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Point of Taxation Rules – A Study

Point of Taxation Rules was notified vide Notification No.18/2011-ST dated 1st March, 2011. The Amendment to these Rules was notified vide Notification No.25/2011-ST dated 31st March, 2011. The point of taxation need a close study by every stakeholder i.e. service provider, service receiver, Government as these rules are a change from the past. Any change raises new hopes and expectations and these rules are not exception, for Government the change raises hopes of increased revenue and for the rest it is the much desired clarity in law. In this article, the author analyses the point of taxation rules from professional perspective.

Unlike goods which can be felt, touched and a trail of transfer can be established, services leave no trail as they are intangible. The necessity to document “point of taxation” rules arises as the payment of tax is shifted from realisation basis to accrual basis. Section 66 of the Finance Act, 1994, the charging section, contains that service tax shall be levied when taxable service as envisaged in Section 65(105) (a) to (zzzzv) is provided. Point of taxation rules contain the provisions

CA. Rajendra Kumar P

(The author is a member of the Institute. He can be reached at rk@ssaca.in)

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Example:Date of Completion of Service: 30th April

Date of Raising of Invoice: 3rd May

Point of Taxation: 3rd May

Date of Completion of Service: 30th April

Date of Raising of Invoice: 16th May

Point of Taxation: 30th April

Date of Completion of Service: 30th April

Date of Raising of Invoice: 13th May

Date of Receipt of Advance: R50000 on April 10th, 25000 on April 25th.

Point of Taxation: April 10th, April 25th and May 13th.

Rule 4 contains the rules to determine point of taxation in case of change of rate of tax. The rule begins with the words “Notwithstanding anything contained in Rule 3” which means that when there is a change in rate of service tax it is this rule which is applicable and not Rule 3. When there is a change in rate of service tax the point of taxation shall be determined in the following manner: Where a taxable service has been provided before

the change in effective rate of tax and the invoice for the said taxable service has been issued and the payment for the same has been received after the change in effective rate of tax then the point of taxation shall be the date of payment or the date on which the invoice has been issued, whichever is earlier.

Where a taxable service has been provided before the change in effective rate of tax and the invoice has been issued before the change in effective rate of tax but the payment for the same has been received after the change in effective rate of tax then the point of taxation shall be the date on which the invoice has been issued.

Where a taxable service has been provided before the change in effective rate of tax and the payment for the same is received before the change in effective rate of tax but the invoice has been issued after the change in effective rate of tax then the point

to determine when a taxable service is provided i.e. when and at which point the necessity to levy tax under Section 66 and Section 66A is triggered and once the point of levy is determined the tax shall be paid as per the provisions contained in Rule 6 of Service Tax Rules.

As per Rule 2 of the point of taxation rules the said rules shall come into force on the 1st April, 2011. However, Rule 9 which contains the provisions for transition provides an option for Services which have been provided in full on or before 30th June, 2011 or where invoices are issued up to 30th June, 2011. In both these instances the option to apply the Rules relating to point of taxation is left with the service provider or receiver as the case may be. The service provider or the receiver can treat the point of taxation as the date on which the payment is received or made as the case may be or apply the new set of rules which have been notified with effect from 1st April, 2011. In short the Rule provides an option to deposit service tax on realisation basis for services which are provided in full or where invoices are issued on or before 30th June, 2011 only.

The point when the levy to tax is triggered is contained in Rule 3. As per Rule 3(a) the point of taxation shall be at the time when the invoice for the service provided or to be provided is issued. The proviso to this rule lays down that if the invoice is not issued within 14 days of the completion of the service then the point of taxation shall be the date of completion of the service in question. Sub rule (b) also contains that if any payment is received before the time which is specified in clause (a) then the point of taxation shall be the date on which such payment was received, to the extent of such payment. Explanation to this rule clearly specifies that if any advance is received by the service provider towards the provision of taxable service then the point of taxation shall be date of receipt of such advance. If advance is received on one or more dates then the point of taxation shall be each such date on which the advance is received.

s per Rule 2 of the point of taxation rules the said rules come into force on the 1st April, 2011. However, Rule 9 which contains the provisions for transition

provides an option for Services which have been provided in full on or before 30th June, 2011 or where invoices are issued up to 30th June, 2011. In both these instances the option to apply the Rules relating to point of taxation is left with the service provider or receiver as the case may be.

