WIRC INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Workshop on Service Tax Subject : 1. Point of Taxation Rules, 2011 - amended till date 2. Reverse Charge Mechanism [Section 68(2)] 3. Amendments in Service Tax Rules, 1994 Date : Saturday, July 7, 2012 Venue Faculty Email ID : M. C. Ghia Hall, Kalaghoda, Mumbai : CA Naresh K. Sheth : nksheth25@gmail.com / nksheth@vsnl.com N. K. SHETH & COMPANY 1 Preamble Presentation covers the major amendments in Service tax legislation through the Finance Act, 2012 in respect of: Point of Taxation Rules, 2011 Reverse Charge Mechanism [Section 68(2)] Service Tax Rules, 2004 Amendments effective from dates mentioned in Finance Act / Notification: Enactment date 28.05.2012 Notified date 01.07.2012 Commencement of F.Y. 01.04.2012 Reference to following in presentation would mean: Act Finance Act, 1994 STR Service Tax Rules, 1994 POTR Point of Taxation Rules, 2011 N. K. SHETH & COMPANY 2 1
POINT OF TAXATION RULES, 2011 ( POTR ) AS AMENDED BY NOTIFICATION NO.4/2012- SERVICE TAX DATED 17 MARCH,2012 N. K. SHETH & COMPANY 3 POTR Basics Point of Taxation Rules ( POTR ) prescribes the point of taxation Point of Taxation ( POT ) means the point of time when service shall be deemed to have been provided (occurrence of taxable event) [Rule 2(e)] Due date for tax payment linked with POT (Rule 6(1) of Service Tax Rules) Pre POTR, tax obligation was on realization of consideration (Cash basis) Post POTR, tax obligation generally arises on accrual or realization of consideration, whichever is earlier (subject to few exceptions) Does POTR is in consonance with legislative intent to bring it at par with VAT or Excise Duty in view of impending GST enactment? N. K. SHETH & COMPANY 4 2
POT Reverse Charge Mechanism (Rule 7) POT for following services in respect of which service recipient is obliged to pay tax under reverse charge mechanism U/s 68(2) / Rule 2(1)(d) shall be the date of payment: Nature of Service Service provider Service recipient Insurance auxiliary business Insurance agent Any person carrying on insurance business GTA services Goods transport agent Specified persons paying freight Sponsorship Services Any person Any body corporate or partnership firm located in taxable territory Arbitration services Arbitral tribunal Business entity located in taxable territory Legal services Individual advocate / firm of advocates Business entity located in taxable territory N. K. SHETH & COMPANY 5 POT Reverse Charge Mechanism (Rule 7) Nature of Service Service provider Service recipient Support services excluding (1) renting of immovable property (2) Postal services (3) Services in relation to an aircraft or vessel (4) Transport of goods or passengers Rent-a-cab Supply of manpower for any purpose Works contract Any service (popularly known - Import of service) Government or local authority Any individual, HUF, firm or partnership firm including AOP located in taxable aabee territory oy Person in non-taxable territory Business entity located in taxable territory Business entity registered as a body corporate Person in taxable territory Where payment for service is not made within period of 6 months of date of invoice, POT shall be determined as per General Rule (Rule 3) N. K. SHETH & COMPANY 6 3
POT Transaction with Associated Enterprises (Rule 7) In case where service provider is located outside India and is an associated enterprise of service recipient, POT will be earlier of (Proviso to Rule 7): Date of payment Date of debit in books of account of person liable to pay tax This Proviso does not apply to an Indian service provider providing service to associated enterprise located in or outside India Associated Enterprise has the meaning assigned to it in Section 92A of Income Tax Act, 1961 (Section 65(7b) of Act) Relationship to be seen on which date? Rule 7 overrides all other Rules of POTR Rule 3 General Rule (discussed in slide 9) Rule 8 Royalty, Patents, Copyright, Trademarks (discussed in slide 8) Rule 4-Change in tax rate (discussed in slide 15) N. K. SHETH & COMPANY 7 POT Copyright etc. (Rule 8) This exception is carved out for Copyrights Trademarks Designs Patents Royalty What about Franchise services? This Rule applies where: Whole consideration not ascertainable when services performed; and Usage by / benefit to service recipient gives rise to payment obligation In above referred cases, POT would be earlier of [Rule 8]: Date of issue of invoice Date of receipt of consideration by service provider Whether this Rule will be redundant in case where service provider is associated enterprise? N. K. SHETH & COMPANY 8 4
