POINT OF TAXATION RULES 2011

[ROHAN THAKKAR]

1.      Purpose of the Rules

• The purpose of these rules is to introduce clarity and certainty in the matter of levy and collection of Service Tax particularly in situations of change of rate of service tax or imposition of service tax on new services. At present there is lack of clarity as to the date from which the changed rate or a new levy of service tax become payable and tax payers as well as tax officials face uncertainty in this regard as the provisions are not explicit.
• Similar uncertainty prevails in regard to cases of continuous supply of services. So far these issues have been addressed by CBEC through clarificatory circulars that accompany such changes. A need has been felt to put the regulatory frame work on a transparent, clear and durable basis and hence these rules have been introduced.
• Currently the payment of service tax is linked to receipt of payment for the service, which is at odds with regime in force in Central Excise and VAT laws implemented by the states.
• In both Central Excise and VAT, tax payment is required on accrual basis – upon manufacture and clearance of goods in the former and issue of invoice in the latter. In neither case is the tax payment linked actual receipt of payment for the goods. The GST regime is likely to follow this practice and it is necessary to align the service tax regime with it so that transition to GST will be smooth. The change in the point of payment of tax will also simplify accounting for the taxpayers.

2.      Paradigm from cash to accrual

• Section 65(105) of the Finance Act defines various taxable services as ‘any service provided or to be provided’. Section 67 (valuation provision) and section 66A (Import of service) also provide for ‘any service provided or to be provided’.
• Rule 2(e) of the Point of Taxation Rules states that “point of taxation” means the point in time when a service shall be deemed to have been provided;

 3.      Determination of Point of Taxation

• These rules determine the point in time when the services shall be deemed to be provided.
• For the purposes of these rules, unless otherwise provided, “point of taxation‟ shall be,-

• The time when the invoice for the service provided or to be provided is issued.

However, 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. [Rule 3(a) of Point of Taxation Rules, 2011]

• 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. [Rule 3(b) of Point of Taxation Rules, 2011]

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.”.

• Thus, the summary of above provision reads as: ‘The point of taxation will be

a)      Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.

b)     Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above. Its effect has been illustrated in the below mentioned table [CBEC LETTER [F.NO.341/34/2010-TRU], DATED 31-3-2011]

S.No.	Date of completion of service	Date of invoice	Date on which payment recd.	Point of Taxation	Remarks
1.	April 10, 2011	April 20, 2011	April 30, 2011	April 20, 2011	Invoice issued in 14 days and before receipt of payment
2.	April 10, 2011	April 26, 2011	April 30, 2011	April 10, 2011	Invoice not issued within 14 days and payment received after completion of service
3.	April 10, 2011	April 20, 2011	April 15, 2011	April 15, 2011	Invoice issued in 14 days but payment received before invoice
4.	April 10, 2011	April 26, 2011	April 5, 2011 (part) and April 25, 2011 (remaining)	April 5, 2011 and April 10, 2011 for respective amounts	Invoice not issued in 14 days. Part payment before completion, remaining later

4. Raising an Invoice [Rule 4A(1) of Service Tax Rules, 1994]

• Every person providing taxable service shall , not later than fourteen days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier, issue an invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him in respect of such taxable service provided or to be provided and such invoice, bill or, as the case may be, challan shall be serially numbered and shall contain the following, namely :

1. the name, address and the registration number of such person;
2. the name and address of the person receiving taxable service;
3. description, classification and value of taxable service provided or to be provided; and
4. the service tax payable thereon.

