'Date of Payment' in case of Rate Change/New Levy

“Date of Payment” in case of Rate change/New Levy

Prepared By:
CA Pradeep jain
CA Preeti Parihar
Ankit Palgauta

Point of Taxation Rules, 2011 have been reviewed in Budget, 2012. A new rule has been inserted after rule 2, namely rule 2A which specifies the date of payment. This rule says that for the purpose of these rules, the date of payment will be EARLIER of the following:-

i. Date of entering payment in the books of accounts; or
ii. Date of credit in bank account of person liable to pay service tax.

Normally, date of receipt of cheque is the date when the payment is recognised in books of accounts. However, in the cases where the date of credit in bank account is before, for eg., in case of direct credit via internet banking, that date will be considered as date of payment irrespective of the fact that this is recognised later on in the books of accounts.

However, as per proviso to this section, the date of payment will be the “date of credit in bank account” in the following cases –

(i) If 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 and its credit in the bank account; and

(ii) If the credit in the bank account is after four working days from the date when there is change in effective rate of tax or a service is taxed for the first time; and

(iii) The payment is made by way of an instrument which is credited to a bank account,

Further, if any rule requires determination of the time or date of payment received, the expression “date of payment” shall be mean such date on which the payment is received. This rule have major implications in case of export of services and eight specified services provided by the individual or firms where the POT is the date of payment.

The point of taxation in such cases has been determined as date of payment, as such rate applicable on that date will be applied. This creates problems in the cases where the invoice is already raised and payment is received after a lapse of certain time. Since the point of taxation is receipt of payment, the rate applicable on that date will be considered and service tax will be paid accordingly.

Now, what about the fact that the bill is already raised and service tax has been recovered at the rate prevalent at the time of raising the invoice. However, at the time when the payment was received, the service tax rate is increased. Service provider will be required to pay service tax at the increased rate. But who will bear the incidence of this increased tax rate? Obviously the service provider as the transaction was already over from the side of service recipient when he issued the cheque/ made the payment. Now he will not bother about the increase in rate of tax, as such, ultimately the service provider will have to bear the loss.

Now, government has inserted rule 2A according to which date of credit in bank account will be seen if there is rate change. This has made the situation even more complicated. Suppose, the services were provided and invoice was raised in the month of February when the rate of service tax was 10%. As such, bill was raised with this rate. However, the cheque is received on March, 31. However, the date when the cheque is cleared is falling in the month of April when the service tax rate has gone up to 12%. According to Point of Taxation Rules, the service tax is to be paid @ 12% as point of taxation in this case is date of credit in bank account. Now who will bear the incidence of additional 2%? The service provider will suffer because he doesn’t have power to rectify the anomalies in the rules.

It is worthwhile to mention here that determining the point of taxation on the basis of receipt of payment is itself not justified. It has been held by hon’ble High Court in the case of COMMR. OF C. EX. & CUS., VADODARA-II Versus SCHOTT GLASS INDIA PVT. LTD. [2009 (14) S.T.R. 146 (Guj.)] that under service tax law, the taxable event is always linked to providing of service. The verdicts of hon’ble High Court are as under:-

“Import of Services - Liability of recipient - Taxable service rendered between November 2001 and March 2002 - Liability cannot be fastened on recipient of service merely because invoiceraised and payment made after 16-8-2002- Taxable event occurred already and raising of invoicesand/or making payment cannot be considered as taxable event - Rule 2(1)(d)(iv) of Service TaxRules, 1994 not applicable retrospectively to services rendered prior to 16-8-2002 - Impugned Tribunal order sustainable - Substantial question of law absent - Sections 65(105) and 66 of Finance Act, 1994 - Rule 2(1)(d)(iv) ibid. [paras 2, 4, 5]

Taxable event - Service tax- Taxable event is whether realization of payment for taxable services rendered or rendering of services - Service taxlevied on all taxable services provided on or after commencement of relevant chapter of Finance Act, 1994 - Taxable event is providing taxable services as defined in Section 65(105) ibid - Raising invoiceand/or making payment cannot be considered taxable event- Neither Section nor Rule suggest that taxable event is raising of an invoicefor making payment - Sections 65(105) and 66 ibid - Rule 2(1)(d)(iv) of Service TaxRules, 1994. [paras 1, 4]”

Therefore, the linking the taxable event to the date of receipt of payment or date of credit of payment in the bank account is against the provisions of Finance Act, 1994. This analogy is reiterated by hon’ble Tribunal in the following case –

· CCE, Trichy Vs Sri Ramajayam Transport [2011-TIOL-920-CESTAT-MAD]

Service Tax - Demand of short payment of service tax - Rate of service tax applicable is the rate prevailing on the date of rendering the service - The impugned order is silent on the claim of the respondents that they have paid excess service tax - Matter remanded: CHENNAI CESTAT;

Thus, the above referred provisions of Point of taxation rules are ultra vires the scheme of Finance Act, 1994. This is also an unfavourable provision from the point of view of person liable to pay tax. This is a critical provision and needs further review.

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'Date of Payment' in case of Rate Change/New Levy

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