POINT OF TAXATION RULES SERVICE TAX UPDATED FEB 2012

Point of taxation means the point in time when a service is deemed to have been provided. The point of taxation enables determination of the rate of tax,value of taxable service, rate of exchange and due date for payment of service tax. Payment of service tax, since its inception in the year 1994, had been linked with the receipt of consideration of the services. However, Point of Taxation Rules, 2011 introduced with effect from 01.04.2011, have brought a paradigm shift in the point of taxation of services.

Payment of Service Tax

Vide Notification No.3/2011-ST dated 1st March, 2011, Rule 6 of the Service Tax Rules, 1994 was Amended w.e.f. 1st April, 2011 whereby the service tax liability was required to be discharged by the service provider by 

• 5th of the month immediately Following the calendar month/quarter in which the service was deemed to be provided as per the Point of Taxation Rules,2011.
• In case the service tax is paid electronically through internet banking, the due date shall be 6th of the following month/quarter.
• In respect of payments towards taxable services received in the month/quarter of March, the due date for payment of service tax shall be 31st March.

Effective date for Point of Taxation Rules

The Point of Taxation Rules (POTR), 2011 have been notified w.e.f. 1st April,2011 vide Notification No.18/2011-ST dated 1st March, 2011 as amended by Notification No.25/2011-ST dated 31st March, 2011,. 

The Point of Taxation Rules, 2011 were optional for the service providers till 30th June, 2011. The POTR, 2011 were made mandatory w.e.f. 1st July, 2011

Determination of Point of Taxation (Rule 3)

• Point of taxation shall be the time when invoice for service provided or agreed to be provided is issued. 
• In case the invoice is not issued within the time period specified in Rule 4A of the Service Tax Rules, 1994, point of taxation shall be the date of the completion of such service. 
• In case service provider receives payment before issuance of invoice or completion of service, the point of taxation shall be the receipt of payment to the extent of such payment.

S. No.	Date of completion of service	Date of invoice	Date on which payment received	Point of taxation	Remarks
1	April 10, 2011	April 20, 2011	April 30, 2011	April 20, 2011	Invoice  issued  in 14     days     and before receipt of payment
2	April 10, 2011	April 26, 2011	April 30, 2011	April 10, 2011	Invoice      not issued within 14 days       and payment received after    completion of service
3	April 10, 2011	April 20, 2011	April 15, 2011	April 15, 2011	Invoice  issued  in 14 days but payment received before invoice
4	April 10, 2011	April 26, 2011	April 5, 2011 (part) and April 25, 2011 (remaining)	April 5, 2011 and April 10, 2011 for respective amounts	Invoice            not issued      in      14 days.              Part payment    before completion, remaining later

Note: w.e.f 1st April, 2012, the time period for issuance of an invoice specified in Rule 4A of the Service Tax Rules, 1994 has been increased from 14 days to 30 days from the date of completion of service or receipt of any payment towards the value of such taxable service, whichever is earlier.
In case service provider is banking company or a financial institution including NBFC, the time period has to be read as 45 days.


Completion of service 

CBEC vide Circular No.144/13/2011-ST dated 18th July, 2011 has clarified the term “Completion of Service” to mean that all the other auxiliary activities such as measurement, quality testing etc. besides the physical part of providing prime service also to be completed, which enable the service provider to be in a position to issue an invoice. However, such auxiliary activities shall not be flimsy or irrelevant grounds for delay in issuance of invoice.

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 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.

Rule 2(c) of POTR defines “Continuous supply of service” to mean any service which is provided, or agreed to be provided continuously or on recurrent basis, under a contract, for a period exceeding 3 months with the obligation for payment periodically or from time to time or where the Central Government, by a notification in the official gazette prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition.

CBEC vide Notification No. 38/2012-ST dated 20th June, 2012 has amended Notification No.28/2011-ST dated 1st April, 2011 and substituted following services as “continuous supply of service” for the purpose of Point of Taxation Rules, 2011 w.e.f. 1st July, 2012:

• (i) Telecommunication services
• (ii) Service portion in the execution of works contract

Rule 3 further provides that wherever the provider of taxable service receives a payment upto Rs 1,000/- in excess of the amount indicated in the invoice,the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of Rule 3(a) of POTR, 2011.

In case the service provider receives any advance towards provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Date of payment

For the purpose of POTR, 2011, 

“date of payment” shall be the earlier of the dates on which the payment is entered in the books of accounts or is credited to the bank account of the person liable to pay tax.

