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Change in Service Tax Rate — Section 67A vs Point of Taxation Rules.

Introduction:

The Finance Budget 2015, has proposed to increase the effective rate of service tax from 12.36% to 14% for all taxable services. The increased rate is going to be effective from a date to be notified soon after the enactment of Finance Act, 2015. In addition to this, there is a proposal to levy additional two percent as Swatch Bharat Cess on certain to be selected services. In this context, applicability of new service tax rate assumes significant importance and is shortly going to be a topic of everyone’s interest. An attempt is made to introduce this debate.

Scope of Section 67A:

Section 67A provides that—‘The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Thus in terms of this Section, the applicable rate of service tax shall be the one prevailing at the time when a taxable service is provided or agreed to be provided. This section is an independent section and this should not be read or interpreted in align with the Point of Taxation Rules, 2011 as no reference is given to delegate rule making authority in this regard to Central Government.

The phrase ‘provided or agreed to be provided’ is also existing current levy section i.e. Section 66B as well as in the erstwhile Section 65 (105) of the Finance Act, 1994. The phrase ‘to be provided’ is added in levy section after the words ‘provided’ during the Finance Budget, 2005. It has been then clarified that the objective of the amendment is to link payment of service tax on the advances received for the services to be provided in future.

On a harmonious construction of Section 67A in line with charging Section 66B, similar interpretation can be adopted for the phrase ‘provided or to be provided’ appearing in Section 67A.Thus it can be rationally concluded that in terms of Section 67A, the rate of service tax shall be the rate in force at the time when service is provided. Similarly, in a case where advance is received for a taxable service to be provided in future, it is the rate in force on the date on which the advance amount is received.

Recently, the observations of Delhi Tribunal on Section 67A in the case of Paharpur Cooling Towers Ltd vs. CCE, 2015-TIOL-78-CESTAT-Del would add further support to this interpretation. This case dealt with a scenario prior to Section 67A. In this case, the appellant received advance money and service is provided subsequently. In between there is a rate change. The appellant contested that interest is payable only from the date of provision of service but not from the date on which the advance amount is received as they could arrive at rate of tax only when they provide the service but not at time of advance receipt.

The Delhi Tribunal held that it was only on 18.05.2012, Section 67A was introduced which provided that rate of service tax shall be the rate of tax inforce at the time when service is provided or agreed to be provided. This has only prospective applicability. Advance received by the appellants has to be adjusted in due course as and when service is provided and the rate at which service tax would be payable would be known only when service is provided. Accordingly the Appellant’s view was accepted to hold that interest is payable only from the date of provision of service but not from the date of receipt of advance amount.

Conflicting Provisions in Point of Taxation Rules, 2011:

Point of Taxation Rules, 2011 are brought into effect from April 2011 onwards to determine the point of taxation i.e. point of time when a service is deemed to have completed. This point of taxation when introduced has twofold effect. One is that the applicable rate of service tax is one prevailing on date of POT. The other one is that service tax payable immediately by 5th/6th of a month subsequent to the calendar month in which point of taxation occurs.

Rule 5B of the Service Tax Rules, 1994 was omitted after introduction of Section 67A. This rule provides that rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided under the rules made in this regard. Consequently, Rule 4 and Rule 5 of these rules provides for determination of point of taxation when there is a change in service tax rate or when levy is made applicable for first time. These rules continue to exist ever after insertion of Section 67A and omission of Rule 5B. Unlike Section 67A, these rules provide for determination of applicable rate of tax based on timing of invoice and payment ignoring the date of provision of service.

In view of this reason, ambiguity arises whether the applicable rate of tax shall be determined as per these rules or as per Section 67A.In the humble opinion of the paper writer, after introduction of Section 67A and omission of Rule 5B of Service Tax Rules, 1994, these rules lost their legal sanctity for the purpose of determining the applicable rate of service tax and are not required to be considered. With this understanding on rate of service tax, let us know proceed to consider certain FAQs.

Frequently Asked Questions:

As effective date for new rate of service tax is notified only after enactment of Finance Budget, for the purpose of addressing these FAQs, it is assumed that new rate (14%) is going to be effective from 01.06.2015.

