Revised Service tax rate 14% applicable from June 1: Practical Implication
After the Hon’ble President has given assent to the Finance Bill, 2015 on Thursday, May 14, 2015, the Ministry of Finance, Department of Revenue vide Notification No. 14/2015-ST dated May 19, 2015 has notified increase in the rate of Service tax from 12.36% to flat 14% (Including Education Cess and Secondary & Higher Secondary Education Cess) to be effective from June 1, 2015. The extract of notification is reproduced hereunder:
“In exercise of the powers conferred by clauses (a), (c) and (f) of section 107, section 108, sub-sections (2), (3) and (4) of section 109, section 153 and section 159 of the Finance Act, 2015 (No. 20 of 2015), the Central Government hereby appoints the 1st day of June, 2015 as the date on which the provisions of clauses (a), (c) and (f) of section 107, section 108, sub-sections (2), (3) and (4) of section 109, section 153 and section 159 of the said Act shall come into force.”
With the new Service tax rate becoming effective from June 1, 2015, the much debated topic among the Trade on the presently applicable rate of Service tax would definitely come to an end but there are chances of protest being faced by the service provider in respect of the ongoing transactions for which either certain advance payment is received prior to June 1, 2015 but the completion of provision of service may take place post facto thereof or vice versa.
To understand the issues further, it is appropriate here to have an overview of the Point of taxation as governed under the Point of Taxation Rules, 2011 (“the POT Rules”).
With the introduction of the POT Rules,Service tax payment is made on accrual basis in terms of the provisions contained under the POT Rules. The general Rule 3 of the POT Rules stipulates that Point of taxation shall be the earlier one among raising of invoice or date of making the payment. Further, if the invoice is not raised within 30 days(45 days for Banking and financial services) from the date of completion of provision of service, Point of taxation shall be the date of completion of provision of service.
Thus, by applying the provisions of Rule 3 of the POT Rules, the service provider would be liable to pay Service tax on the advance payments received at the prevailing rate of 12.36%. However, the service provider may encounter the issue of adjusting this payment of tax for increase in Service tax rate after wards when the service will be provided and invoice will be raised for the services rendered, for which advance has been received already. This issue is discussed in detail hereunder.
Point of taxation involving change in effective rate of tax is governed by Rule 4 of the Point of Taxation (POT)Rules, which provides for determination of Point of taxation when there is change in effective rate of tax (hereinafter referred as “the change”) as mentioned in the table below:
|S. No.||Taxable services have been provided||Invoice is issued||Payment received||POT shall be||Applicable rate|
|1||Before the change||After the change||After the change||Date of issuance of invoice or Date of receipt of payment,whichever is earlier||14%|
|Before the change||After the change||Date of issue of invoice||12.36%|
|After the change||Before the change||Date of payment||12.36%|
|2||After the change||Before the change||After the change||Date of payment||14%|
|Before the change||Before the change||Date of receipt of payment or date of issue of invoice, whichever is earlier||12.36%`|
|After the change||Before the change||Date of issue of invoice||14%|
Now based on above discussion, some practical scenario can be resolved as under:
|Case No||Service rendered||Invoice issued||Payment Made||Tax rate|
|Case 1||Up to 31.05.15||Up to 31.05.15||Up to 31.05.15||12.36%|
|Case 2||Up to 31.05.15||After 31.05.15||After 31.05.15||14%|
|Case 3||Up to 31.05.15||Up to 31.05.15||After 31.05.15||12.36%|
|Case 4||Up to 31.05.15||After 31.05.15||Up to 31.05.15||12.36%|
|Case 5||After 31.05.15||Up to 31.05.15||Up to 31.05.15||12.36%|
|Case 6||After 31.05.15||After 31.05.15||After 31.05.15||14%|
|Case 7||After 31.05.15||Up to 31.05.15||After 31.05.15||14%|
|Case 8||After 31.05.15||After 31.05.15||Up to 31.05.15||14%|
Thus, problem may be faced by service provider in case advance payment is received but services are actually provided on or after 01.06.15. In this case service provider is liable to collect differential amount of service tax from service receiver and deposit the same to central government.