Draft Point of Taxation (for Services Provided or Received in India) Rules, 2010

Draft Point of Taxation (for Services Provided or Received in India) Rules, 2010

The Government of India proposes to issue Point of Taxation (for Services Provided or Received in India) Rules, 2010 in exercise of the powers conferred on it under Sec. 94 (2) (hhh) of the Finance Act, 1994.

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.

The other major change proposed to be brought about through these rules is to link the payment of tax to provision of service, raising of the invoice or payment for service provided or to be provided, whichever is the earliest. 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.

            The proposed changes are broadly on lines of best international practices.

            Consistent with the CBEC’s practice of wide consultation with all stakeholders, the draft of these rules is being published on the web site for public scrutiny, comments and suggestions. The draft is also accompanied by explanatory notes for each of the clauses. The Central Board of Excise and Customs welcomes responses from all who wish to comment on the proposals and will give careful consideration to all suggestions and comments while finalizing the rule.  Kindly send your response at roopamkapoor@gmail.com

For being considered, the responses must reach us latest by 01.09.2010.

Draft Point of Taxation (for Services Provided or Received in India) Rules, 2010

1) These Rules shall be called the Point of Taxation (for services provided or received in India) Rules, 2010.  They shall come into force on the date of their publication in the official gazette.

1)      (Explanatory Notes)

Explanatory Notes to Draft Point of Taxation Rules

Rule 1:  Preliminary

Rule 2:  Contains the definitions for the Rules.

Rule 3: Provides that the taxable event shall be the provision of service, including future provision. This would mean that the service, even though promised to be provided at a future date, shall be taxable. The rule also lays down that, if the service provider issues an invoice or receives any payment before providing service, the service, to the extent of the amount mentioned in the invoice, or the amount of payment, shall be deemed to have been provided. It means that the service provider shall be liable to pay the tax to the extent of amount mentioned in invoice, or the payment received, even if the service has not been provided at that point of time.

Rule 4: Prescribes that rate of tax applicable in the case of advances received shall be the rate applicable when the advance is received. This essentially clarifies the treatment of advances, and is in line with the provisions in these Rules that the tax payment shall be linked to the issuance of invoice, or the payment received, whichever is earlier. This would bring in certainty that once tax is charged on payment / invoiced amount, such determination of tax would be final & there would be no need to re-open the same. However, interest free deposits shall not be covered within the ambit of this rule.

Rule 5: Determines the point of taxation where there is a change in rate of tax. In other words, it prescribes the applicable of rate of tax in the cases where the tax rate changes between the occurrence of different events, viz., provision of service, issuance of invoice, and receipt of payment. This Rule only covers the change in rate of tax, including any service which was exempt and becomes taxable, and does not cover the services which become taxable for the first time. The provisions of this rule can be summarized in tabular form as shown below (Please note that the words ‘Before’ and ‘After’ mean “before the change in tax rates” or “after the change in tax rates”, as the case may be).

The principle followed in the above rule is that wherever two  points of taxation have occurred, whether before the change in tax rate or after the change in tax rate, the earlier event of the two would be the point of taxation, with the exception of clause (ii), where a deviation has been made. For this clause too, although the point of taxation would be the date of invoice, the same would be invalid if the payment has not been received within 30 days.

Rule 6: Rule 6 is specifically provided for conditions where a service (which is not a continuous supply of service) is charged to tax for the first time i.e. becomes taxable for the first time. The rule provides that:-

(a)  If an invoice has been issued and payment received before a service becomes taxable, no tax would be charged even if the service is provided after the same has become taxable. This provision is consistent with the other similar provisions in these rules, and ensures that a financial transaction which has achieved finality before a service was taxable shall not be reopened for collection of tax.

(b)  If any payment has been received prior to a service being chargeable to tax, no tax shall be chargeable if an invoice has been issued within 14 days of receipt of payment. The period of 14 days is the period also prescribed in Rule 4A of Service Tax Rules, 1994 and ensures that a payment is not shown as having been made earlier than it was actually made.

