Before making a study of Point of Taxation Rules, it is important to know the objective of introduction of these rules. Under any Indirect Tax, the process of levying tax is governed by two events. These are 1) taxable event i.e. levy and 2) Collection. The ‘Collection’ can be further divided into assessment and payment. In Central Excise, the taxable event is manufacture of goods and are assessed to duty at the time of removal of goods and collected within the time frame specified in the Central Excise Rules. Similarly in VAT the taxable event and assessment will be on transfer of property in goods and same is collected by 25th of the next month. This is the fundamental aspect of any fiscal law.
Since the levy is with respect to manufacture/sale of goods which are tangible, it is comparatively easy to identify and determine the specified events. In case of services, due to their intangible nature identification of time at which a service is completed will always be disputable/ subjective. In order to overcome this inherent limitation, the Finance Act 1994, has been imposing and collecting service tax on receipt of consideration for the services provided or to be provided.
However, payment of service tax on the basis of receipt of consideration is against the principles laid down in the Central Excise and VAT. Receipt of consideration in respect thereof is of no significance. Since all the indirect taxes are proposed to be brought under one single legislation GST, it is necessary to apply common principles in all the cases. Therefore, Point of Taxation Rules, 2011 has been introduced to bring uniformity in levy & collection of all these taxes.
Further, in the absence of any specific provisions in the Finance Act, 1994 or the rules made there under, there was no clarity about levy and collection with regard to change in service tax rate, when a new service has been brought under tax net, an activity falling under a particular taxable service has been exempted. These rules strive to reduce the ambiguity in these cases.
Point of Taxation Rules, 2011:
The Point of Taxation Rules, 2011 (hereinafter referred to as POTR) has been introduced through Notification No: 18/2011, dt 1st march 2011. Before these rules came into effect, a major surgery has been done vide Notification no: 25/2011 dt 31st march 2011 by shifting the focus from service provided or to be provided to issue of invoice for service provided or to be provided and certain terms used were also changed to provide more clarity and extensive provisions are made granting more time to Service Provider to switch over to the new provisions.
Objectivity of determining the point of taxation (POT):
The main purpose of these rules is to determine the point in time during the course of provision of services at which levy is attracted and service tax is collected. Further this point in time shall also determine the rate of service tax. Further the definition of “Point of Taxation” in these rules provides that at point of taxation, the service shall be deemed to have been provided.
Under POTR, the liability on the assessee to levy tax and pay in the immediate month or quarter is at the earliest of the following events:
· Issue of invoice
· Completion of Service if invoice is not issued within 14 days and
· Receipt of consideration/advance
Structure of these rules:
The POTR contains 9 rules. Rule 2 provides for definition and Rule 3 provides for determining POT in general scenario and Rules 4 to 8 covers certain special cases and Rule 9 provides for the transitional provisions.
Applicability of these Rules:
These rules are come into force from 1st April, 2011. These rules are not applicable to taxable services which are completed before 1st April, 2011 or in respect of which invoice has been issued prior to 1st April, 2011.
Further in relation to those services where the provision of service is completed or invoice has been issued before 30th June, 2011 then the applicability of POTR is at the option of the service provider. Therefore the service provider may choose the applicability of POTR for some of the contracts as well. With effect from 1st July, 2011 these rules are mandatory and are applicable to all service providers unless they are excluded by these rules.
Rule 3: Determination of Point of Taxation in general scenario:
This Rule provides for determination of point of taxation in a general scenario. If the case does not fall into any of the situations covered by Rules 4 to 8, then the point of taxation shall be determined by this Rule.
Accordingly, the determination of point of taxation is with reference earlier of the following three events.
1. Date of issue of invoice for the service provided and for the service to be provided in future.
2. Date of completion of service where an invoice has not been issued within 14 days of completion of service.
3. Date of receipt of payment for service provided or to be provided.
In case the earlier event is issue of invoice, then POT is the date of issue of invoice for the service provided. Further also covers the situations where service provider is issuing invoice before the service has been provided as per the service contract. Therefore liability to service provider arises at the time of issue of invoices for the services completed and in progress and also for the services to be commenced.
The service provider may defer the tax liability by postponing the issue of invoice. In order to cover such cases, a proviso has been inserted stating that in case no invoice has been issued within 14 days of completion of service, then the date of completion of such service shall be the POT.
