Point of Taxation Rules Under Service Tax

Point of Taxation was introduced in year 2011. Since then there have been  numerous amendments. In this post we have tried to analyse the provisions of point of taxation rules with all the changes and amendment since 2011.

Point of Taxation Rules is very important as they lay down clearly when the service tax has to be levied.

Generally speaking as thumb rule, service tax has to be levied by the service provider the earlier of issuance of invoice or receipt of payment.

However, there are scenarios or situation when you need to apply specific provision mentioned in Point of Taxation Rules. Before we discuss them lets understand

What is the Point of Taxation?

The Point of Taxation shall be

1. The time when the invoice for the service provided or to be provided is issued .In case where invoice is not issued within 14 days from the date of completion of taxable service, then the point of taxation shall be the date of completion of provision of the service
2. In a case, where the person providing the service, receives a payment before the time specified above, the time, when he receives the payment, to the extent of such payment.

Example: ABCD Pvt Ltd Issues Invoice to XYZ Pvt Ltd for INR 10000 on 6^th of December 2016. However, the XYZ Pvt Ltd make the payment on 30^th of November 2016, then the point of taxation will be 30^TH of November 2016.

3. In case of continuous supply of service 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 receiver of service 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

What Happens When There is Change in Service Tax Rate?

Many times it happens that due to finance budget or for some other reason effective rate of service tax changes. In this case then how do you determine point of taxation?  For such instances you need to refer Rule 4 of Point of Taxation Rules.

Rule 4 of Point of Taxation Rules

In case a taxable service has been provided before the change in effective rate of tax:

• where the invoice for the same has been issued and the payment received after the change in effective rate of tax, the point of taxation shall be date of payment or issuing of invoice, 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 in effective rate of tax, the point of taxation shall be the date of issuing of invoice; or

• where the payment is also received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax, the point of taxation shall be the date of payment;

In case a taxable service has been provided after the change in effective rate of tax,-

• 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 the 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 in effective rate of tax but the payment has been received before the change in effective rate of tax, the point of taxation shall be date of issuing of invoice.

What Happens When  Service Becomes Taxable for First Time ?

Let’s say you have started your business and after few months the turnover crosses 10 Lacs. Then the question arises whether one should pay service tax on the amount which is more than 10 lacs or on the whole amount.

Take another scenario you are providing service on which no service tax is payable. However, as per amendments in service tax law, you need to charge service tax . Then what you should do? Whether you should pay service tax on the old billing or new billing?.   The answer to such question lies in rule 5 of Point of Taxation Rules.

Here is Rule 5

Where a service is taxed for the first time, then,—

(a) 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;

(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time

What is The Point of Taxation for Government Authorities, Service Receivers Who Have to Pay Tax Based on Reverse Charge Mechanism?

In such cases, one should refer Rule 7 of Point of Taxation Rules.

Rule 7 of Point of Taxation Rules

Notwithstanding anything contained in rules 3,4, or 8, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made:

Provided that where the payment is not made within a period of three months of the date of invoice, the point of taxation shall be the date immediately following the said period of three months

Provided also that where there is change in the liability or extent of liability of a person required to pay tax as recipient of service notified under sub-section (2) of section 68 of the Act, in case service has been provided and the invoice issued before the date of such change, but payment has not been made as on such date, the point of taxation shall be the date of issuance of invoice

Provided also that in case of services provided by the Government or local authority to any business entity, the point of taxation shall be the earlier of the dates on which, –

(a)    any payment, part or full, in respect of such service becomes due, as specified in the invoice, bill, challan or any other document issued by the Government or local authority demanding such payment; or

(b)   payment for such services is made

Point of Taxation For Copy-Rights, Royalty, TradeMarks, Patents And Similar Items

At times it become difficult to ascertain when to charge service tax when service is in the nature of royalty, trademark, design or patents then in such instances you need to refer Rule 8 of Point of Taxation.

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

What is the Point of Taxation if the point of taxation is not determinable as per the above Rules

In such cases one need to refer Rule 8A of point of Taxation Rules which says

Where the point of taxation cannot be determined as per these rules as the date of invoice or the date of payment or both are not available,

the Central Excise officer, may, require the concerned person to produce such accounts, documents or other evidence as he may deem necessary and after taking into account such material and the effective rate of tax prevalent at different points of time,

shall, by an order in writing, after giving an opportunity of being heard, determine the point of taxation to the best of his judgement.

What is The Status of Invoices Issued Prior to 1^st of Oct 2014?

In view of the rule 7 of Point of Taxation Rules, if the invoice has been issued before Oct 2014, but payment  has not been made, then one has to refer rule 10 of Point of  Taxation Rules which says:

the point of taxation shall,–

(a) if payment is made within a period of six months of the date of invoice, be the date on which payment is made;

(b) if payment is not made within a period of six months of the date of invoice, be determined as if rule 7 and this rule do not exist.‖

For example Company ABCD Private Ltd has received a service on 30^th Sept 2014, but it made payment on 21^st Mar 2015. Then point of taxation  under Reverse charge mechanism will be 21^st Mar 2015. However, if ABCD Pvt Ltd does not make payment to service provider then point of taxation will be determined in accordance with other rules.