POINT OF TAXATION IN SERVICE TAX- PART-II

[Dr. Sanjiv Agarwal]

Definitions

While the definition of associated enterprises and invoice is already, there in the service tax provisions/Income Tax Act, following new terms have been defined-

Continuous supply of service

Rule 2 C defines continuous supply of service to mean any service which is provided, or to be provided continuously, under a contract, for a period exceeding three months, or where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

 Thus, a service to be a continuous supply of service should satisfy the following conditions- 

a) It should be a service (taxable service) 

b) Such service should be provided or to be provided continuously.

c)  It should be provided under a contract

d) Supply of service should be for a period exceeding three months (calendar month)

e) Service prescribed to be a continuous supply of service by Central Government by was of a Notification whether or not subject to any condition.

Thus, where (e) is not the case, all conditions must be satisfied.

Point of Taxation

Rule 2 (e) defines ‘point of taxation’ as the point in time when a service shall be deemed to have been provided. This will be determined as per Point of Taxation Rules 2011. The determination of point of taxation shall be crucial to determine the timing of service tax liability and the applicability of rate of service tax. The taxability will be decided by point of taxation only. The Point of Taxation rules provide for various situations to determine the point of taxation.

Taxable service

According to Rule 2 (f), taxable service mean a service which is subject to service tax whether or not the same is fully exempt by the Central Government under section 93 of the Finance Act 1994.While taxable services have been defined in section 65 (105) (a to zzzzw) of Point of Taxation Rules, it would also include wholly or partly exempted services under any Notification issued by the Central Government.  

Determination of Point of Taxation( Rule 3)

Rule 3 deals with the determination of point of taxation.  The point of taxation shall be determined in the following manner:

• a provision of service shall be treated as having taken place at the time when service is provided or to be provided; or
• if, before the time specified the person providing service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

The explanation 1 to the rule 3 provides that wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.  The explanation 2 to Rule 3 provides that in respect of services taxable under Section 66A of the Finance Act, 1944, the point of taxation shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier. 

In case of import of service, the point of taxation is the date on which invoice (of foreign service provider) is received or payment is made to foreign in service tax provider, whichever is earlier (except in case of associated enterprises).

Determination of Point of Taxation in case of Change of Rate of Tax (Rule 4)

Rule 4 deals with the determination of  point of taxation in case of change of rate of tax. The point of taxation in cases where there is a change of rate of tax in respect of a service, shall be determined in the following circumstances:

• · In case a taxable service has been provided before the change of rate;
• · In case a taxable service has been provided after the change of rate.

In case a taxable service has been provided before the date of change of rate, the point of taxation will be determined as follows:

• ·Where the invoice for the same has been issued and the payment received after the change of rate, the point of taxation shall be the date of payment or issuing of invoices, whichever is earlier; or
• ·Where the invoice has also been issued prior to change in tax rate but the payment is received after the change of rate, the point of taxation shall be the date of issuing of invoice; or
• ·Where the payment is also received before the change of rate, but the invoice for the same has been issued after the change of rate, the point of taxation shall be the date of payment.

In case a taxable service has been provided after the date of change of rate, the point of taxation will be determined as follows:

• ·Where the payment for the invoice is also made after the change in tax rate but the invoice has been issued prior to the change of tax rate, the point of taxation shall be the date of payment; or
• ·Where the invoice has been issued and the payment for the invoice received before the change of tax rate, the point of taxation shall be date of receipt of payment or date of issuance of invoice, whichever is earlier; or
• ·Where the invoice has also been raised after the change of rate but the payment has been received before the change of rate, the point of taxation shall be date of issuing of invoice.

This can be summarised as under -

Where the taxable service is provided before the date of change of rate:

Situation	Point of Taxation
Where the invoice issued and the payment received after the change of rate	Date of payment received or issuing of invoice, whichever is earlier
Where the invoice issued prior to change in tax rate but the payment is received after the change of rate	Date of issuing of invoice
Where payment received before the change of rate but the invoice issued after the change of rate	Date of payment received

Where the taxable service is provided after the date of change of rate

Situation	Point of Taxation
Where the payment received after the change of rate but the invoice issue prior to the change of tax rate	Date of payment received
Where the invoice issued and payment received before the change of tax rate	Date of payment of issue of invoice, whichever is earlier
Where payment received before the change of rate but the invoice issued after the change of rate	Date of issuing of invoice

Payment of Tax in cases of New Services (Rule 5)

Rule 5 deals with payment of service tax for new taxable services.  Where a service, not being a service covered by Rule 6 being continuous supply of service, is taxed for the first time, then no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable and no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within the period referred to in Rule 4A of the Service Tax Rules, 1994.

For such services, the contract between service provider and receiver will be important as the point of taxation is dependent on such agreement. In case of continuous supply of service and periodical billing (like weekly, monthly, half yearly etc) by service provider, each period will be treated  separately provided on the date the liability of payment arise. If contract provides different dates of payments on which service receiver is liable to pay, then such different dates shall constitute point of taxation. If before providing the service of fixing date of service, payment is received or invoice is issued, point of taxation will be the date of payment or date of invoice whichever is earlier. In case of reverse charge method under section 66A of the Finance Act, 1994, the date of receipt of invoice or date of making the payment will be the point of taxation. Where any advance is received for the continuous supply of service, the point of taxation will be date of receipt of such advance.

Determination of Point of Taxation in case of Continuous Supply of Service (Rule 6)

Some services may be continuing ones like telecommunication services or long term maintenance contracts. Rule 6 deals with the determination of point of taxation in such cases.  The point of taxation in such cases will be determined as follows:

• · In case of continuous supply of service, the whole or part of which is determined or payable periodically or from time to time, shall be treated as separately provided at the date on which the payment is liable to be made by the service provider, if such date is specified in the contract;
• · If, before the time specified in (1) above, the person providing the service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

The explanation 1 to Rule provides that wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.   The explanation 2 to this Rule provides that in respect of services taxable under Section 66A of the Act, the point of taxation shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

Determination of Point of Taxation in case of Associated Enterprises (Rule 7)

Rule 7 deals with the determination of point of taxation in case of associated enterprises.   Rule 7 provides that the point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or invoice under Rule 4A of the Service Tax Rules, 1994 has been issued, or the date of debit or credit in books of accounts of the person liable to pay service tax, whichever is earlier.

Thus, the determination of point of taxation in case of associate enterprises will be earliest of following three-

• · the date of issuing of invoice
• · the date of receipt of payment
• · accounting entry made in the books of accounts

Determination of Point of Taxation in case of Copyrights etc (Rule 8)

Rule 8 deals with this.  It provides that in respect of royalties and payments pertaining to copyrights, trademarks, designs or patents, where the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration, the service shall be treated as having been provided each time when a payment in respect of such use or the benefit is received by the provider in respect thereof, or an invoice is issued by the provider, whichever is earlier .

As per the announcement made by the finance minister in the parliament on 23^rd March, 2011, the implementation of Point of Taxation Rules shall be deferred by three months and is likely to be implemented now w.e.f. 1^st July 2011 for which notification is expected before 1^st April 2011.

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