Applicability of rate of Service tax for the taxable services provided prior to 1st June 2015, but billed and received payments at a later date – An analysis

[Indian Commerce]

Introduction:

The Finance Bill, 2015 has received President’s assent on 14^th May 2015, increasing the rate of Service tax to 14% w.e.f. 01^st June 2015 by amending Section 66B.

It is now important to understand the applicability of the new rate, particularly when a taxable service provided is prior to change in rate of tax, since, charging Service tax from 1^st June 2015, for the taxable services provided prior to that, is conflicting.

An overview of Rules and Act relates to the applicability of rate of Service tax

A (i) Point of taxation Rules, 2011

Rule 4(a)(i) of Point of Taxation Rules, 2011, determination of point of taxation in case of change in rate of tax; states as:

“Where the invoice for the same has been issued and the payment received after the change in the effective rate of tax (1^st June 2015, in this case), the point of taxation shall be the date of payment or issuing of invoice, whichever is earlier”

According to this rule, the invoice and the receipt of payment occurring after 1^st June 2015, the rate of tax @ 14% should be applied, even though services was rendered prior to 1^st June 2015.

ii) Rule 6 of Service tax Rules, 1994 for Payment of Service tax

As per this Rule, the service tax shall be paid by the 5^th or 6^th of the month immediately following the month in which services are provided or deemed to be provided as per the rules framed in this regard. Since, Rule 6 still exists, it can be concluded that Point of Taxation Rules, 2011 are still relevant for determining the due date for payment of service tax.

B) Section 67A was introduced subsequently by Finance Act, 2012, w.e.f 28^th May 2012, reads as,

“The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

According to this Section, for the services completed prior to the change in the rate of tax (1^st June 2015, in this case), the applicable rate of service tax shall be the one prevailing at the time when a taxable service is provided or agreed to be provided (date prior to 1^st June 2015).

Similarly, this Act also covers services agreed to be provided, it would even be applicable in a case where advance is received before the change in the effective rate of tax for a taxable service to be provided in the future, i.e. the rate in force on the date on which the advance amount is received.

Conflict of application, between Point of Taxation Rules, 2011 and Section 67A

Whether one has to charge Service tax at the rate prevailing when the services was agreed to be provided as per Section 67A or charge Service tax at the rate applicable on that date of invoice or receipt of payment whichever is earlier, as per Point of Taxation Rules 2011.

Conclusion:

In general, a rule cannot override the Act and further in this case the said Act was introduced at a later date after the introduction of this Rule.

Secondly, with effect from 1^st July 2012, Rule 5B of the Service Tax Rules, 1994, which provides for determination of service tax rate with reference to the point of taxation rules is deleted, even through it become redundant after the introduction of Section 67A, w.e.f 28^th May 2012.

Following the flow of change that have taken place since 2011, till now, it can be said that for the determination of rate of tax, it should be only according to Section 67A (namely the rate of service tax in force or as applicable at the time when the taxable service has been provided or agreed to be provided.)

This should be clarified with the proper illustrations by the CBEC at the earliest, to avoid any future litigation.

Discussions to this article

[PAWAN KUMAR]

Dear Sir,

Kindly explain the situation in case of reverse charge (Full & Partial).

Whether the rate is to be applied on date of payment or as per rule 4.

[Indian Commerce]

Similarly, as per Point of taxation Rules, when a service received prior to change in effective rate of tax (e.g.10^th May 2015),

If the bill received in current month (e.g. 10^th June 2015) and payment made to the service provider in current month (e,g, 02^nd June 2015), the new rate @ 14% should be adopted.

However, as per Section 67A of Finance Act 1994, the rate prevailing at that period (i.e.,12.36%) should be adopted.

As referred in my article, it is once again a conflict between the act and rule. In general a rule cannot override the Act, hence it should be handled appropriately. The CBEC should clarify these issues at the earliest.