Generally invoice issued before the service commenced or in progress is for the purpose of receiving advances/part payments from customers. In order to keep service tax in align with other indirect taxes, the legislature intends to bring this point in time to trigger the tax liability irrespective of the fact whether service provider has received the advance/part payment or not.
There is a possibility that service provider may receive advance/part payment without issuing any invoice. In order to cover this scenario also, this Rule provides that when any payment has been received by the service receiver providing the service before issuing invoice, the POT to the extent of such receipt shall be the time of receipt.
This rule uses the words “receives the payment”. It does not refer to ‘advance’ paid by service receiver. Therefore there is a possibility of presuming that only payment made towards consideration of taxable service provided shall be covered. There may be cases where service receiver is required to pay certain amount as security deposit before the commencement of service. In order to cover these cases an Explanation has been inserted which provides wherever advance received by whatever name by the service provider towards the provision of taxable service, then the POT shall be the time of receipt of each such advance.
Table explaining various scenarios covered under Rule3.
|S.No||Date of Completion of Service||Invoice date||Date of payment received||Point of Taxation||Remarks|
|1||10/04/2011||20/4/2011||30/4/2011||20/4/2011||Invoice issued within 14 days & before receipt of payment.|
|2||10/4/2011||26/4/2011||30/4/2011||10/4/2011||Invoice not issued within 14 days & Payment received after completion of service|
|3||10/4/2011||20/4/2011||15/4/2011||15/4/2011||Invoice issued within 14 days but payment received before invoice|
|4||10/4/2011||26/4/2011||5/4/2011(part) & balance 25/4/2011||5/4/2011 for part & 10/4/2011 for the respective amount||Invoice not issued within 14 days & part payment before completion and remaining later|
Question & Answers:
Q1: Service has been completed on 28th October 2011. Invoice has been issued on 24th November 2011. Determine POT
A: In this case, since invoice has not been issued within 14 days of completion of service proviso to Rule 3(a) will not be applicable and the POT shall be date of completion of service i.e., 28th October 2011. The impact of this will be that service provider has to pay the service tax to the Government by 5th/6th of November 2011. Failure to do so will attract interest under section 75 of the Finance Act, 1994.
In case if the invoice has been issued on 8th November 2011, Rule 3(a) alone applicable and the POT will be that date because invoice has been issued within 14 days of completion of service. The Service Provider has to pay service tax to the Government by 5th/6th of November 2011.
Q2: On 1st July, A Ltd has entered into contract to provide management consultancy service. An amount of Rs. 700000 has been received as advance. Determine POT?
A: In terms of Explanation to Rule 3, advance received is taxable. Hence Rs. 700000 is taxable in July 2011.
Q3: On 20th July, 2011 a new contract was assigned for Rs. 500000. As laid down by the terms of the contract, an invoice for Rs. 100000 has been issued for the purpose of claiming an advance on the same day. Against such advance an amount of Rs. 60000 was received as advance on 08 August, 2011. Determine POT?
A: In this case invoice has been issued for an amount of Rs. 100000 before providing the service. As against the same, an amount of Rs. 60000 has been received as advance. Since invoice has been issued for Rs. 100000, it will be taxable under Rule 3(a) in July 2011. As far as receipt of Rs. 60000 is concerned, it is against the invoice raised for Rs. 100000 which has already been taxed in July, 2011. Hence subsequent receipt of advance is of no relevance.
Clarification on completion of service:
Circular No. 144/13/2011-ST Dated: July 18, 2011 states that in many situations it is not possible to issue invoices within 14 days of the completion of the service since the exact date of completion of service is difficult to identify. Instances have been given where after the task of providing the service may be physically accomplished, but certain other formalities are required to be completed from the client’s end before an invoice can be issued.
The Service Tax Rules, 1994 require that invoice should be issued within a period of 14 days from date of completion of the taxable service. The invoice needs to indicate the value of service so completed. Thus it is important to identify the service so completed. This would include not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing etc which may be essential pre-requisites for identification of completion of service. The test for the determination whether a service has been completed would be the completion of all the related activities that place the service provider in a situation to be able to issue an invoice. However such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice.
Note: The remaining rules will be covered in the subsequent articles which will be posted soon.
CA Manindar Kakarla