A

here a taxable service has been provided before the change in effective rate of tax and the invoice for the said taxable service has been issued and the

payment for the same has been received after the change in effective rate of tax then the point of taxation shall be the date of payment or the date on which the invoice has been issued, whichever is earlier.

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of taxation shall be the date when the payment has been received.

Where a taxable service is provided after the change of effective rate of tax and the payment is made after the change in effective rate of tax but the invoice for the said taxable service is issued prior to the change in effective rate of tax then the point of taxation shall be the date of payment.

Where a taxable service is provided after the change in effective rate of tax and the invoice for the same is issued and the payment for the said invoice is received before the change in effective rate of tax then the point of taxation shall be the date when the payment was received or the date when the invoice was issued whichever is earlier.

Where a taxable service is provided after the change in effective rate of tax and the invoice is issued after the change in rate but the payment is received before the change in rate of tax then the point of taxation shall be the date when the invoice has been issued.

AnExample:Tax Rate – upto 30-04-2011 – 10.30 per centTax Rate – from 01-05-2011 – 12.36 per cent

Situations Service Provided

Invoice Raised

Payment Received

Point ofTaxation

1 28-04-2011 03-05-2011 10-05-2011 03-05-2011

2 28-04-2011 30-04-2011 10-05-2011 30-04-2011

3 28-04-2011 03-05-2011 30-04-2011 30-04-2011

4 03-05-2011 28-04-2011 05-05-2011 05-05-2011

5 03-05-2011 28-04-2011 30-04-2011 28-04-2011

6 03-05-2011 05-05-2011 28-04-2011 05-05-2011

Rule 5 contains the provisions for payment of tax in case of new services. It is explicitly stated that where a service is taxable for the first time then no tax shall be payable to the extent the invoice has been issued and the payment has been received against such invoice before the said service became taxable.

The word “and” is very important and signifies that mere issuance of invoice is not sufficient; the payment should also have been received before the service became taxable. In other words, all payments realised after the service became taxable shall suffer tax even though invoice has been issued prior to the date when the service was brought within the tax net. Sub rule 5 (b) also states that service tax shall not be payable if the payment has been received before the service became

taxable and the invoice for the said payment has been issued within the period referred to in Rule 4A of the Service Tax Rules i.e. within 14 days from the date of provision of service or receipt of payment whichever is earlier.

Rule 6 deals with “continuous supply of service” (CSS). The following services have been notified as “CSS” vide Notification No. 28/ST-2011 dated 1st April, 2011:

Section 65(105)(zzzx) Telecommunication

Section 65(105)(zzq) Commercial or Industrial Construction

Section 65(105)(zzzh) Construction of Complex

Section 65(105)(zzzu) Internet Telecommunication

Section 65(105)(zzzza) Works Contract

The above services will be treated under the category of “CSS” irrespective of the period for which they are provided or agreed to be provided. All other taxable services shall be treated as CSS only if they are provided or agreed to be provided continuously for a period exceeding three months.

Rule 3, 4 and 8 of the Point of Taxation rules do not apply in case of continuous supply of service. Rule 6 alone applies to CSS. Point of Taxation in case of CSS shall be the time when the invoice for the service provided or to be provided is issued. If the invoice is not issued within 14 days of the completion of the provision of service then the point of taxation shall be the date of completion of such service. However, where any payment is received in advance by the service provider, the date on which such payment was received will be point of taxation to the extent of such payment. In majority of the cases services which are in the continuous supply are governed by a written contract.

Explanation 1 to Rule 6 addresses the issue when terms of contract govern the payment criteria. The explanation clarifies that where the service provided in whole or part is determined periodically on the completion of an event in terms of a contract and upon happening of such an event the service receiver is liable to make payment to the service provider

here a taxable service is provided after the change in effective rate of tax and the invoice for the same is issued and the payment for the said invoice is received

before the change in effective rate of tax then the point of taxation shall be the date when the payment was received or the date when the invoice was issued whichever is earlier.

