Rule 7 of Point of Taxation Rules: Reducing the time limit from 6 months to 3 months does not pain m

Rule 7 of Point of Taxation Rules: Reducing the time limit from 6 months to 3 months does not pain much

An article by:-
CA. Pradeep Jain
CA. Preeti Parihar
Manish Bhati

Introduction:-

Point of Taxation means the point in time when a service shall be deemed to have been provided and service tax is required to be paid on that point of time. The provisions related to determination of point of taxation under different situations have been prescribed under a separate set of rules namely the Point of Taxation Rules, 2011. This article revolves round the changes made by budget, 2014 in the Point of Taxation rules pertaining to the most typical concept of service tax law, i.e. the Reverse Charge Mechanism.

Situation prior to Budget, 2014:-
As per Rule 7 of Point of taxation rules 2011 as it existed prior to announcement of budget, where any person receiving the service is liable to pay tax instead of service provider then point of taxation shall,:-

“Where the payment is made within a period of 6 months of the date of invoice then the Point of taxation, be the date on which Payment is made."
Provided that where the payment is not made within a period of 6 months of the date of the invoice then the point of taxation shall be determined as if this rule does not exist and point of taxation shall be determined according to rule 3 of Point of taxation Rules 2011.

According to Rule 3 of point of taxation rules 2011, point of taxation shall be:-

(a) Where Invoice is issued with in specified time period specified in rule 4A of the service tax rules 1994 (Rule 4A of Service tax rules 1994 as produced below) then the Point of taxation shall be the time when the invoice for the service provided or to be provided is issued.

(b) Where invoice is not issued with in specified time period specified in rule 4A of Service Tax Rule 1994, then the point of taxation shall be the date of completion of provision of the service. Rule 4A of Service Tax Rules, 1994 states that the provider of taxable service is required to issue the invoice within 30 days (14 days upto 31.03.2012) from the date of completion of service.
Thus, according to rule 7 of Point of Taxation Rules, 2011 as it stood prior to announcement of budget, the date of payment shall be the Point of taxation provided the payment is made to the service provider within six months from the date of invoice. If there is any failure to make the payment within the 6 months of date of invoice, then the point of taxation shall fall on a back date as per rule 3 of the Point of Taxation Rules, 2011; i.e. the date of invoice or date of completion of service, as the case may be. Thus, failure to make the payment to service provider will take the Point of Taxation to back date and in that case service receiver has to pay service tax along with interest from the date of invoice or date of completion of service upto the date of actual payment.

Situation after Budget, 2014:-
With the announcement of Budget, 2014; Notification No. 13/2014-ST dated 11th July, 2014 has issued to amend the aforesaid rule 7 of the Point of Taxation Rules, 2011. As per amended Rule 7, where any person receiving the service is liable to pay tax instead of service provider then point of taxation shall,:-

“Where the payment is made within a period of 3 months of the date of invoice, be the date on which Payment is made.
Provided that where the payment is not made within a period of 3 months of the date of the invoice then the point of taxation shall be the date immediately following the said period of 3 months.”

Thus, according to new provision, in case of Reverse charge, the point of taxation shall be the date of payment only if the payment is made within three months of the date of invoice. If the payment is not made within three months from the date of invoice, the point of taxation shall be the date just after the expiry of this period of three months. For eg. the date of issue of invoice is 1.8.2014. If the payment is made on or before 31.10.2014, the point of taxation shall be that date. However, if no payment is made upto this date, the point of taxation shall be 1.11.2014. The service tax for this point of taxation has to be paid upto 5.12.2014. If the payment is made after this date, say on 9.1.2015; the interest will be required to be paid for the period from 5.12.2014 to 9.1.2015.

Transitional Provision:-
The switching over to new rule has been facilitated by inserting a new rule 10 to Point of Taxation Rules, 2011 as a transitional provision. This rule has been inserted vide the notification no. 13/2014-ST and it reads as follows:-

“10. Notwithstanding anything contained in the first proviso to rule 7, if the invoice in respect of a service, for which point of taxation is determinable under rule 7 has been issued before the 1st day of October, 2014 but payment has not been made as on the said day, the point of taxation shall,–
(a) if payment is made within a period of six months of the date of invoice, be the date on which payment is made;
(b) if payment is not made within a period of six months of the date of invoice, be determined as if rule 7 and this rule do not exist.”

The analysis of this rule makes it ample clear that if an invoice for the service covered under Reverse charge has been issued before 1.10.2014; the point of taxation shall be determined according to rule 7 as it existed before the issuance of notification no. 13/2014-ST. Thus, the old provisions will continue to be applicable and the new provision will be applicable for the invoices issued after this notification comes into force, i.e. from 1.10.2014.

Winding up:-

Amendment in the rule 7 of the Point of Taxation Rules, 2011 gives somewhat relief, in respect of payment of interest, to defaulter service receivers; who do not make payment of invoice within prescribed period. The old provision shifted the point of taxation to the earlier date in case of failure to pay the invoice within a period of six months. This attracted huge amount of interest which will substantially reduce with the amended provision. Though the time limit for making the payment to service provider has been halved, yet the relief from payment of interest from back date is a welcome step looking to the fact that this budget has drastically increased the interest rates in case of delay in payment of service tax.

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Rule 7 of Point of Taxation Rules: Reducing the time limit from 6 months to 3 months does not pain m

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