Budget 2012: Applicable Rate of Service Tax

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