Rule 6 of Service Tax Rules goes for major revamp – Payment of service tax is no longer only after payment received

By TIOL News Service

NEW DELHI, FEB 28, 2011: RULE 6 appears to be the center of attraction of this budget. Rule 6 of the CENVAT Credit Rules as well as Rule 6 of the Service Tax Rules have gone for major changes.  Till now service tax is payable only on receipt of payment for the services rendered. Rule 6 of the Service Tax Rule reads:

(1) The service tax shall be paid to the credit of the Central Government,-

(i) by the 6th day of the month, if the duty is deposited electronically through internet banking; and

(ii) by the 5th day of the month, in any other case,immediately following the calendar month in which the payments are received, towards the value of taxable services:

Netizens may recall that earlier draft rules  for determination of point of Point of Taxation (for Services Provided or Received in India) Rules 2010 were made public eliciting feedback. Now these Rules have been notified and will be effective from  1st April 2011. Not only that, the concept of “ deemed to be provided as per these rules framed in this regard” has been substituted in many places in Service Tax Rules 1994. A significant amendment is made to Rule 6 of the Service Tax Rules 1994 which may bring a sea change in the payment of service tax. The new rule reads:

(1) The service tax shall be paid to the credit of the Central Government,-

(i) by the 6th day of the month, if the duty is deposited electronically through internet banking; and

(ii) by the 5th day of the month, in any other case,immediately following the calendar month in which the service is deemed to be provided as per the rules framed in this regard

The effect of this amendment is that the monthly tax liability has to be determined as per the rules notified according to which service shall be deemed to be provided at the earliest of the following three

1. Date on which service is provided or to be provided

2. Date of invoice

3. Date of payment

However, this important amendment to rule 6 has not been explained in the JS(TRU) letter and interestingly, the FM in his budget speech mentioned:

Adoption of Point of Taxation rules for services which would shift the basis for tax collection from “cash” towards “accrual” basis as with Central Excise duty.

So lot of changes are going to take place from 1st April 2011 in service tax collection.