Budget 2012: Applicable Rate of Service Tax
Union
Budget 2012, announced on March 16, 2012, has proposed a sizable
quantum of amendments for the service industry. The entire regime of
taxation has been proposed to be shifted from ‘positive list' to
‘negative list' (with effect from such date as the Central Government
may, by notification, appoint). However, the major challenge, currently,
faced by the industry is on account of the change in the rate of
service tax from 10% to 12% with effect from April 1, 2012. The change
in rate, coupled with certain legislative changes regarding the
determination of applicable rate, point of taxation, date of payment,
has created a lot of confusion among the service providers, regarding
the rate at which service tax should be charged on, in different
scenarios, like:
+
Contracts being entered into during the current period that is prior to
April 1, 2012, for services to be provided/ consideration to be
received subsequent to April 1, 2012, or
+
Contracts for services to be provided prior to April 1, 2012 where the
payment would be received subsequent to April 1, 2012, or
+ Continuing contracts executed prior to April 1, 2012
and also the mechanism for discharge of service tax liability.
In
relation to the period prior to April 1, 2011, the provisions relating
to determination of rate of tax applicable on a service transaction were
absent from the Service Tax Laws. Accordingly, the practice adopted by
the service industry was to charge service tax at the rate in force
during the period when the service was provided. This practice found
support from the judicial pronouncements issued in relation to the
relevant period. There were, however, disputes in relation to
determination of the date of provision of service, in particular, in the
case of continuing services, where the invoicing is done on a
periodical basis.
The
Finance Act 2011, vide Notification No. 3/2011 dated April 1, 2011
introduced Rule 5B in the Service Tax Rules, 1994, which provided that
the rate of tax applicable on a transaction shall be "the rate prevailing at the time when the services are deemed to have been provided under the rules made in this regard".
Accordingly, the Point of Taxation Rules, 2011 (‘the POT Rules'), were
introduced stipulating ‘when a service would be deemed to have been
provided' (termed as ‘point of taxation' in terms of the POT Rules). In
terms of the POT Rules, in case of a change in the effective rate of
tax, the point of taxation and the corresponding applicable rate could
be determined in two different scenarios, as follows:
Scenario 1: Taxable services are provided before the change in effective rate of tax, i.e. April 1, 2012:
|
Situation
|
Date of Issuance of Invoice
|
Date of Payment
|
Point of Taxation
|
Applicable Rate
|
|
A
|
April 6
|
April 1
|
April 1
|
New Rate (12%)
|
|
B
|
March 15
|
April 15
|
March 15
|
Old Rate (10%)
|
|
C
|
April 15
|
March 15
|
March 15
|
Old Rate (10%)
|
Scenario 2: Taxable services are provided after the change in effective rate of tax, i.e. April 1, 2012:
|
Situation
|
Date of Issuance of Invoice
|
Date of Payment
|
Point of taxation
|
Applicable Rate
|
|
A
|
March 20
|
March 31
|
March 20
|
Old Rate (10%)
|
|
B
|
March 15
|
April 15
|
April 15
|
New Rate (12%)
|
|
C
|
April 15
|
March 15
|
April 15
|
New Rate (12%)
|
The above tables could be summarized for each of the situations as follows:
+ If the service has been provided prior to the date of change in rate, then,
the new rate would be applicable only in the situation when both the
date of issuance of invoice as well as the date of payment is subsequent
to the date of change in rate.
+ If the service has not been provided prior to the date of change in rate, then,
the old rate would be applicable only in the situation when both the
date of issuance of invoice as well as the date of payment is prior to
the date of change in rate.
Further,
Situation B under Scenario 2 gives rise to a practical challenge,
wherein the invoice, when issued prior to April 1, 2012, would reflect
the rate of 10%. However, the point of taxation would be April 15, 2012,
when the payment is received. Consequently, the service tax liability
would be required to be discharged at the rate of 12% as liability for
the month of April 2012. The service providers, in such a scenario,
would be required to issue a supplementary invoice for differential
service tax at the rate of 2% in the month of April 2012.
Position after the Union Budget 2012:
A
complexity has arisen by virtue of an amendment to the POT Rules, by
insertion of Rule 2A w.e.f. April 1, 2012 (vide Notification No. 4/2012
dated March 17, 2012), which stipulates what constitutes the ‘date of
payment'.
Summary of the propositions of Rule 2A:
Generally,
the date of payment would be the earlier of the date on which the
payment is entered in the books of accounts or is credited to the bank
account of the service provider. However, in case where,
+ the service provider receives the payment for services by way of an instrument like cheque, demand draft etc.,
+ records the payment in the books of accounts prior to the change in rate of tax (viz. by March 31, 2012), and
+ the amount is credited in his bank account after four working days of change in rate of tax (viz. after April 5, 2012),
then,
the ‘date of payment' shall be the date of credit of amount in the bank
account, instead of the date of recording the payment in the books of
accounts.
Accordingly,
the position which emerges in relation to the increase in rate, from
10% to 12%, w.e.f. April 1, 2012 is as follows:
+
If the service has been provided prior to April 1, 2012, then, the rate
of 10% would be applicable when either of the date of issuance of
invoice or date of payment (or both) is prior to April 1, 2012. In the
latter case (viz. date of payment prior to April 1, 2012 and date of
issuance of invoice on or after April 1, 2012), it must be ensured that
where the payment is recorded in the books of accounts (of the service
provider) on receipt of the cheque/ demand draft upto March 31, 2012,
the same should be credited in the bank account by April 5, 2012. In all
the other cases, tax rate of 12% would be applicable
+
If the service has not been provided prior to April 1, 2012, then, the
rate of 10% would be applicable only in the situation when both the date
of issuance of invoice as well as the date of payment is prior to the
date of change in rate. Again, it should be ensured that where the
payment is recorded in the books of accounts (of the service provider)
on receipt of the cheque/ demand draft upto March 31, 2012, the same
should be credited in the bank account upto April 5, 2012. In all the
other cases, tax rate of 12% would be applicable.
+
Further, where the invoice has been raised charging service tax @ 10%
in relation to the services to be provided after April 1, 2012 and the
payment has not been received till March 31, 2012 (or April 5, 2012 in
specific scenario covered by Rule 2A of the POT Rules), then the service
provider would be required to issue a supplementary invoice charging
the differential service tax @ 2% during the month in which the payment
is received.
With
simultaneously proposed amendments, such as the insertion of Section
67A in the Finance Act, 1994, and the deletion of Rule 5B of the Service
Tax Rules, 1994, the interpretation issues are on the upswing.
Accordingly, the assessees would be required to monitor not only the
contracts/ agreements but also the invoices/ payments/ receipts, till
suitable clarifications are issued by the department.
Source:TIOL
