Payment terms in PO & CENVAT eligibility - new order
AUGUST 06, 2014
By Raman Venkat, CA
THE recent budget amendment in bringing upper time limit of 6 months in availing CENVAT is effective from 1st of Sep 2014. Meaning,post 1st of September no CENVAT on any invoice dated prior to 28th Feb 2014 and in Oct 2014 No CENVAT on invoices issued prior to 31st March 2014 so on and so forth.
Before we discuss on what would be the ideal payment terms in a PO for service including import of service and services on which partial reverse charge is applicable, let us see the legal position as on date in point of taxation and under CENVAT credit rules.
Point of taxation helps us to find out when exactly service tax is payable. The domestic service provider shall pay service tax on his own and pass it on to Service receiver through CENVAT invoice. However, when it comes to import of service and services on which partial reverse charge is applicable, service receiver is obligated to determine when exactly service tax is payable as the obligation to pay off service tax lies with service receiver.
A careful reading of the Point of Taxation provision would reveal the fact that if any payment is made to vendor after 3 months, same would attract interest liability obviously with penalty for not discharging tax on due date.
This is the starting point where a compulsion is created in the law to have payment terms within 3 months from the date of raising invoice on service procurement.
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CENVAT CONDITIONS
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SCENARIOS
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Normal service tax /ED/CVD
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Partial reverse charge
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Import of service (Full reverse charge )
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Lower Time Limit
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Avail CENVAT on receipt of invoice
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Condition
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NA
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On payment of service tax
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On payment of service tax
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Restriction 1
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Service tax should be paid within 3 months from the date of invoice
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NA
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Restriction 2
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Service value should be paid within 3 months from the date of invoice
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NA
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Consequences of not meeting restriction 1 & 2
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Reverse the credit at the end of 3rd month and take back on payment
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NA
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Upper time limit
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6 months from invoice date
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6 months from invoice date
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6 months from invoice date
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What happens if vendor is paid after 6 months
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NO credit
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NO credit
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No credit
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The time frame and obligation for availing CENVAT creditis given in simple terms in the aforesaid table.
The relevant dates prescribed in the CENVAT credit rules are given for all the 3 scenarios, remember service tax and excise duty shall be paid by service provider if services/goods are procured domestically. However for other two scenarios, service receiver will pay service tax directly to Govt.
In all the 3 cases, the moment invoices are accounted in the books of accounts credit can be availed. Here the assumption is that accounting of invoice happens as early as possible from the invoice date, say a week or10 days.
Whether service tax payment is mandatory to qualify credit taken, the answer is yes, in the normal case where service provider discharges service tax and under reverse charge and partial reverse charge, payment of service tax must be paid by service recipient.
The credit availed must be reversed if domestic vendor and vendors where partial reverse charge is obligated is not paid for value of service and service tax within 3 months.
However such a restriction is not made when it comes to import of services.In this regard, please note that though there is no condition under CENVAT rules that vendor shall be paid within 3 months for import of service, the due date for discharging service tax liability under point of taxation rules obligates payment to vendor within 3 months from the date of invoice.
The credit reversed can be taken back if payment is made to vendor well within 6 months from the date of invoice or to say 3 months from reversal of credit.
However, whatever may be the reason there will not be any credit if payment to vendor is made after 6 months from invoice date.
To conclude, the payment terms in service PO shall be ideally 3 months to discharge service tax liability as per point of taxation rules and may extend up to 6 months so as not to lose CENVAT eligibility but definitely not beyond 6 months at any cost.
(The author is Senior Manager - Indirect Taxes - Wipro Limited.)
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