received after 1.3.2015 could be set off to pay excise duty by a manufacturer of final product. Similarly that balance 50% of ED and SHE cess on capital goods received in the factory of manufacture of final product in 2014-15 can be utilized to pay excise duty.
There is no clarity on the past period accumulated credit. A similar issue, could arise under service tax, when cesses are subsumed wef 1.6.2015. Where the customer has substantial accumulated credit could examine legal validity and take a call on set off of such accumulated credit of cess against the service tax payable post 1.6.2015 under intimation to department. It is hoped there would be some clarification issued in this regard.
The service providers may need to ensure that bills in respect of the completed services and advance receipts is raised and service tax is paid in next month/ month next to quarter. This would ensure that there are no demands for differential service tax, citing increase in service tax rate to take effect from 1.6.2015. The customer may also not have any objection especially those who are unable to avail the firstname.lastname@example.org, email@example.com
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