AS-9 REVENUE RECOGNITION issued by THE ICAI   The emphasis of Point of Taxation Rules, 2011 is on ‘completion of service’, which categorically states that service tax is required to be paid on issue of invoice or date of payment. It has been made mandatory to issue invoice within 14 days of completion of service. In this regard, certain principles on revenue recognition has been established by AS-9 which has been reproduced here: Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition. (para-5) If invoice has been made for services to be provided, then the point of taxation will be the date of such invoice. However, in other cases, invoices are made only after the service is provided. Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method. (Para-7)  Effect of Uncertainties on Revenue Recognition (Para 9) Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments. When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.  In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service. (Para 12)  Annexure B of AS-9 B. Rendering of Services 1. Installation Fees In cases where installation fees are other than incidental to the sale of a product, they should be recognised as revenue only when the equipment is installed and accepted by the customer. 2. Advertising and insurance agency commissions Revenue should be recognised when the service is completed. For advertising agencies, media commissions will normally be recognized when the related advertisement or commercial appears before the public and the necessary intimation is received by the agency, as opposed to production commission, which will be recognised when the project is completed. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies. 3. Financial service commissions A financial service may be rendered as a single act or may be provided over a period of time. Similarly, charges for such services may be made as a single amount or in stages over the period of the service or the life of the transaction to which it relates. Such charges may be settled in full when made or added to a loan or other account and settled in stages. The recognition of such revenue should therefore have regard to: (a) whether the service has been provided “once and for all” or is on a “continuing” basis; (b) the incidence of the costs relating to the service; (c) when the payment for the service will be received. In general, commissions charged for arranging or granting loan or other facilities should be recognisedwhen a bindingobligation has been entered into.Commitment, facility or loanmanagement fees which relate to continuing obligations or services should normally be recognised over the life of the loan or facility having regard to the amount of the obligation outstanding, the nature of the services provided and the timing of the costs relating thereto. 4. Admission fees Revenue from artistic performances, banquets and other special events should be recognised when the event takes place. When a subscription to a number of events is sold, the fee should be allocated to each event on a systematic and rational basis. 5. Tuition fees Revenue should be recognised over the period of instruction. 6. Entrance and membership fees Revenue recognition from these sources will depend on the nature of the services being provided. Entrance fee received is generally capitalised. If the membership fee permits only membership and all other services or products are paid for separately, or if there is a separate annual subscription, the fee should be recognised when received. If the membership fee entitles the member to services or publications to be provided during the year, it should be recognised on a systematic and rational basis having regard to the timing and nature of all services provided.

c) Rule 6(3) of service tax Rules, 1994 also recognizes that services being intangible, perishable, insepearble and simultaneously provided and is different from that of goods, hence, it has made a clarity on deficient provision of service which provides that  ‘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.’ [CBEC LETTER [F.NO.341/34/2010-TRU], DATED 31-3-2011]

 5. Determination of point of taxation in case of change of rate of tax.

• Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax in respect of a service, shall be determined in the following manner, namely:-

Time of provision of taxable service	Time of issue of invoice	Time of receipt of payment	Point of taxation
Taxable service has been provided before the change in effective rate of tax	After the change of effective rate of tax	After the change of effective rate of tax	Date of payment or issuing of invoice, whichever is earlier;
	Before change in effective rate of tax	After the change of effective rate of tax	Date of issuing invoice
	After the change of effective rate of tax	Before change in effective rate of tax	Date of Payment
Taxable service has been provided after the change in effective rate of tax	Before the change of effective rate of tax	After change in effective rate of tax	Date of issuing Payment
	Before the change of effective rate of tax	Before change in effective rate of tax	Date of payment or issuing of invoice, whichever is earlier;
	After change in effective rate of tax	Before the change of effective rate of tax	Date of issuing of invoice.

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 there under. Thus, even if the change in percentage of abatement will constitute “change in effective rate of tax”.

 Relevant Date for Rate of Tax

• Rule 5B of Service Tax Rules, 1994 has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided

6. Payment of tax in cases of new services.- Where a service, not being a service covered by rule 6, is taxed for the first time, then, the tax treatment w.r.t the same is as under:

Provision of service	Invoice	Payment receipt	Point of Taxation
Before service become taxable	Before	Before	No Tax is required to be paid
	Invoice issued within 14 days from completion of service	Before	No Tax is required to be paid
After service become taxable	Before	After	Rules do not provide. However, tax is not required to be paid as per Rule 3; because, point of taxation will be the date of invoice or date of receipt of payment, whichever is earlier.
The above provision does not apply to ‘continuous supply of service’.