1. X Ltd has provided consultancy services which got completed by May 15th 2015. Invoice issued on 5th June 2015 and payment received on 30th June 2015. What is the applicable rate of service tax?

Reply: As discussed above, in terms of Section 67A, the rate prevailing at the time of provision of service is relevant. In the instant case, service got completed on 15th May, 2015. The effective rate of service tax on this date is 12.36% only but not 14%. Therefore, while issuing invoice on 5th June, 2015, X Ltd is required to charge service tax at 12.36% only.

2. X Ltd has provided consultancy services in June 2015 for an advance received in the month of May 2015 itself. X Ltd paid service tax on this amount by 6th of June, 2015 at 12.36%. What is the applicable rate of service tax on this service?

Reply: In view of the above discussion, as advance money is received, the rate prevailing on the date of receipt of advance is relevant. As advance is received in May month itself, rate applicable is 12.36%.

3. X Ltd has received an advance of Rs. 250000 plus service tax @ 12.36% in April 2015 to provide services to Y Ltd. X Ltd started providing services in the month of May 2015 and continued till 20th June 2015. On 25th June, X Ltd is considering to issue invoice for their services. No service tax is paid at the time when advance is received. What is the applicable rate of service tax? Whether X Ltd is required to collect the differential service tax (14%-12.36%)? Whether interest is payable?

Reply: X Ltd has received advance amount along with service tax in April 2015 itself. Rate prevailing at this point of time is relevant i.e. 12.36%. Further in terms of Rule 6 of the Service Tax Rules, 1996 read with Rule 3 of the Point of Taxation Rules, 2011, X Ltd is required to pay service tax on the advance amount by 6th May, 2015. Levy got attracted and got crystallized into tax collection, before new rate has come into force. Therefore new rate of 14% is not applicable though service got completed on 20th June, 2015. There is no need to collect differential service tax. As X Ltd has not paid service tax till date, it is required to pay along with interest from due date (6th May 2015)

4. X Ltd agreed to provide consultancy services of Rs. 200000 in the month of June, 2015. For this, an advance amount of Rs. 100000 plus service tax is received in the month of April, 2015 itself. But no service tax is paid on this. Services are completed by 20th June, 2015. Now X Ltd is issuing invoice. Advise X Ltd on rate applicability and service tax payment.

Reply: X Ltd has received advance of Rs. 100000 plus service tax at 12.36% in April 2015 itself. Rate prevailing at this point of time is relevant i.e. 12.36%. Service tax is payable on this amount by 6th May, 2015 itself.

With respect to balance due amount of Rs. 100000, rate prevailing at the time of provision of service (i.e. 20th June, 2015) is relevant. Accordingly it is 14%. In this scenario, X Ltd is required to issue two invoices one for advance charging service tax at 12.36% and another for the balance due amount charging service tax at 14%.

For paying service tax on advance amount, X Ltd is required to pay the service tax amount along with interest calculated from due date i.e. 6th May, 2015 itself.

5. X Ltd has provided services in Jan 2015. It has issued invoice in Jan 2015 itself by charging service tax at 12.36%. This amount was long outstanding and X Ltd has not paid any service tax on this. X Ltd received this amount in June 2015. What is the rate at which service tax is payable? Whether interest is applicable?

Reply: As service provided in Jan 2015 itself, rate prevailing at this point of time is relevant i.e.12.36%. Invoice is also issued in Jan, 2015 itself. Though amount is received in June 2015, X Ltd is required to pay service tax on this transaction at 12.36%. However, X Ltd is required to pay interest calculated from due date i.e. 6th February, 2015.

6. X Ltd has provided retainer consultancy services. As per the contract, invoices are required to be issued for every month within 5 days after completion and payment will be received within days after issuance of invoice. Advise X Ltd on applicability of service tax for the services provided in the month of May and June.

Reply: As per terms of the contract, invoice is required to be raised within 5 days after completion of the month. For services provided in May month, invoice is required to be raised by 5th June and for services provided in June month, invoice is required to be raised by 5th July. As rate prevailing at the time of provision of service is relevant, for services provided in May month, the applicable rate of service tax is 12.36% and for services provided in June month, the applicable rate is 14%.

CA. Manindar Kakarla

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Category Service Tax, Other Articles by - CA.Manindar Kakarla 



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