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Taxing art: New rules on point of taxation

MONISH BHALLA , Last updated: 18 September 2010  

The Art of taxation is one of the fortes of the finance ministry. It has innovative concepts and ideas of creating tax liabilities even though the service has not been provided at a given point of time. The CBEC has proposed a new rule to be implemented soon and there are more surprises in store for the service providers. What can be more ironical than collecting service tax to the tune of Rs. 65,000 crore per annum, without defining some vital terms like 'point of taxation' and 'taxable event'.

In one and a half decade of service tax regime, uncertainty and confusion has always prevailed in the matter of levy and collection of service tax and more particularly so, in situations of change of rate of service tax or imposition of service tax on new services. There is lack of clarity as to the date from which the changed rate or a new levy of service tax become payable. So far, issues have been addressed by CBEC through clarifications that accompany such changes. This has given way to a new set of rules christened point of taxation (for services provided or received in India) Rules, 2010 as proposed by the board. But, will these new rules iron out the confusions or create more?

As per the proposed Rule 3, the taxable event shall be the provision of service, including future provision. This would mean that the service, even though promised to be provided at a future date, shall be taxable. The rule also lays down that, if the service provider issues an invoice or receives any payment before providing service, the service, to the extent of the amount mentioned in the invoice, or the amount of payment, shall be deemed to have been provided. It means that the service provider shall be liable to pay the tax to the extent of amount mentioned in invoice, or the payment received, even if the service has not been provided at that point of time.

In these rules, certain terms are defined with an intention to clarify the situation, e.g. 'Point of taxation' means the point of time when the tax becomes payable to the government. 'Taxable service' means a service which is subjected to service tax, whether or not the same is fully exempt by the central government vide powers conferred under Section 93 of the Act; and 'taxable event' means an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or the receipt of payment.

According to draft rules, provision of service is treated as having taken place at the time when service is provided or deemed to be having taken place at the time the invoice was issued or the payment is received, as the case may be, whichever is earlier. Further on treatment of advances it has been stated that wherever any advance, by whatever name it is known, is received by the service provider, the tax becomes payable on the date of receipt of each such advance.

Interestingly, it has been provided that on interest free refundable deposit there is no levy of tax. So a question may arise that in case of a deposit which fetches interest, will it fall under service tax? Well no clarification has been provided in the draft rules. In respect of royalties and similar payments, as per the new rules, where the total consideration was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of these service by a person other than the supplier gives rise to any payment of consideration, the service shall be treated as having been provided each time that a payment in respect of such use or the benefit is received or invoice is issued whichever is earlier.

The other major change proposed to be brought about through these rules is to link the payment of tax to provision of service, raising of the invoice or payment for service provided or to be provided, whichever is the earliest. With GST round the corner, we hope that such new rules will form a basis of defining taxing methodologies provided that they don't themselves become a source of new litigations.

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