Amendments in the Point of Taxation Rules (POT) 2011 – some important discussions.

[C.A. DEV KUMAR KOTHARI]

Amendments in the Point of Taxation Rules (POT):

Relevant link is as follows :

The principal notification No. 18/2011-Service Tax, dated the 1^st March 2011, published in the Gazette of India, Extraordinary, vide number G.S.R.175(E), dated the 1^st March, 2011.

Now we find amendment within the same month in which the original rules were made. This shows how frequently Rules are amended – is it indicative of framing Rules without proper application of mind and without foreseeing necessary implications with reference to ground realities .

Amendment:

The link is http://www.taxmanagementindia.com/visitor/detail_notification.asp?ID=23514

the notification is  tO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (i)].

The notification reads as follows with highlights provided for analysis:

Government of India, Ministry of Finance ,Department of Revenue dated New Delhi, 31^st March, 2011

Notification No.25/2011 – Service Tax.

Amendment in the Point of Taxation Rules, 2011.

G.S.R. E).- In exercise of the powers conferred by clause (a) and clause (hhh) of sub-section (2) of section 94 of the Finance Act, 1994 (32 of 1994) the Central Government hereby makes the following rules further to amend the Point of Taxation Rules, 2011, namely:-

1. (1) These rules may be called the Point of Taxation (Amendment) Rules, 2011.

(2) They shall come into force on the 1^st day of April, 2011.

2. In the Point of Taxation Rules, 2011 (hereinafter referred to as the “said rules”), for rule 3, the following rule shall be substituted, namely:-

“3. Determination of point of taxation.- For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be,-

(a) the time when the invoice for the service provided or to be provided is issued:

Provided that where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be date of such completion.

(b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Explanation .- For the purpose of this rule, 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.”.

3. In rule 4 of the said rules,-

(i)  for the words “change of rate”, wherever they occur, the words “change in effective rate of tax” shall be substituted;

(ii)  for the words “change of rate of tax” or “change in tax rate” or “change of tax rate”, respectively at both the places where they occur, the words “change in effective rate of tax” shall be substituted;

(iii) after sub-clause (iii) of clause (b), the following Explanation shall be inserted, namely:-

“Explanation.- For the purposes of this rule, “change in effective rate of tax” shall include a change in the portion of value on which tax is payable in terms of a notification issued under the provisions of Finance Act, 1994 or rules made thereunder.”.

4. For rule 6 of the said rules, the following rule shall be substituted, namely:-

“6. Determination of point of taxation in case of continuous supply of service.-Notwithstanding anything contained in rules 3, 4 or 8, in case of continuous supply of service, the `point of taxation’ shall be,-

(a) the time when the invoice for the service provided or to be provided is issued:

Provided that where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be date of such completion.

(b)  in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Explanation 1. – For the purpose of this rule, where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service.

Explanation 2.- For the purpose of this rule, 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.”.

5. For rule 7, the following rule shall be substituted, namely:-

“7. Determination of point of taxation in case of specified services or persons.-Notwithstanding anything contained in these rules, the point of taxation in respect of,-

(a) the services covered by sub-rule (1) of rule 3 of Export of Services Rules, 2005;

(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

(c) individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994, shall be the date on which payment is received or made, as the case may be:

Provided that in case of services referred to in clause (a), where payment is not received within the period specified by the Reserve Bank of India, the point of taxation shall be determined, as if this rule does not exist.

Provided further that in case of services referred to in clause (b) where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.

Provided also that in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be the date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

6. For rule 9, the following rule shall be substituted, namely:-

“9. Transitional Provisions.- Nothing contained in this sub-rule shall be applicable,-

(i) where the  provision of service is completed; or

(ii) where invoices are issued prior to the date on which these rules come into force.

Provided that services for which provision is completed on or before 30^th day of June, 2011 or where the invoices are issued upto the 30^th day of June, 2011, the point of taxation shall, at the option of the taxpayer, be the date on which the payment is received or made as the case may be.”.

[F.No. 334/3/2011 – TRU]

(SAMAR NANDA)

Under Secretary to the Government of India

A reading of the above Amendment Rules shows that certain amendments are made w.e.f. 01.04.2011  in the Point of Taxation Rules (POT).