The “date of payment” shall be the date of credit in bank account when:

• there is a change in effective rate of tax or when a service is taxed for the first time during the period between such entry in books of accounts & its credit in the bank account; and
• the credit in the bank account is after four working days from the date when there is a change in effective rate of tax or when a service is taxed for the first time; and
• the payment is made by way of an instrument which is credited to a bank account.

If any rule requires determination of the time or date of payment received,the term “date of payment” shall be construed to mean such date on which the payment is received.

In Case of Change in Rate of Tax (Rule 4)

Rule 2(ba) of POTR, 2011 defines “change in effective rate of tax” to include a change in portion of value on which tax is payable in terms of a notification issued under the provisions of Finance Act, 1994 or rules made there under. Notwithstanding anything contained in Rule 3 of POTR, 2011, Rule 4 of POTR, 2011 provides that in case of a change of rate of tax in respect of service, point of taxation will be determined in the following manner:

Provision of Service	Issuance of Invoice	Payment	Point of Taxation	Applicable Rate of Service Tax
Before change of rate	After change of rate	After change of rate	Date of invoice or payment, whichever is earlier	12%
	Before change of rate	After change of rate	Date of invoice	10%
	After change of rate	Before change of rate	Date of payment	10%
After change of rate	Before change of rate	After change of rate	Date of payment	12%
	Before change of rate	Before change of rate	Date of invoice or payment, whichever is earlier	10%
	After change of rate	Before change of rate	Date of invoice	12%

Note: For the purpose of above illustrations, the rate of service tax is presumed at 10% before change of rate & the same is presumed at 12% after change of rate.

CBEC vide Circular No 162/13/2012-ST dated 6th July, 2012 has clarified that point of taxation in respect of taxable works contract in progress on 1st July, 2012 would be determined as per the provisions of Rule 4 as if there is change in effective rate of tax. It is clarified that following would be considered as “change in effective rate of tax” in respect of a works contract:

1. The change in the portion of total value liable to tax in respect of works contract other than original works [The Works Contract Composition Scheme, 2007 has been omitted w.e.f. 1st July, 2012 thereby service tax payable under Composition Scheme @ 4.8% on the total value of contract till 30th June, 2012 is now required to be discharged @ effective rate of 7.2 % of the value of works contracts (12% of 60% of value of total amount charged for works contract)].
2. Exemption granted to certain works contracts w.e.f. 1st July, 2012 .which were earlier taxable.
3. Taxability of certain works contracts which were hitherto exempted.
4. Change in the manner of payment of tax from composition scheme under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 to payment on actual value under clause (i) of rule 2A of the Service Tax (Determination of Value) Rules, 2006.

It is also clarified that following would not be considered as “change in effective rate of tax” in respect of a works contract:

• (i) Works contracts earlier paying service tax @ 4.8% under composition scheme and now required to pay service tax @12% on 40% of the total amount charged, keeping the effective rate again same at 4.8% (as only the manner of expression has been altered).
• (ii) Works contracts which were outside the scope of taxation (and not merely exempted) but have become now taxable e.g. construction of  residential complex comprising of 2 to 12 residential units, construction of buildings meant for use by NGOs etc. (Rule 5 of the Point of Taxation Rules, 2011 shall apply to such services.)

It has been clarified by the CBEC vide their Letter F.No. 341 /34/2010-TRU dated 31st March, 2011 that change in rate of abatement or any other notification issued, altered, or amended and which has the effect of change in taxability, if any, of the service will also be construed as change in effective rate of tax.

Section 67A-Date of determination of rate of tax, value of taxable service and rate of exchange

The rate of service tax, value of taxable service and rate of exchange shall be the rate of service tax, value of taxable service and rate of exchange as applicable when the taxable service has been provided or agreed to be provided. “Rate of exchange” means the rate of exchange referred to in Section 14 of Customs Act, 1962

In Case of Service Taxed for the First Time (Rule 5) 

When a service is taxed for the first time, no service tax is payable:

• • in case invoice as well as payment are received against such invoice before such service became taxable;
• in case payment is received before such service became taxable & the service provider has issued invoice within the period of 14 days of the date when such service is taxed for the first time. The time limit of issuing bill, invoice is raised to 30/45 days in Rule 4A of The Service Tax Rules,1994, however there is no corresponding amendment thereto in POT Rules. The provisions of Rule 5 are explained with an example here below.