7. Point of taxation in case of continuous supply of service

• “Continuous supply of service” means

1. Any service which is provided, or to be provided continuously, under a contract, for a period exceeding 3 months,  (like renting of immovable property, supply of tangible goods, for service) or
2. 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;

• 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:

1. Telecommunication service [65(105)(zzzx)]
2. Commercial or industrial construction [65(105)(zzq)]
3. Construction of residential complex [65(105)(zzzh)]
4. Internet Telecommunication Service [65(105)(zzzu)]
5. Works contract service [65(105)(zzzza)]

• These services will constitute “continuous supply of services” irrespective of the period for which they are provided or agreed to be provided.
• 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. However, where the invoice is not issued within 14 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. [Rule 6 of the Point of Taxation Rules, 2011]

• 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 1 to Point of Taxation Rules]
• 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.” [Explanation 2 to Point of Taxation Rules]

8. Point of taxation w.r.t Export of service

• Notwithstanding anything contained in these rules, the amount for export of services made pursuant to Rule 3(1) of the Export of service Rules, 2005 shall be received within the time limit prescribed by RBI in this regard.

It may be noted that RBI has extended the period of realization of export proceeds from 6 months to 12 months. However, this relaxation is valid till 30th September, 2011 [RBI/2010-11/457; A.P. (DIR Series) Circular No. 47]. However, export on elongated credit terms can be made with prior permission of the RBI.

• However, 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. [First Proviso to Rule 7]
• Export of services is exempt subject, inter alia, to the condition that the payment should be 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. [Para 9 of TRU (II) MF(DR) letter F.No.341/34/2010-TRU dated 31-3-2011]. Thus, the time limit of realization of payment will commence from date of completion of service.
• Thus, if service is exported as per Export of Service Rules but foreign exchange is not realised within period prescribed by RBI, service tax will become payable, since realization of payment in foreign exchange is one essential condition to treat a service as ‘Export of Service’. The point of taxation will be determined in this case as if this rule does not exist. i.e., as per Rule 3, 4, 5, 6 or 8 of Point of taxation Rules. Thus, the accrual method will come into play and service tax liability will shift to much earlier date. In such case, interest and penalty will also be required to be paid.

9. Point of taxation where tax is payable under reverse charge mechanism

There are services where tax is payable under reverse charge mechanism like

• Goods Transport Agency;
• Mutual fund agent and insurance agent;
• Sponsorship services
• in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service; etc.

• In the case of services where the recipient is obligated 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.
• Thus, the option given to make payment of service tax on the basis of payment made will be come to an end and the accrual concept will come into play.

10.  Certain service provider shall pay service tax on cash (receipt) basis

• The services provided by professionals will continue to be taxed on receipt basis even after 1-7-2011. In this regard, following services provided by individuals or proprietary firms or partnership firms has been covered

•       Architect’s service;
•       Chartered accountant’s service;
•       Cost accountant’s service;
•       Interior decorator service;
•       Company secretary’s service;
•       Scientific or technical consultancy service; and
•       Legal services.
•       Consulting Engineer

• The benefit shall not be available in case of any other service also supplied by the person concerned along with the specified services. Thus, if a chartered accountant also provides management consultancy services, the benefit for payment of service tax on receipt basis will be available only for the receipts of Chartered Accountant service and not for Management Consultancy service.
• Persons providing any other service other than specified above do not have an option to pay tax on receipt basis.

11. Determination of point of taxation in case of copyrights, etc. . .-

• 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. [Rule 8 of Point of Taxation Rules]

 12. Availment of service tax credit

• 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.
• However, if payment is not made to service provider within three months of date of invoice, the credit taken will have to be reversed. The credit can be taken again after payment is made to service provider.
• 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.

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

1.  where the  provision of service is completed; or
2. 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.

Thus, now one needs to be very careful as to the time when the services are completed and also when the services are deemed to have been completed.