(c)  The rule also clearly lays down that any service, which is a not a continuous supply of service, if provided before the service becomes chargeable to tax, shall not be subjected to tax.

Rule 7: Rule 7 deals with the continuous supply of services (eg., construction services, maintenance and repair services etc.), According to the proposed definition in rule 2 of these rules, ‘continuous supply of service’ refers to services that are supplied continuously for a period exceeding six months or services that are specified by the Govt. as continuous supply of services, subject to prescribed conditions, if any.

The proposed rule essentially prescribes that the rate of tax will be the rate applicable on the date the payment becomes due as per the contract, or, if the payment is linked to completion of certain events (milestones), when those milestones are completed. If none of the above two conditions is specified in a long term contract, then the service provider is required to pay the service tax at the time of raising of invoice, or receipt of payment, whichever is earlier.

This rule also provides that if any payment has been received in respect of non-taxable service, before it becomes taxable, the same would not be charged to tax, even if the service is provided subsequently

The only exception in this case pertains to the services in continuous supply of service a part of which is being provided before the service becomes taxable, (i.e the service becomes taxable during the currency of provision of service but payment for which is received after the service becomes taxable). Certain examples of this are

(a)  The payment for construction services is made before the tax becomes applicable but the construction is started after the service becomes taxable.

(b)  Part of the construction is done before the service becomes taxable but payment for the same is received after the service becomes taxable

(c)  Water supply has been made in the month of March & April, the bill is raised in month of May, but the service has become taxable in the month of April

Similar situations can be interpolated in other services which are supplied continuously.

In such cases, tax is liable to be paid on the basis of raising of invoice or the date provided for payment in the contract or the actual payment, as the case may be.. This Rule is drafted keeping in view the fact that the extent of service provided during a particular period of time in continuous supply of the service is difficult to determine.

Further, alternatively, payment received in respect of payments received prior to service becoming taxable, but where the service may be provided subsequently, will also not be taxable.

It has been prescribed that  the clauses of the rule shall be read sequentially. Thus, if there is a date of payment prescribed in the contract, the tax becomes due on that day irrespective of the fact if the payment has been received or not. In case, the date of payment is not prescribed in the contract, but payment is linked to achievement of milestones, then the tax becomes payable even if no payment has been received by the service provider. However, if no date of payment is prescribed in the contract, or if the payment is not linked to achievement of any milestones, then the tax would be payable whenever the service provider issues an invoice, or receives a payment (whichever is earlier).

Rule 8 and 9: Provides for points of taxation for “associated enterprises” and the treatment of royalties and similar payments.

2) In these Rules, unless the context otherwise requires,-

a)      “Act” means the Finance Act, 1994 (32 of 1994);

b)      “ associated enterprises” shall have the meaning assigned to it in section 92 A of the Income Tax Act, 1961 (43 of 1961) ;

c)      “continuous supply of service” means any service which is provided, or to be provided, under a contract, for a period exceeding six months ,or where the Central Government, by a notification, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

d)      “ Invoice” shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan as prescribed therein;

e)      “ Point of taxation” means the point of time when the tax becomes payable to the Government;

f)       “taxable service” means a service which is subjected to service tax, whether or not the same is fully exempt by the Central Government vide powers conferred under Section 93 of the Act;

g)      ‘taxable event” means an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or the receipt of payment.

(Explanatory Notes)

3) For the purposes of these rules, -

a)      A provision of service shall be treated as having taken place at the time when service is provided, or is to be provided.

b)      If, before the time prescribed in sub-rule (a), the person providing the service issues an invoice or receives a payment in respect of service to be provided, the supply shall be, to the extent covered by the invoice or the payment made thereof, deemed to be have taken place at the time the invoice was issued or the payment is received, as the case may be, whichever is earlier.

(Explanatory Notes)

4) Treatment of advances:  Wherever any advance, by whatever name it is known, is received by the service provider towards the provision of taxable service, the tax becomes payable on the date of receipt of each such advance.

