An Easy to understand Analysis of Point of Taxation. (By CA.Vikas Khandelwal)

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1 An Easy to understand Analysis Point Taxation (By CA.Vikas Khandelwal) As per Rule 6(1) Service Tax Rules, 1994, service tax shall be paid to the credit the Central Government, by the 5 th (or 6 th if paid electronically), immediately following the calendar month or the quarter (as the case may be) in which the service is deemed to be provided as per the rules framed in this regard. Accordingly, Point Taxation Rules, 2011 has been notified to provide the provisions to determine when the service is deemed to be provided. As per rule 2(e) Point Taxation Rules, 2011, point taxation means the point in time when a service shall be deemed to have been provided. Thus, now, for correctly discharging the monthly/quarterly service tax liability, assessee must know when the service shall be deemed to have been provided. For said purpose, Point Taxation Rules, 2011 (herein after referred to as the rules ) provides different set provisions for 7 cases. Here, we are discussing the provisions for two cases, viz, one time service and continuous supply service for following reasons: (i) These two cases are very important and covers most the transactions for most assesses. Therefore, these cases need special attention. (ii) The subject line Point Taxation is very simple if invoice is issued within 14 days is applicable to these two cases only. (The other five cases shall be discussed in our next mail) 1. Any Provision Taxable Service (for easy reference referred as One time Service ) This is the main category. All services other than followings shall be governed by the provision this category. (i) Continuous supply service ; (ii) Export Services ; (iii) Liability under Reverse Charge Mechanism; (iv) Specified Services taxable on receipt basis (when provided by individuals or proprietary firms or partnership firms); (v) Copy rights, etc. (The rules provide separate set provisions for aforesaid categories) Page 1 11

2 2. Continuous supply service (i)any service which is provided or to be provided continuously under a contract, for a period exceeding three months ; or (ii) Any service notified by central government as continuous supply service. Notification No. 28/2011 dated notifies following services as continuous supply service for the purpose Point Taxation Rules, 2011: (i) Commercial or Industrial Construction Services[Section 65(105)(zzq] (ii) Complex Construction Services [Section 65(105)(zzzh)] (iii) Telecommunication Services [Section 65(105)(zzzx)] (iv) Internet Telecommunication Services [Section 65(105)(zzzv] (v) Services in Execution Works Contract [Section 65(105)(zzzza)] Thus, these five categories services, even if not provided under a contract for a period exceeding 3 months, shall be deemed to be continuous supply services. Determination Point Taxation for One Time Service and for Continuous supply service (Summary Rule 3 & 6 Point Taxation Rules, 2011): Case-I Invoice is issued within fourteen days from the date completion the provision service; the point taxation shall be date Invoice for the service provided or to be provided. However, if payment is received prior to date issue invoice, then the date receipt payment shall be point taxation for the amount payment to the extent received. Case-II Invoice is NOT issued within fourteen days from the date completion the provision service, the point taxation shall be date completion the provision the service However, if payment is received prior to date completion provision service, then the date receipt payment shall be point taxation for the amount payment to the extent received. Page 2 11

3 .. In other words, the point taxation, in this case, shall be earlier the following two dates:.. In other words, the point taxation, in this case, shall be earlier the following two dates: (i) (ii) Date Invoice for the service provided or to be provided ; or Date payment (including advance payment, if any) to the extent it is received prior to issue invoice. (i) (ii) Date completion the provision the service or Date Payment (including advance payment, if any) to the extent it is received prior to date completion the provision the service. Date completion the provision service in case continuous supply service According to Explanation 1 to Rule 6 Point Taxation Rules, 2011, where the provision the whole or part the service is determined periodically on the completion an event in terms a contract, which requires the service receiver to make any payment to service provider, the date completion each such event as specified in the contract shall be deemed to be date completion provision service. Illustration No.2 given herein below may be referred for better understanding date completion the provision the service in case continuous supply service. A policy should be made to issue invoice within 14 days from the date completion the provision service for the following reasons: 1. To simplify manner computation monthly/quarterly Service Tax liability: If invoice is issued within 14 days completion provision service, in such case, only Case 1 discussed hereinabove shall be applicable. In such case, date completion service (which is very difficult to record in books accounts) shall have no role in computation monthly/quarterly liability. Assessee will compute service tax liability by applying following simple formula: Page 3 11