POT General Rule (Rule 3) General rule applies to cases not falling under: Rule 4 - Change in tax rate Rule 5 - Where the service is taxed for the first time Rule 7 - Liability under reverse charge mechanism - Transactions with associated enterprises Rule 8 - Transactions for copyright, patents, trademarks or design In general, POT would be earlier of [Rule 3]: Date of issue of invoice where invoice is issued within 30 days from completion of service Date of completion of service where invoice is not issued within 30 days from completion of service Date of receipt of consideration (including receipt of advance) Continuous supply of service falls under General Rule w.e.f. 01.04.2012 N. K. SHETH & COMPANY 9 POT General Rule (Rule 3) Where service provider receives a payment upto Rs. 1,000/- in excess of the amount indicated in the invoice, POT for such excess amount, at the option of the service provider, shall be earlier of date of issue of invoice, or date of completion of service, where invoice not issued within 30 days Amendment vide Notification No 37/2012-ST dated 20.06.2012 Where service provider opting receipt as POTR in respect of an amount of Rs. 1,000/- in excess of the amount indicated in the invoice, no invoice is required to be issued to such an extent N. K. SHETH & COMPANY 10 5
Meaning of Continuous Supply of Service Continuous supply of service would mean [Rule 2(c) of POTR]: Services provided/agreed to be provided continuously, or recurrent basis, Under a contract for a period exceeding 3 months With the obligation for payment periodically or from time to time Any service notified as continuous supply of service Notification No. 38/2012-ST dated 20.06.2012 notifies following services as continuous service : Telecommunication Service Service portion of Works Contract N. K. SHETH & COMPANY 11 Meaning of Completion of Service Date of completion of continuous service would be completion of an event which requires service receiver to make payment as per contract. Completion is not defined/explained in POTR except continuous service In terms of Circular No 144/13/2011-ST dt. 18.07.2011 completion means: completion of all other auxiliary / related activities that place the service provider in a situation to be able to issue an invoice Such auxiliary activities could include activities like measurement, quality testing etc which may be essential pre-requisites for identification of completion of service This interpretation of completion of services also applies to continuous supply of service Circular puts the caveat that auxiliary activities should not be flimsy or irrelevant Circular may not achieve desired purpose due to such caveat N. K. SHETH & COMPANY 12 6
Circular Explaining General Rule TRU Circular No.F.No.341/34/2010-TRU dated 31.03.2011 explaining applicability of POTR in regular cases: Completion Invoice Payment Point of of service date received Taxation Remarks 16.07.11 26.07.11 06.08.11 26.07.11 Invoice issued in 30 days and before receipt of payment 16.07.11 18.08.11 21.07.11 16.07.11 Invoice not issued within 30 days and payment received after invoice date 16.07.11 26.07.11 21.07.11 21.07.11 Invoice issued in 30 days but payment received before invoice 16.07.11 18.08.11 11.07.11 (part) and 21.07.11 (remaining) 11.07.11 and 16.7.11 for respective. Amounts Invoice not issued in 30 days. Part payment before completion, remaining later. N. K. SHETH & COMPANY 13 POT New Services (Rule 5) New services (other than continuous service), not liable to tax if (Rule 5): Invoice raised and payment received before effective date; or Payment received before effective date and invoice raised within 30 days from effective date Effective date would mean notified date on which Services become taxable Consider following example: Hotel Accommodation Service is taxable w.e.f. 01.05.2011. Hotel opts for POT from inception (i.e. 01.05.2011) A person stays in hotel from 16.04.2011 to 10.05.201105 Hotel makes bill / guest makes payment on check out (i.e. 10.05.2011) In terms of above Rule, service tax is payable on entire billing though the service was not taxable for the period 16.04.2011 to Is this proposition legally tenable? N. K. SHETH & COMPANY 14 7
POT In case of change in Tax Rate (Rule 4) Provision of service Before rate change Before rate change Before rate change 30.09.2011 30 09 2011 Date of Invoice Date of payment POT / Effective tax rate on POT date 02.05.2011 Before rate change 30.09.2011 Before rate Change Before rate change 30 04 2011 30.05.2012 30.05.2012 Before rate change 30.05.2012 Before rate change 30 04 2011 Invoice date or payment date, whichever is earlier 02.05.2011 Date of invoice Date of payment Date of payment 30.05.2012 Invoice date or payment date, whichever is earlier 30.09.2011 date, whichever is earlier 30.09.2011 Is it fair and legally correct to modify POT in case of change in tax rates? Circular No 158/9/2012-ST dated 08.05.2012 is in consonance with Rules? 30.09.2011 Before rate change Date of invoice 30.09.2011 N. K. SHETH & COMPANY 15 Determination Of Tax Rate, Value Of Taxable Services And Exchange Rate [Section 67A] w.e.f. 28.05.2012 Following prevailing on the date of provision of service / receipt of advance will be relevant for discharging service tax liability: Tax rate Value of taxable services Exchange rate. Subsequent change in any of above would not alter service tax liability at later date. Whether Rule 4 of POTR is inconsistent with above referred provision? The exchange rate would mean the rate of exchange referred to in the Explanation to Section 14 of the Customs Act, 1962. N. K. SHETH & COMPANY 16 8