Provided that no tax shall be payable on an interest free refundable deposit.

(Explanatory Notes)

5) For the purposes of these Rules, if there is a difference in date and time between the raising of invoice, date of payment and providing of taxable service, and the tax rate changes during such period, the point of taxation shall be determined in the following manner

a)      Where a taxable service has been provided before the change of rate*, but the invoice for the same has been raised and the payment received after the change of rate, the point of taxation shall be the date of payment or issuance of invoice, whichever is earlier.

b)      Where the invoice has been raised and service provided prior to a change in tax rate*, the point of taxation shall be the date of raising of invoice, provided the payment for the invoice is made within 30 days of raising of invoice. In other cases, it would be the date of payment.

c)      Where the invoice has been raised prior to the change of tax rate*, but the service has been provided and the payment for the invoice made after the change in tax rate, the point of taxation shall be the date of payment.

d)      Where the invoice has been raised and the payment for the invoice received before the change of tax rate*, but the service provided after the change of rate, point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier.

*(Note:- change in tax rate includes withdrawal of exemption)

(Explanatory Notes)

6) Where a service, not being a service covered by rule 7 of these rules, is taxed for the first time -

a)      no tax shall be payable to the extent the invoice has been issued and payment received before such service becomes taxable, even if the service is provided at a time when it is taxable;

b)      no tax shall be payable if the payment has been received and invoice has been issued within the period prescribed under rule 4A of the Service Tax Rules, 1994. 

Provided that no tax shall be payable on any service which has been provided before the service becomes taxable.

(Explanatory Notes)

7) Continuous Supply of service:

a)      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 supplied at the following times;

i)       If the date of payment is prescribed in the contract, the date on which the payment is liable to be made by the service receiver, irrespective of whether or not any invoice has been raised or any payment received by the service provider;

ii)      If the payment is linked to the completion of an event, the time of completion of that event;

If the date of payment is not prescribed in the contract, each time when the service provider receives the payment, or issues an invoice, whichever is earlier.

Provided that, for the provision of services covered by this Rule, no tax shall be payable on the payment received before any service becomes taxable, provided that such payment is covered by clause (i) or (iii) above.

Provide further that the clauses (i) to (iii) shall be read sequentially for the purposes of this rule.

(Explanatory Notes)

8) The point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or the date of debit or credit in books of accounts, or issuance of debit or credit notes, whichever is earlier.

(Explanatory Notes)

9)         In respect of royalties and similar payments, where the whole amount of the consideration for the provision of service was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of these service by a person other than the supplier gives rise to any payment of consideration, the service shall be treated as having been provided each time that a payment in respect of such use or the benefit is received by the provider, or an invoice is issued by the provider, whichever is earlier.

(Explanatory Notes)

Explanatory Notes to Draft Point of Taxation Rules

Rule 1:  Preliminary

Rule 2:  Contains the definitions for the Rules.

Rule 3: Provides that the taxable event shall be the provision of service, including future provision. This would mean that the service, even though promised to be provided at a future date, shall be taxable. The rule also lays down that, if the service provider issues an invoice or receives any payment before providing service, the service, to the extent of the amount mentioned in the invoice, or the amount of payment, shall be deemed to have been provided. It means that the service provider shall be liable to pay the tax to the extent of amount mentioned in invoice, or the payment received, even if the service has not been provided at that point of time.

Rule 4: Prescribes that rate of tax applicable in the case of advances received shall be the rate applicable when the advance is received. This essentially clarifies the treatment of advances, and is in line with the provisions in these Rules that the tax payment shall be linked to the issuance of invoice, or the payment received, whichever is earlier. This would bring in certainty that once tax is charged on payment / invoiced amount, such determination of tax would be final & there would be no need to re-open the same. However, interest free deposits shall not be covered within the ambit of this rule.