4 Illustration: Computation liability for the month July 11 Amount (i.e. Value services) received during July 11 for the services rendered or invoice issued on or before (Note: Assuming assessee is opting for Point Taxation scheme w. e. f Point Taxation Rules, 2011 has been notified w. e. f However, Assessee has been given an option to opt for point taxation scheme w. e. f ) Add: Value Invoice issued in the month July 11 Add: Advance received during July 11 (Value taxable service portion only) i.e. Advance received*100/100+rate tax Less: Advances (received in July 11 or prior to July 11) adjusted against the invoice issued during July 11 (Value taxable service portion only i.e. Advance received*100/100+rate tax) =Value Taxable Service for the month July 11 on which service tax is payable (This column shall be applicable till the debtors as on is not completely recovered or written f) () (since advance, whenever received, is separately added, therefore, advance adjusted against the invoice issued during the month shall be deducted to avoid double taxation) Similarly, for the month August 11, service tax liability shall be computed as under: Amount (i.e. Value services) received during August 11 for the services rendered or invoice issued on or before Add: Value Invoice issued in the month August 11 Add: Advance received during July 11 (Value taxable service portion only i.e. Advance received*100/100+rate tax) Less: Advance (received in Aug 11 or prior to Aug 11) adjusted against the invoice issued during August 11 (This column shall be applicable till the debtors as on is not completely recovered or written f) () Page 4 11

5 (Value taxable service portion only i.e. Advance received*100/100+rate tax) =Value Taxable Service for the month August 11 on which service tax is payable (Please refer illustration No.1 for better understanding this case) 2. To avoid pre-ponement tax liability and interest thereon: If assessee does not issue invoice within 14 days, it may lead to pre-ponement service tax liability, it can be understood with the help following example: Example: A Market Research agency (hereinafter referred as Firm ) issues a research report on (i.e. research services complete on ). Firm receives the payment on Date Issue Invoice Whether invoice issued within 14 days completion provision service Point taxation Month in which liability falling Situation Yes Invoice date or payment date, whichever is earlier i.e =August 11 Situation No Service completion date or payment date, whichever is earlier i.e =July 11 If invoice is not issued within 14 days from the date completion services, point taxation shall be date completion services. Such date may fall in preceding month as illustrated in above example. Further in such case, liability shall be pre-poned and assessee may have to pay interest if it fails to pay tax within due date. Continuing with above example; Firm completed its services on , but it does not deposit the tax by (i.e. due date for July 11 monthly Page 5 11

6 liability) since the completion provision services is not recorded in books. Now, if assessee fails to issue invoice by (i.e. within 14 days from ), liability will be shifted to date completion service i.e falling in the month July 11. Thus, if invoice is issued within 14 days from the date completion provision service, computation service tax liability will be very easy as assesse will not be required to identify date completion service at the time computation service tax liability. Illustrations on point Taxation Illustration 1: A consulting Engineer firm (hereinafter referred to as firm ) opts for Point taxation w. e. f In other words, prior to , it was depositing the service tax on receipt basis. During the month July 11, it has issued the invoice within 14 days completion provision service. For the purpose computation liability its service tax liability, relevant details are as under: Balances as on : Amount Receivable as on (Current Asset) Advance Received as on (Current Liability) Gross Amount (A) Value portion(i.e. Service A*100/110.3) (A*10.3/110.3) 5,51,500/- 5,00,000/- 51,500/- 10,00,000/- 9,06, , Tax Details for the month July 11 Invoice issued during the month july 11 Advance Received during July 11 Advance adjusted against billing done in July 11 (whether received in july 11 or prior to july 11) Amount Received out receivable standing as on Gross Amount (A) Value portion(i.e. Service A*100/110.3) (A*10.3/110.3) 30,88,400/- 28,00,000/- 2,88,400/- 7,00,000/- 6,34, , ,47,850/- 9,50,000/- 97,850/- 2,97,810/- 2,70,000/- 27,810/- Tax Page 6 11

7 Since all invoices are issued within 14 days from the date completion provision services, we are not required to find instances where invoice are not issued within 14 days. Based on above figures, computation liability shall be as under: Amount (i.e. Value services) received during July 11 for the services rendered or invoice issued on or before Add: Value Invoice issued in the month July 11 2,70, ,00, Add: Advance received during July 11 6,34, Less: Advances (received in July 11 or 9,50, prior to July 11) adjusted against the invoice issued during July 11 =Value Taxable Service for the month July 11 on which service tax is payable 27,54, Service Tax payable 2,83, Illustration 2: ABC & Co. is engaged in providing construction activity. It has entered into an agreement with XYZ & Company to construct a building. Value the contract is Rs.10,00,000/-. As per the terms agreement, ABC shall receive the payment from XYZ as per following schedule: Events % payment Mobilization advance at the time signing the 10% agreement On Completion 20% 16% On Completion 50% 22% On completion 100% 52% Total 100 Page 7 11