Insertion of New Rules POTR Vide Notification No 4/2012-ST dated 17.03.2012 w.e.f. 01.04.2012 Rule Pre-amendment Position Post-amendment Position Rule 2A Date --- Earlier of: of Payment Date on which payment is entered in the books of accounts, or Date on which payment is credited to the bank account of the person liable to pay tax Rule 8A POT in other cases --- Where POT cannot be determined as the date of invoice or the date of payment or both are not available, the Officer shall by an order in writing, after giving an opportunity of being heard, determine POT to the best of his judgment N. K. SHETH & COMPANY 17 REVERSE CHARGE MECHANISM [Section 68(2)] N. K. SHETH & COMPANY 18 9
Reverse Charge Mechanism w.e.f. 01.07.2012 Usually, Service provider is liable to Service tax. In certain cases, Service recipient is obliged to discharge service tax liability. This is popularly known as Reverse Charge Mechanism Government derives power to collect Service tax from recipient under: Section 68(2) of the Finance Act, 1994 Rule 2(1)(d) of Service Tax Rules, 1994 Reverse Charge mechanism Applicability will depend on: Nature and description of Service Status of Service Provider Status of Service Recipient Finance Act, 2012 brings concept of Partial Reverse Charge mechanism obligating discharge of Service Tax liability: Partially by Service recipient Partially by Service provider N. K. SHETH & COMPANY 19 Reverse Charge Mechanism Notification No. 30/2012- ST dated 20.06.2012 w.e.f. 01.07.2012 Description of Service Liability of Service Provider Liability of Service Recipient Insurance Agents NIL 100% Goods Transport Agencies for transportation of goods by road to specified person (person liable to pay freight treated as service recipient) NIL 100% Sponsorship provided to partnership firm/corporate entity NIL 100% Services Provided by Arbitral Tribunal to business entity NIL 100% Services Provided by Individual Advocates or a firm of advocates by way of legal services to a business entity NIL 100% Rent-a-Cab (where abatement is availed) provided by Non-corporate entity to corporate business entity not in a similar line of business Rent-a-Cab (where abatement is not availed) provided by Non-corporate entity to corporate business entity not in a similar line of business NIL 100% 60% 40% N. K. SHETH & COMPANY 20 10
Reverse Charge Mechanism Notification No. 30/2012- ST dated 20.06.2012 w.e.f. 01.07.2012 Description of Service Liability of Service Provider Liability of Service Recipient Supply of Manpower for any purpose provided by Non- 25% 75% corporate entity to corporate business entity Works Contract Service provided by Non-corporate entity to corporate business entity Support service by Government / Local Authority to business entity excluding (1) renting of immovable property (2) Postal services (3) Services in relation to an aircraft or vessel (4) Transport of goods or passengers Services provided by a person in non taxable territory to a person located in taxable territory (popularly know as import of service) 50% 50% NIL 100% NIL 100% N. K. SHETH & COMPANY 21 Reverse Charge Mechanism Some Issues Whether Service provider is obliged to disclose total service tax payable in his Invoice? Where Service provider is not liable to Service tax, whether Service receiver is liable to discharge the tax obligation? If yes, whether full tax or part of tax is to be paid by him? Where one of the parties do not discharge its obligation, whether full tax can be recovered from other party? Whether Service recipient can choose valuation method (especially in case of works contract service) different than that of Service provider? Whether Service provider (discharging partial liability) entitled to claim full Cenvat? Whether Service provider is entitled to refund in case where Cenvat exceeds his tax liability? N. K. SHETH & COMPANY 22 11