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then the date of completion of each such event will be deemed to be the date of completion of service irrespective of whether payment is received from the service receiver or not. The classic examples in this case are construction related services, works contract, maintenance services, etc. Explanation 2 clarifies that where any advance payment is received by the service provider from the service receiver towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance payment.

Specific taxable services or persons have been accorded special treatment in determining the point of taxation vide Rule 7. The following taxable services or persons qualify for the privileges contained in this rule:a. Services covered by sub-rule (1) of Rule 3 of Export

of Services Rules.b. Persons who are liable to tax under the reverse

charge mechanism i.e. where the recipient of taxable service is liable to deposit service tax as a deemed service provider

c. Individuals, Proprietary Firms or Partnership Firms who are providing any of the following taxable services: Architect, Interior Decorator, Chartered Accountant, Cost Accountant, Company Secretary, Scientific and Technical Consultancy, Legal Services.In all the above three instances the point of taxation

shall be the date on which the payment is received or made by the service provider or service receiver as the case may be. However, there are three provisos to this rule which prescribe certain conditions to pay service tax on realisation basis. The first proviso provides that with respect to services covered under sub-rule (1) of Rule 3 of Export of Services Rules the payment for such services should be realised within the period specified by the Reserve Bank of India and if the payment is not received with the said specified period then the point of taxation shall be determined as if Rule 7 did not exist at all. Proviso 2 lays down that in respect of services

where the recipient of the taxable service is liable to pay service tax then such recipient should make payment of the value of taxable service to the service provider within six months from the date of invoice and if such payment is not made then it would be deemed that Rule 7 did not exist at all. Hence, if payment is not made within six months then the date of invoice will be the point of taxation and payment of tax will become due which will result in interest outflow along with tax. Proviso 3 of this rule deals with “associated enterprises” taxation. In the case of associated enterprises where the person who is providing the services is located outside India the point of taxation shall be the date of making credit entry for the amount to be paid in the books of account of the person receiving such service or the actual date of making the payment to the service provider outside India whichever is earlier.

Rule 8 deals with royalties, copyrights, trademarks, designs and patents. It may be possible that at the time when these services are provided the whole amount of consideration payable to the service provider may not be ascertainable. In this situation the rule provides that after the service has been provided and the use or benefit of the said service by any person other than the service provider gives rise to payment of any consideration then the service shall be treated as having been provided each time when the consideration is received or an invoice is issued by the service provider whichever is earlier.

Rule 9 contains the transition provisions. The Point of Taxation Rules does not apply to services which are completed or where invoices are issued prior to the date on which these rules came into force i.e. 1st April, 2011. A three month breather from the application of the provisions of these rules is provided in the proviso to this rule. Services which are completed on or before 30th June, 2011 or where the invoices are issued upto 30th June, 2011 the option to follow the provisions of these rules with effect from 1st April, 2011 or treat the point of taxation as the date on which the payment is received or made is at the discretion of the service provider or service receiver, as the case may be.

In conclusion, the point of taxation need a close study by every stakeholder i.e. service provider, service receiver, Government as these rules are a change from the past. Any change raises new hopes and expectations and these rules are not exception, for Government the change raises hopes of increased revenue and for the rest it is the much desired clarity in law. Time will alone answer the question whether these new rules fulfilled the hopes of Government or others or both. n

ule 3, 4 and 8 of the Point of Taxation rules do not apply in case of continuous supply of service. Rule 6 alone applies to CSS. Point of Taxation in case of

CSS shall be the time when the invoice for the service provided or to be provided is issued. If the invoice is not issued within 14 days of the completion of the provision of service then the point of taxation shall be the date of completion of such service. In majority of the cases services which are in the continuous supply are governed by a written contract.

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Note: Rule 7 of Point of Taxation Rules, 2011 has been amended vide Notification No. 41/2011 ST dated 27-06-2011 to provide that point of taxation in case of taxable consulting engineer’s service would be the date on which payment is received or made. However, if the payment is not made within a period of six months of the date of invoice, the provisions of this rule would not apply.