Receipt basis:

Certain professional carrying profession as a proprietor or as a partnership firm will continue to be liable to pay tax on receipt basis instead of accrual basis as envisaged in original Rules framed on 01.03.2011.  One more important change is that services providers/ receiver are given an option to apply these rules from 1^st July 2011 instead of 01.04.2011. This is to facilitate a shift in the method.

Some highlights of important changes:

Transitional provision: AS per new Rule 9 of POT Rules 2011  the transitional provisions will apply to all invoices issued before 31.03.2011 to service provider/ receiver who switch over to the new rules on 01.04.2011. 

In case  the new rules are adopted from  01.07.2011 the tax payer will have  similar  option  in respect of invoices issued before the date they switch over to the new rules that is say 30.06.2011.  The benefit will also apply in situations where services has been completed before 01.04.2011 or 01.07.2011, as the case may be. It is also clarified that the payments received before the new rules come into force do not require any transitional provisions as they are already required to pay tax on payment basis. 

Though the rules shall come into force from 01.04.2011, an option has been given in rule 9 to pay tax on payment basis, as at present, till 30.06.2011. Therefore, it appears that the tax payer should exercise the option as soon as possible and intimate the same to the concerned authorities, to avoid any dispute.

Point of taxation:

As per amended/ new  Rule 3 various points of taxation shall be as follows:

(a)        When invoice is issued within fourteen days from completion of service:

 Date of invoice or payment, whichever is earlier,

 (b)  When invoice is not issued within fourteen days from completion of service:

           Date of completion of the provision of service or payment,whichever is earlier.

Tabular illustrations:

Date of completion of service	Date of invoice	Date on which payment recd.	Point of Taxation	Remarks
25.04.2011	30.04.2011	04.05.2011	30.04.2011- THE DATE OF INVOICE	Invoice issued within 14 days and before receipt of payment
04.04. 2011	21.04.2011	April 30, 2011	04.04. 2011- date of completion of service	Invoice not issued within 14 DAYS AND PAYMENT RECEIVED AFTER COMPLETION OF SERVICE
06.04.2011	19.04.2011	17.04.2011	17.04.2011- the date of receipt of payment.	Invoice issued within 14 days but payment received before invoice
09.04.2011	April 26, 2011	07.04.2011 (part) and  25.04. 2011 full and final	07.04.2011- part payment received and 09.04.2011 for balance on completion of service.	Invoice not issued within 14 days. Part payment before completion, remaining later

It is therefore advisable to issue invoice within 14 days from the completion of service.

Effective rate of tax:

 Rule 4 has been amended so that  change in the effective rate of tax shall also include change in that portion of value on which tax is payable in terms of an exemption notification or rules made in that  regard. Exemptions are granted in value of taxable services for example, exemptions vide Notification No. 1/2006-ST dated 01.03.2006 which has the effect of payment of tax only on a part of the value.  In other cases either the values or the rates at which tax is payable are provided under rule 6(7, 7A, 7B or 7C) of the Service Tax Rules, 1994 as well as the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Whenever these values or the composition rates are changed, it would have the same effect as the change in the rate of duty.  It is also clarified that the rate of tax shall also include any other notification which is issued, rescinded or amended and has the effect of altering the taxability of any service.

Continuous services:

 Rule 6 relating to continuous supply of service have been aligned with the revised rule 3 and the date of completion of continuous service has been defined within the rule.   This date shall be the date of completion of the specified event as stated in the contract which require a  payment in part or whole for the contract according to stages of completion or work-in-progress etc.  For example, in the case of construction services if the payments are linked to stage-by-stage completion of construction, the provision of service shall be deemed to be completed in part when each such stage of construction is completed.  Moreover, it has been provided that this rule will have primacy over rules 3, 4 and 8.