Reverse Charge Mechanism Some Issues Whether Service recipient is entitled to Cenvat in respect of tax paid by him under Reverse Charge Mechanism in following situations: Service recipient is a manufacturer of excisable goods Service recipient is provider of taxable services Service recipient is below threshold limit liable to excise / service tax Service recipient is a trader Whether Service recipient can discharge Service tax liability under Reverse charge mechanism from accumulated Cenvat balance? Whether Service recipient can claim Cenvat of Input / Capital Goods / Input Services pleading that he is assessee paying service tax? Whether Service provider and Service recipient have to discharge their respective service tax liability on the same point of time? N. K. SHETH & COMPANY 23 Reverse Charge Mechanism Some Issues Whether phrase Manpower Supply for any purpose is wide enough to cover security, house keeping, retainership services etc.? Whether Service recipient is obliged to pay Service tax under Reverse Charge mechanism in respect of Invoice issued by Service provider before 30.06.2012 charging Service tax? Whether Service recipient can avail threshold exemption in respect of services on which tax to be paid under Reverse Charge mechanism? Whether Service recipient (who is not liable to Excise or Service tax) is obliged to: Obtain Service tax registration File the Service tax returns N. K. SHETH & COMPANY 24 12
MAJOR AMENDMENTS IN SERVICE TAX RULES, 1994 THROUGH NOTIFICATION NO. 3/2012-ST DATED 17.03.2012 AND 36/2012-ST DATED 20.06.2012 06 2012 N. K. SHETH & COMPANY 25 Change in Tax Rates w.e.f. 01.04.2012 Notification 3/2012-ST Alternate / Optional Rates (excluding education cess) Service Rule Up to 31.03.2012 From 01.04.2012 Life Insurance 6(7A) - First year Premium 150% 1.50 300% 3.00 - Renewal Premium 1.50 % 1.50 % Promotion, Marketing and organizing Lottery - Guaranteed Prize Payout less than 80% 6(7C) Rs.6,000 for every Rs. 10,00,000 Rs.7,000 for every Rs. 10,00,000 - Guaranteed Prize Payout more than 80% Rs.9,000 for every Rs. 10,00,000 Rs.11,000 for every Rs. 10,00,000 Air Travel Agents - Domestic bookings - International bookings Rule 6(7) 0.60% 1.20% 0.60% 1.20% N. K. SHETH & COMPANY 26 13
Change in Tax Rates w.e.f. 01.04.2012 Notification 3/2012-ST Service Rule Up to 31.03.2012 From 01.04.2012 Foreign Exchange 6(7B) Dealing - Up to Rs.1,00,000 0.1% (Minimum of Rs.25) 0.12% (Min. of Rs.30) - Rs.1,00,001 to Rs.10,00,000 - Above Rs.10,00,000 Rs.100 + 0.05% of excess over Rs.1,00,000 Rs.550 + 0.01% of excess over 10,00,000 (Max of Rs.5,000) Rs. 120 + 0.06% of excess over Rs.1,00,000 Rs.660 + 0.12% of excess over 10,00,000 (Max of Rs.6,000) N. K. SHETH & COMPANY 27 Service Tax Rule 6A and Notification 39/2012-ST Exporter of Services will be entitled to refund (rebate) of Input service tax used in providing export of services Notification No 39/2012-ST dated 20.06.2012 Any service provided/agreed to be provided shall be treated as export of service when: Service provider is located in the taxable territory Service recipient is located outside India Service is not a service specified in Negative list (i.e. Section 66D) Place of provision of the service is outside India Consideration for such service is received in convertible foreign exchange; and The service provider and service recipient are not merely establishments of a distinct person N. K. SHETH & COMPANY 28 14
Procedural Amendments Extension of Time limit for issuance of invoice (w.e.f 01.04.2012): For banking and financial institutions 14 days to 45 days For other service providers 14 days to 30 days Discharge of service tax liability on accrual to realization basis / vice versa (w.e.f 01.04.2012) Individuals / firms and LLP having turnover of taxable services of Rs.50 Lakhs or less in immediately preceding financial year. Realization basis irrespective of nature of services. Individuals / firms and LLP having turnover of taxable services of more than Rs.50 Lakhs in immediately preceding financial year. Service providers other than Individuals / firms and LLP Accrual basis irrespective of nature of services. Provider of professional services will also be covered. Accrual basis irrespective of nature of services. N. K. SHETH & COMPANY 29 Procedural Amendments Adjustment of excess payment of service tax (w.e.f 01.04.2012): Monetary limit of Rs.2 Lakhs removed and adjustment allowed without any monetary limit Requirement of intimating such adjustment to jurisdictional superintendent is omitted Partnership firm to include Limited Liability Partnership (LLP). This provides clarity on due date for tax payment and whether to pay service tax on accrual / realization basis by LLP (w.e.f 01.04.2012) N. K. SHETH & COMPANY 30 15
Words of Caution Views expressed are the personal views of faculty based on his interpretation of law Application/implications p of various provisions will vary on facts of the case and law prevailing on relevant time Contents of this presentation should not be construed as legal or professional advice This is an educational meeting arranged with clear understanding that Faculty will not be responsible for any error, omission, commission and result of any action taken by participant or anyone on the basis of this presentation N. K. SHETH & COMPANY 31 THANK YOU N. K. SHETH & COMPANY 32 16