8 The actual dates completion are as under: S. No. Events % payme nt 1. Mobilization advance (10%) Amount Due Date completion provision service =Due date for payment Date issue invoice Date receipt payment 10% 1,00,000/ % Completion 16% 1,60,000/ % Completion 22% 2,20,000/ % 52% 5,20,000/ Completion ,00,000/- Point Taxation each invoice/payment shall be as under: 1. Mobilization advance : In this case, there is no date completion provision service. As per explanation 1 to Rule 6 Point Taxation Rules, 2011, where the provision the whole or part the service is determined periodically on the completion an event in terms a contract, which requires the service receiver to make any payment to service provider, the date completion each such event as specified in the contract shall be deemed to be date completion provision service. Here, provision whole or part service is not determined, therefore, there is no date completion provision service. Here, since invoice is not issued within 14 days, point taxation shall be as under: (i) Date completion provision service..not applicable in this case; (ii) Date receipt payment Whichever is earlier? Therefore, point taxation in this case is Thus, liability in respect advance received amounting to Rs.1,00,000/- shall fall in the month July 11. Page 8 11

9 2. 20% Completion: Relevant dates in this case are as under: Date completion Date issue Date receipt Whether invoice provision invoice payment issued within 14 service days from date completion provision service NO Since in this case, invoice is not issued within 14 days from date completion service, point taxation shall be determined as under: (i) Date completion provision service (ii) Date receipt payment Whichever is earlier. Accordingly, point taxation in this case is Thus, liability on 20% completion project amounting to Rs.1,60,000/- shall fall in the month July % Completion: Relevant dates in this case are as under: Date completion Date issue Date receipt Whether invoice provision invoice payment issued within 14 service days from date completion provision service Yes Since in this case, invoice is issued within 14 days from date completion service, point taxation shall be determined as under: (i) (ii) Date issue invoice Date receipt payment Whichever is earlier. Accordingly, point taxation in this case is Thus, liability on 50% completion project amounting to Rs.2,20,000/- shall fall in the month Sept 11. Page 9 11

10 4. 100% Completion: Relevant dates in this case are as under: Date completion Date issue Date receipt Whether invoice provision invoice payment issued within 14 service days from date completion provision service No Since in this case, invoice is not issued within 14 days from date completion service, point taxation shall be determined as under: (i) (ii) Date completion provision service Date receipt payment Whichever is earlier. Accordingly, point taxation in this case is Thus, liability on 100% completion project amounting to Rs.5,20,000/- shall fall in the month Oct 11. It may be noted that, in this case if invoice had been issued on or before (i.e. within 14 days), then liability would have arisen in the month Nov 11. Illustration 3: ABC & Company provides telephone services. It raises its invoice on monthly basis. There is different billing cycle for each customer. The details billing cycle ending in the month August 11 are as under: Customer Billing period Invoice Date payment Name date A to B to C to D to Telephone service is covered under the category Telecommunication Services. As mentioned hereinabove, Telecommunication services have been notified as continuous supply services. Thus, date completion provision service shall be identified in accordance with the provision explanation 1 to Rule 6 Point Taxation Rules, As per said explanation, where the provision the whole or part the service is determined periodically on the completion an event in terms a contract, which requires the service receiver to make any payment to service provider, the date completion each such event as specified in the contract shall be deemed to be date completion provision service. Page 10 11

11 Accordingly, last date billing cycle shall be date completion provision service for each customer. Point taxation in case aforesaid billing shall be as under: Customer Whether invoice issued Method for Name within 14 days from determining date completion point provision service taxation A Yes Invoice date or payment date, whichever is earlier B Yes Invoice date or payment date, whichever is earlier C No completion date or payment date, whichever is earlier D Yes Invoice date or payment date, whichever is earlier Point Taxation August August August 11 Month in which liability falls September 11 Best Regards, CA. Vikas Khandelwal, 610, GD ITL Twin Towers, B-08, Netaji Subhash Place, Ring Road, Pitampura Delhi Ph: , M vkfice2@gmail.com Page 11 11