Rule 5: Determines the point of taxation where there is a change in rate of tax. In other words, it prescribes the applicable of rate of tax in the cases where the tax rate changes between the occurrence of different events, viz., provision of service, issuance of invoice, and receipt of payment. This Rule only covers the change in rate of tax, including any service which was exempt and becomes taxable, and does not cover the services which become taxable for the first time. The provisions of this rule can be summarized in tabular form as shown below (Please note that the words ‘Before’ and ‘After’ mean “before the change in tax rates” or “after the change in tax rates”, as the case may be).

The principle followed in the above rule is that wherever two  points of taxation have occurred, whether before the change in tax rate or after the change in tax rate, the earlier event of the two would be the point of taxation, with the exception of clause (ii), where a deviation has been made. For this clause too, although the point of taxation would be the date of invoice, the same would be invalid if the payment has not been received within 30 days.

Rule 6: Rule 6 is specifically provided for conditions where a service (which is not a continuous supply of service) is charged to tax for the first time i.e. becomes taxable for the first time. The rule provides that:-

(a)  If an invoice has been issued and payment received before a service becomes taxable, no tax would be charged even if the service is provided after the same has become taxable. This provision is consistent with the other similar provisions in these rules, and ensures that a financial transaction which has achieved finality before a service was taxable shall not be reopened for collection of tax.

(b)  If any payment has been received prior to a service being chargeable to tax, no tax shall be chargeable if an invoice has been issued within 14 days of receipt of payment. The period of 14 days is the period also prescribed in Rule 4A of Service Tax Rules, 1994 and ensures that a payment is not shown as having been made earlier than it was actually made.

(c)  The rule also clearly lays down that any service, which is a not a continuous supply of service, if provided before the service becomes chargeable to tax, shall not be subjected to tax.

Rule 7: Rule 7 deals with the continuous supply of services (eg., construction services, maintenance and repair services etc.), According to the proposed definition in rule 2 of these rules, ‘continuous supply of service’ refers to services that are supplied continuously for a period exceeding six months or services that are specified by the Govt. as continuous supply of services, subject to prescribed conditions, if any.

The proposed rule essentially prescribes that the rate of tax will be the rate applicable on the date the payment becomes due as per the contract, or, if the payment is linked to completion of certain events (milestones), when those milestones are completed. If none of the above two conditions is specified in a long term contract, then the service provider is required to pay the service tax at the time of raising of invoice, or receipt of payment, whichever is earlier.

This rule also provides that if any payment has been received in respect of non-taxable service, before it becomes taxable, the same would not be charged to tax, even if the service is provided subsequently

The only exception in this case pertains to the services in continuous supply of service a part of which is being provided before the service becomes taxable, (i.e the service becomes taxable during the currency of provision of service but payment for which is received after the service becomes taxable). Certain examples of this are

(a)  The payment for construction services is made before the tax becomes applicable but the construction is started after the service becomes taxable.

(b)  Part of the construction is done before the service becomes taxable but payment for the same is received after the service becomes taxable

(c)  Water supply has been made in the month of March & April, the bill is raised in month of May, but the service has become taxable in the month of April

Similar situations can be interpolated in other services which are supplied continuously.

In such cases, tax is liable to be paid on the basis of raising of invoice or the date provided for payment in the contract or the actual payment, as the case may be.. This Rule is drafted keeping in view the fact that the extent of service provided during a particular period of time in continuous supply of the service is difficult to determine.

Further, alternatively, payment received in respect of payments received prior to service becoming taxable, but where the service may be provided subsequently, will also not be taxable.

It has been prescribed that  the clauses of the rule shall be read sequentially. Thus, if there is a date of payment prescribed in the contract, the tax becomes due on that day irrespective of the fact if the payment has been received or not. In case, the date of payment is not prescribed in the contract, but payment is linked to achievement of milestones, then the tax becomes payable even if no payment has been received by the service provider. However, if no date of payment is prescribed in the contract, or if the payment is not linked to achievement of any milestones, then the tax would be payable whenever the service provider issues an invoice, or receives a payment (whichever is earlier).

Rule 8 and 9: Provides for points of taxation for “associated enterprises” and the treatment of royalties and similar payments.