The following services have been notified as "continuous supply of services" in terms of clause 2(c) of the rules vide notification No. 28/ST-2011 dated 01.04.2011:

 (a)  Telecommunication service [65(105)(zzzx)]

 (b)  Commercial or industrial construction [65(105)(zzq)]

 (c)  Construction of residential complex [65(105)(zzzh)]

 (d)  Internet Telecommunication Service [65(105)(zzzu)]

 (e)  Works contract service [65(105)(zzzza)]

Other services will be considered continuous supply only if they are provided or agreed to be provided continuously for a period exceeding three months.

Associates:

Rule 7 relating to associated enterprises has been deleted.  Now that the date of completion of the provision of service is an important criterion in the determination of point of taxation, it shall take care of most of the dealings between the associated enterprises.   Thus in case of failure to issue the invoice within the prescribed period, the date of completion of provision of service shall come into effect even if payment is not made.

Payment basis

Rule 7 has  been replaced by a new provision whereby the point of taxation shall be the date of making / receiving the payment.  This provision shall apply to the following:

  (i)  Export of services;

 (ii)  Persons, where the obligation to pay tax is on the service recipient in terms of rule 2(1)(d) of the Service Tax Rules, 1994 in respect of services notified under section 68(2) of the Finance Act, 1994.

(iii)  Individuals, proprietorships and partnership firms providing specified services  that is services rendered to clients by  Chartered Accountant in practice, Cost Accountant in practice, Company Secretary in practice, Architect, Interior Decorator, Legal, Scientific and Technical consultancy services. 

The benefit of this exemption shall not be available in relation to  any other service provided by these professional persons. For example, if an Architect also provide construction services, then construction services will be taxable based on accrual method and not receipt basis.

Exports:

 Export of services is exempt when the payment is received in convertible foreign exchange.  Until the payment is received, the provision of service, even if all other conditions are met, would not constitute export.  In order to remove the hardship that will be caused due to accrual method, the point of taxation has been changed to the date of payment.   However, if the payment is not received within the period prescribed by RBI, the point of taxation shall be determined in the absence of this rule. 

Comment of author:-This means that the accrual basis will be followed, and in that case the service provider will have to suffer loss due to delay in deposit of service tax determined according to method of accrual. In such cases the last date for realization, as permitted by RBI should be regarded as date of accrual. When it is not possible to recover the export proceeds, the consideration becoming bas should not be regarded as accrued.

Reveres Charge method:

In the case of services where the recipient is required to pay service tax under rule 2(1)(d) of Service Tax Rules i.e. on reverse charge basis, the point of taxation shall be the date of making the payment.  However, if the payment is not made within six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.  Moreover, in the case of associated enterprises, when the service provider is outside India, the point of taxation will be the earlier of the date of credit in the books of account of the service receiver or the date of making the payment.

Comment of author:-This means that the accrual basis will be followed, and in that case the service receiver will have to suffer loss due to delay in deposit of service tax determined according to method of accrual. In such cases the last date for payment as permitted by service provider should be regarded as date of accrual. When for any reason the service charge is not payable, the consideration waived by service provider or becoming not payable should not be regarded as service charges accrued for services availed but not paid.

Other changes: Some changes have also been made in the Service Tax Rules, 1994 vide notification No. 26/2011-ST dated 31.03.2011 and have a close relationship with the Point of Taxation Rules as  discussed below:

  (i)  The obligation to issue invoice shall be within 14 days of completion of service and not provision of service.

 (ii)  If the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver.  However, concession is not available for bad debts.

Input Service:

 The credit of input services under rule 4 (7) of the Cenvat Credit Rules has also been liberalized vide notification No. 13/2011-CE (NT) dated 31.03.2011 and the same shall be available on receipt of invoice (except in cases of reverse charge) as long as the payment is made within three months.  Even specified persons required to pay tax on cash basis will be able to avail credit on receipt of invoice. 

Suitable changes have also been made for reversal of credit or payment when the value of service is renegotiated or altered for any reason by refund or issue of a credit note by the service provider.  Amendment has also been made in Rule 9 of Cenvat Credit Rules, 2004 by allowing credit on supplementary invoice, except in non-bonafide cases, which may become necessary in certain situations e.g. where the point of tax is the date of payment while the invoice had already been issued e.g. rule 4(b)(i) of Point of Taxation Rules.