The services of cricket commentators are made liable to service tax w.e.f. 1st July, 2012. In a case where payment is made to the commentator on or before 30th June, 2012 for which invoice is raised on or before 14th July, 2012, no service tax would be payable in view of Rule 5 of POTR, 2011 inspite of the fact that the match for which the commentator is giving his services is scheduled on or after 1st July, 2012 i.e., at the time when the services are liable for service tax.

Rule 5 covers only two issues which are specifically mentioned  above. Any other situation shall be covered under the general rule, i.e., rule 3. For example, in case where the date of invoice and the date of completion of service is before the service became taxable but the payment has been received after the date the service became taxable then as per rule 3, the POT shall be the date of issuance of invoice or receipt of payment, whichever is earlier.

In Case of Specified Services (Rule 7)

Rule 7 provides that notwithstanding anything contained in these Rules,

• POT shall be the date on which payment is received or made, as the case may be, in respect of persons required to pay tax as recipients of service in respect of services notified under section 68(2) for reverse charge mechanism (Rule 7)2 
• In respect of services notified under section 68(2) where payment is not made within a period of 6 months of the date of invoice, 
• the point of taxation shall be the Time when invoice for service provided or agreed to be provided is issued.
• In case the invoice is not issued within the time period specified in Rule 4A of the Service Tax Rules, 1994, point of taxation shall be the date of the completion of such service.
• In case of associated enterprises where the person providing the service is located outside India, the point of taxation shall be the date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

CBEC vide Circular No.154/5/2012-ST dated 28th March, 2012 has clarified that in respect of invoices issued on or before 31st March, 2012, the point of taxation in respect of specified taxable services rendered by individuals/proprietary firms/partnership firms shall be the date of receipt of payment as provided by erstwhile Rule 7 of the Point of Taxation Rules, 2011. The specified taxable services are:

i) Architects [Section 65(105)(p)]

ii) Interior Decorators [Section 65(105)(q)]

iii) Practising Chartered Accountants [Section 65(105)(s)]

iv) Practising Cost & Works Accountants [Section 65(105)(t)]

v) Practising Company Secretaries [Section 65(105)(u)]

vi) Scientific & Technical Consultancy [Section 65(105)(za)]

vii) Legal Services [Section 65(105)(zzzzm)]

viii) Consulting Engineer Services [Section 65(105)(g)]

CBEC vide Circular No.158/9/2012-ST dated 8th May, 2012 has clarified that since the point of taxation in respect of 8 specified taxable services rendered by individuals/proprietary firms/partnership firms shall be the date of receipt of payment, service tax is required to be paid @12.36% in respect of invoices raised before 1st April, 2012 for which payment is received after 1st April, 2012. The service provider may issue supplementary invoice to recover the differential amount of service tax which would be eligible as CENVAT credit to service recipient subject to fulfillment of various conditions prescribed under the CENVAT Credit Rules, 2004.

The above circular has been quashed as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011 by the Delhi High Court in the case of Delhi Chartered Accountants Society (Regd) v. Union of India and ors. W.P. (C) 4456/2012 & C.M. No. 9237/201. The Delhi High Court has held that the Point of Taxation Rules, 2011 have the force of law and the circulars have to be in conformity with the Act and the Rules and if they are not, they cannot be allowed to govern the controversy. It is well-settled that a Circular which is contrary to the Act and the Rules cannot be enforced.

In Case of Royalties (Rule 8)

In respect of royalties & payments pertaining to copyrights, trademarks, designs or patents, 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 deemed to have been provided each time when 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.

Point of Taxation to the Best of Judgment (Rule 8A)

Rule 8A gives powers to the Central Excise Officer to determine the point of taxation to the best of his judgment in cases where the point of taxation cannot be determined as per POT Rules, 2011 as the date of invoice or the date of payment or both are not available. In such cases, the Central Excise Officer is required to give the concerned person opportunity of being heard before passing such order in writing.

Transitional Provisions (Rule 9)

The provisions of these rules are not applicable in case where provision of services is completed or invoices are issued prior to 1st April, 2011. In case  where provision of services is completed or the invoices are issued prior to 30th June, 2011, the point of taxation, at the option of taxpayer, shall be the date on which the payment is received or made, as the case may. 

By :Committee on Indirect Tax of ICAI