Point of Taxation Rules for Service Tax

Point of Taxation Rules

Heretofore (before) 01-04-2011, the Service Tax was payable on receipt basis i.e. on receipt of amount of the invoice or bill from the customer or receipt of advance, whichever is earlier.

Service Tax is payable only when payment was received irrespective of the fact whether service is provided or not.

With the introduction of POT Rules, general rule for the time of provision of service would be the earliest of the following dates:
a) Date on which service is provided or to be provided
b) Date of invoice
c) Date of payment

POT Rules provides

1. Provision for payment of service tax on accrual basis

2. Specifies the date relevant for determination of service tax

POT Rules not applicable

1. Where services are completed or invoice are issued prior 1-apr-11

POT rules are silent on existing unpaid service tax amount lying in debtors.

POT i.e. point in time when a service shall be deemed to be have been provided, would be

1. When invoice is issued within the prescribed period of 14 days from the date of completion of the provision of the service.

2. Date of invoice or payment (including advance) whichever is earlier.

When invoice is not issued within the prescribed period

1. Date of the completion of the provision of service or payment (including advance)

Non issue of timely invoice would propone tax liability of service provider however this would not entitle service receiver to claim CENVAT Credit.

Due date of payment of service tax to be reckoned with respect to the service which is deemed to be provided as per the POT rule.

Here I am providing the case study to understand the functionality in a better way.

S.No	Date of completion of Service	Date of Invoice	Date on which Payment Received	Point of Taxation	Payment Due Date	Remarks
1	June 10, 2012	June 20, 2012	June 30, 2012	June 20, 2012	July 5, 2012	Invoice issued before receipt of bill amount within 14 days
2	June 10, 2012	June 26, 2012	June 30, 2012	June 10, 2012	July 5, 2012	Invoice Not issued within 14 days and payment received after completion of service
3	June 10, 2012	June 20, 2012	June 15, 2012	June 15, 2012	July 5, 2012	Invoice issued within 14 days but payment received before issue of invoice
4	June 10, 2012	June 26, 2012	June 5, 2012 (Part) and June 25, 2012 Remaining	June 5, 2012 (Part) and June 10, 2012 for respective Amount	July 5, 2012	Invoice not issued within 14 days but part payment before completion, remaining later.
5	June 30, 2012	July 15, 2012	July 1, 2012	June 30, 2012	July 5 , 2012 if timely billed it would have been Aug 5 or Oct 5	Invoice not issued within 14 days but payment received after completion of service.

Peculiar Situation:-

Changes in Effective rate of tax

Rule 4 covers situation where there is

Change in effective rate of tax

Change in the portion of value on which tax is payable in terms of notification3

1. Change on rate of abatement or rate of composition is changed or

2. Value on which tax is applicable is changed Ex. Air travel Agent, Monet changing services, distribution and selling of lottery tickets, work contract services, Life insurance services

It does not cover the situation where service has been brought to tax for the first time.

Issue may arise where services were provided during exemption period and invoicing/payment is done after exemption is withdrawn.

Provision of Service	Issue of invoice	Payment received	Point of Taxation	Rate	Remarks
Before Change	After Change	After Change	Date of invoice or payment ,which ever earlier	New Rate	As service was already taxable , and the tax point is earlier of invoice/payment ,tax charged at new /revised rate
Before Change	Before Change	After Change	Date of invoice	Old Rate	As service was already taxable, and invoice issued before change, the tax point is invoice, tax charged at old rate.
Before Change	After Change	Before Change	Date of  payment	Old Rate	Tax point is date of payment ,Old rate
After Change	Before Change	After Change	Date of  payment	New Rate	Tax charged at revised rate. Supplementary / Additional invoice may be issued for differential tax ,otherwise same would be required to be borne by the service provider
After Change	Before Change	Before Change	Date of invoice or payment ,which ever earlier	Old Rate	Tax charged at old rate
After Change	After Change	Before Change	Date of invoice	New Rate

New Services

Continuous supply of service

 

Royalties ,copyrights  etc.

Exception to POT RULES:

Non-provision of services etc

Cenvat credit rules

Way forward

Point of Taxation Rules - Applicable wef 01.07.2012

Consequent to the changes introduced at the time of Budget 2012 in the Point of Taxation Rules, 2011, together with revision of the service tax rate from 10% to 12% and the subsequent changes that have been made effective from 01.07.2012, the following clarifications have been desired:

(a) Point of taxation and the rate applicable in respect of continuous supply of services at the time of change in rates effective from 01.04.2012;

(b) Applicability of the revised rule 2A of the Service Tax (Determination of Value) Rules, 2006 to ongoing works contracts for determination of value when the value was being determined under the erstwhile Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007; and

(c) Applicability of partial reverse charge provisions in respect of specified services.

2.1 The issues have been examined. The continuous supply of services was governed by rule 6 until 31.03.2012. The rule started with the wordings “notwithstanding anything contained in rules 3, 4 …” Therefore, the point of taxation in respect of services provided in terms of the said rule on or before 31.03.2012 would remain unaffected by rule 4.

2.2 To clarify the matter further, if the invoice had been issued or payment received in respect of such services on or before 31.03.2012, the point of taxation would stand determined under rule 6 accordingly and shall not alter due to the subsequent changes in the Point of Taxation Rules, 2011 that became effective only from 1.4.2012.

3.1 However the position has undergone a change at the time of transition towards the Negative List and the introduction of other accompanying changes in Service Tax (Determination of Value) Rules, 2006 and partial reverse charge. At the said time rule 6 stood omitted and the point of taxation was required to be determined ordinarily in such cases under the main rule i.e. rule 3. This rule is, however, overridden by rule 4 when there is a change in effective rate of tax. The “change in effective rate of tax” has been defined in clause (ba) of rule 2 to include a change in the portion of value on which tax is payable. 

3.2 To illustrate, the following would be changes in effective rate of tax:-

(i) the change in the portion of total value liable to tax in respect of works contract other than original works (from @ 4.8% earlier to @ 12% on 60% of the total amount charged, or effectively @ 7.2% now).

(ii) Exemption granted to certain works contracts wef. 1st July 2012 which were earlier taxable.

(iii) Taxability of certain works contracts which were hitherto exempted.

(iv) Change in the manner of payment of tax from composition scheme under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 to payment on actual value under clause (i) of rule 2A of the Service Tax (Determination of Value) Rules, 2006.

3.3 However, the following will not be a change in effective rate of tax:-

(i) works contracts earlier paying service tax @ 4.8% under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and now required to pay service tax @12% on 40% of the total amount charged, keeping the effective rate again at 4.8% (as only the manner of expression has been altered).

(ii) works contracts which were outside the scope of taxation (and not merely exempted) but have become now taxable e.g. construction of residential complex comprising of 2 to 12 residential units, construction of buildings meant for use by NGOs etc. (Rule 5 of the Point of Taxation Rules, 2011 shall apply to such services.)

3.4 Thus the point of taxation for services provided in respect of taxable works contracts in progress on 01.07.2012 would need to be determined under rule 4 of the Point of Taxation Rules unless there is no change in effective rate of tax.

4. It is further clarified that the provisions of partial reverse charge would also be applicable in respect of such services where point of taxation is on or after 01.07.2012 under the applicable rule in respect of the service provider.

5. This Circular may be communicated to the field formations and service tax assesses, through Public Notice/ Trade Notice. Circular No. 162/13 /2012 –ST F. No. 354/111/2012-TRU