MARCH 20, 2015

By Mukund Abhyankar, CA

BUDGET 2015-16 has proposed an Increase in the rate of service tax from 12% to 14% and abolishment of Education cess & Secondary & Higher Secondary education cess and new Swachh Bharat cess of 2% to increase Service Tax rate from present 12.36% to 16%.

The rate of Service Tax is being increased from 12% to 14% & like Excise Duty now there will not be any cess on Service Tax, from a date yet to be notified. Notification for change in rate of service tax and cess is still awaited.

In addition to this change in basic rate,a new cess called as Swachh Bharat Cess is proposed to be charged on all or any of the taxable services at a rate of 2% on the value of such taxable services from a date yet to be notified.

With these two changes service tax rate would go up to 16% from present rate of 12.36%.

It is also clear that till these notifications are issued, service tax shall continue to be levied @ 12.36% comprising of Basic 12% and 0.36% as cesses.

In view of impending increase in service tax rate, payment of tax on advances received for which services which are yet to be rendered is a matter of great concern to many a service providers.

Service providers need guidance as to at what rate tax is to be recovered on the advance payments considering the possibility that when service will be provided and invoice for that service will get raised the rate might increase by 4% and customer at that point of time may not make the payment of differential tax.

To answer these concerns we have to analyse legal provisions in this respect provided under Point of Taxation Rules.

Relevant provisions of these Rules are reproduced below.

Point of Taxation Rules,2011

Point of Taxation : [Rule 2(e)]

"Point of Taxation" mean the point in time when a service shall be deemed to have been provided.

Rule 3:Determination of point of taxation

For the purposes of these rules, unless otherwise provided, 'point of taxation' shall be-

the time when the invoice for the service provided or agreed to be provided is issued

[Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, (i.e within 30 days or in some cases within 45 days of completion of service), the point of taxation shall be date of such completion of provision of the service.]

in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Explanation .- For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.].

Rule 4: Determination of point of taxation in case of change in effective rate of tax .

Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax in respect of a service, shall be determined in the following manner, namely:-

In case a taxable service has been provided after the change in effective rate of tax-

where the payment for the invoice is also made after the change in effective rate of tax, but the invoice has been issued prior to the change in effective rate of tax, the point of taxation shall be the date of payment; or

where the invoice has been issued and the payment for the invoice received before the change in effective rate of tax, the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or

where the invoice has also been raised after the change in effective rate of tax, but the payment has been received before the change in effective rate of tax, the point of taxation shall be date of issuing of invoice.

Following points of guidance emerge from above about applicable rate of service tax in respect advances which will be received before rate changes and in respect of which advances service provision and billing therefor may take place before or after such rate range.

Conclusion

Existing rate of Service Tax is 12.36%, and the date of revision of service tax rate will be declared by Notification issued for that purpose.

Service Tax liability is determined by Point of Taxation Rules,2011. As per Rule 3 of Point of Taxation Rules,2011 service will be taxable at the time of issue of invoice or provision of service or receipt of payment, whichever is earlier.

Since advance payment is made when the rate stands at 12.36% the tax has to be paid on advance at current rate of 12.36%.

However this payment of tax will need to be adjusted for increase in service tax rate afterwards when the service will be provided and invoice will be raised for the service for which advance has been received already.

In my opinion query about advances received when the rate in force is 12.36% is covered by Rule 3 &Rule 4(b) of POT rules. Payment at current rate of 12.36% is already dealt with under Point 3 above. To the extent of payment of tax at differential rate (16% minus 12.36%), applicable rate of tax for such advance upon considering provisions of Rule 4(b)will be determined as follows.

Where invoice is raised before rate changes, the rate of ST in respect of advance shall remain to be 12.36% (Rule 4(b) (i) & (ii)) & no differential payment will be necessary.

Where invoice is raised after the rate changes, the rate for the service value received in advance shall be 16% (Rule 4(b) (iii) ) and differential tax (16% minus 12.36%) will have to be paid at the time of such invoice.

In view of above,liability for tax rate increase in respect of advances received shall depend upon whether service provider has raised invoices for such advances and if so at what date (before or after change of rate).

A clarification as to whether Swacch Bharat Cess will be considered as part and parcel of service tax for POT Rules is, however, needed to avoid confusion about liability under this Cess for advances received prior to the date of applicability of such cess.