Services rendered to the associate enterprises – Amendment for removal of doubts or creation of doubts
AS per Rule 6 (1) of the Service Tax Rules, 1994, the service tax shall be paid by 5th /6th day of the month immediately following the calendar month in which the payments are received towards the taxable services. Every service provider was paying service tax on the amounts received and there was no doubt regarding the provisions in the rules. This rule has been amended vide Notification 19/2008-Service Tax, Dated: May 10, 2008 by inserting the following explanation:
“Explanation - For the removal of doubts, it is hereby declared that where the transaction of taxable service is with any associated enterprise, any payment received towards the value of taxable service, in such case shall include any amount credited or debited, as the case may be, to any account, whether called ‘Suspense account' or by any other name, in the books of account of a person liable to pay service tax.”
The purpose of this amendment was explained vide TRU Circular dated 29-2-2008 as:
6.1 Service tax is levied at the rate of 12% of the value of taxable services (section 66). Section 67 pertaining to valuation of taxable service for charging service tax states that value shall be the gross amount charged for the service provided or to be provided and includes book adjustment. As per rule 6 of the Service Tax Rules, 1994, service tax is required to be paid only after receipt of the payment.
6.2 It has been brought to the notice that the provision requiring payment of service tax after receipt of payment are used for tax avoidance especially when the transaction is between associated enterprises. There have been instances wherein service tax has not been paid on the ground of non-receipt of payment even though the transaction has been recognized as revenue/expenditure in the statement of profit and loss account for the purpose of determining corporate tax liability.
6.3 As an anti-avoidance measure, it is proposed to clarify that service tax is leviable on taxable services provided by the person liable to pay service tax even if the amount is not actually received, but the amount is credited or debited in the books of account of the service provider. In other words, service tax is required to be paid after receipt of payment or crediting/debiting of the amount in the books of accounts, whichever is earlier. However, this provision is restricted to transaction between associated enterprises. This provision shall also apply to service tax payable under reverse charge method (Section 66A) as taxable services received from associated enterprises. For this purpose section 67 and rule 6(1) are being amended.
So, the amendment was not to remove any doubts, which never existed, but only to recover service tax in respect of transactions between the associated enterprises without waiting for the receipt of money. But while doing so, they seem to have created few fresh doubts instead of removing the unexpected doubts.
While the associated enterprises will pay service tax on the bills/debit notes raised/or on making debit/credit entries, with effect from 10.5.2008, the field formations are insisting payment of service tax on the outstanding balance on 10.5.2008 by holding that the same is payable on 10.5.2008 itself. Their view is that no service tax should be pending as on 10.5.2008 on the ground of “non-realisation” of amount billed.
If this view is accepted, it implies that the amendment has retrospective effect and if it is so, then since 1994, the service tax becomes payable on the date of raising the bill/debit notes and the service providers will have to pay the interest from the date of billing to the date of realization since 1994.
Why do they endeavour to create doubts instead of removing them? Who will rein in the officers demanding instantaneous payment of tax on huge amounts outstanding as on 10.5.2008? Will someone take the issue a bit seriously and remove the doubts in the amendment made to remove the doubts?