How to deal with change in service tax rate
New service tax rate of 14% is effective from June 1, 2015. This article is intended to provide you with insights of how to deal with change in rate and which scenarios old rate shall prevail and when a new rate has to be applied. Few of the practical questions posed could be as under:
- What if invoice is issued before the change of rate but payment is received after the change in rate. Which rate needs to be applied?
- What should be the rate applied in case service is provided before the change in rate and invoice is issued after the change in rate?
- What if both invoice is issued and service is provided before the rate change but payment is received after the rate change. Which rate needs to be applied?
As per Section 67A of the Finance Act, 1994 The rate of service tax, value of a taxable service and rate of exchange, if any, shall be taken as the rate/value in force or as applicable at the time when the taxable service has been provided or agreed to be provided.
In order to understand the point at which the service is said to have been provided, it would be relevant to read the definition of Point of Taxation as per Rule 2(e) “point of taxation” means the point in time when a service shall be deemed to have been provided. This implies that one has to go to Point of Taxation Rules, to ascertain as to when the service is been provided to determine the rate of tax as per Section 67A
However the point of agreeing to provide the service cannot be determined as per the point of taxation rules and when as service can be said to have been agreed to be provided, whether on receipt of the advance or on the entering to mere agreement to provide the service can be called as the point of agreed to be provided would be an area, which could lead to varied interpretation and lead to litigation.
Further Rule 4 of Point of Taxation Rules, 2011 lays down guiding principles to identify the point of taxation, i.e. the point when the service is deemed to be provided specifically in case of change in rate of service tax. The initial portion again requires an assumption that the service is provided before the change in rate. This leads to an anomaly, since we are reading rule 4 to understand when the service is deemed to be provided, where as the rule state that if the service is provided before/after the change in rate, which has not been clarified.
The reference of service being provided before/after the change in rate needs to be understood in common parlance, which may be considered as completion of the service (delivered all the deliverable of a service contract) and if the same is continuous supply service, then the same can be considered as to that extent of the service which has been provided upto the agreed mile stone.
Discussed below are various changes and its treatment in a tabular form for ease of understanding:
|Service completed||Invoice issued||Payment received||Rate to be considered.|
|Before the change in rate of tax||After the change in rate of tax||After the change in rate of tax||14%|
|Before the change in rate of tax||Before the change in rate of tax||After the change in rate of tax||12.36%|
|Before the change in rate of tax||After the change in rate of tax||Before the change in rate of tax||12.36%|
|After the change in rate of tax||Before the change in rate of tax||After the change in rate of tax||14%|
|After the change in rate of tax||Before the change in rate of tax||Before the change in rate of tax||12.36%|
|After the change in rate of tax||After the change in rate of tax||Before the change in rate of tax||14%|
From the above we can understand that there are 3 events as under:
- Date of provision of service;
- Date of issue of invoice; and
- Date of payment.
Anomaly in existence:
On interpretation of Section 67A, which is supreme to the rule the rate needs to be adopted when the service was provided and the receipt of the consideration and the raising of invoice is irrelevant for this purpose, however Rule 4 of the POTR, 2011 states 2 out the three events which was discussed in our previous article shall be relent to determine the rate of tax.
If one has to go with section 67A then it to be made sure that there is a proper documentation in place to prove the service was provided prior to rate change and also intimate this fact to department. To avoid dispute and one can also examine to issue the Invoice prior to 01.06.2015 for all the completed service.
This situation has arisen perhaps because the POT Rules were notified in 2011 and the Section 67A was inserted in 2012. We may expect some clarification to be issued by the Board in this regard with proper illustrations so that the transition to the new rate is smooth.
In our upcoming article we will discussed above point in detail and further how we can plan of service tax bill make our services more cost effective and competitive.