Point of Taxation Rules and CENVAT Credit Rules - Logic behind making few provisions in these rules needs clarification from CBEC
WE received the following from a concerned netizen.
Industry is obliged to FINMIN for restoration of provision under Point of Taxation Rules 2011 for payment of Service Tax by recipient of services under reverse charge method only after making payment to the Service Provider vide Notfn No 25/2011-ST dated 31.3.2011.
Operation of the provision introduced earlier under Point of Taxation Rules 2011 vide Notfn No 18/2011-ST dtd 1.3.2011 for discharging service tax under reverse charge method on the basis of “date of receipt of Invoice” would have been great nightmare for the recipient of services.
However the second PROVISO inserted in newly amended rule 7 of Point of Taxation Rule may become controversial. The said proviso is reproduced below
“Provided further that in case of services referred in clause (b) where the payment is not received within the period of six months of the date of Invoice, the point of taxation shall be determined as if this rule does not exist.”
As per this Proviso, if service recipient does not pay to the service provider within six months, he would be under statutory obligation to pay service tax on the Invoices raised by foreign vendor / GTA etc [covered under the notification issued Sec 68(2)] from the date of Invoice and if Invoice is not issued within 14 days of completion of services, the date of completion of such service. Admittedly such payment will be considered as delayed payment beyond six months as the liability to pay service tax would start from retrospective effect i.e. from the date of Invoice or date of completion of service.
On the above background, following are some of apprehensions in the field.
++ Said sub-rule (7) of POT Rules is silent as to whether such delayed payment of service tax beyond six months period from the date of Invoice or from the date of completion of service will attract interest till the actual date of payment of such tax by recipient of services?
++ Any payment of Interest on delayed payment of service tax if payable by service receiver because of this PROVISO , it will be additional transaction cost to Industry without any CENVAT benefit.
++ Interest is a penal provision and unintentionally this penalty appears to be cast on the recipient of services for no fault of his.
++ Six months time limit for payment to foreign vendor appears to have been borrowed from RBI guidelines for import of goods and services. However what could be logic in going back to date of Invoice / date of completion of Service for Point of Taxation purpose when RBI will take its course for delayed payment beyond six months.
++ What is logic for fixing this six months time limit under this sub-rule (7) for making payment to domestic service provider i.e. GTA covered under 68(2) when there are no RBI limits for making payments to domestic service providers? In that case what is the logic also in incorporating three months time limit under rule 4(7) of Cenvat Credit Rules for making payment of value of services?
++ There appears to be discrimination between Export of Services and Import of Services under the said rule as far the period of payment / receipt of value of services is concerned.
++ What is logic in making discrimination between selective service providers specified under clause (c) by providing them option to pay service tax on receipt of payment basis?. There could be many small service providers under other categories who also now got burdened of payment of service tax from his pocket on Invoicing basis irrespective whether he receives /realizes money from recipient in time.
++ There is one more provision made under Cenvat Credit rule 4(7) prescribing three months time limit for payment to service provider. Logic behind this provision is also not understood for the following reasons.
Service tax is now payable by service provider on the basis of date of Invoice / completion of service if Invoice is not issued within 14 days or receipt of payment which ever is earlier. Accordingly a corresponding provision is also made in Cenvat Credit Rule 4(7) permitting credit availment of input services on or after the date of receipt of Invoice by recipient of the services for the obvious reasons.
Therefore when on one side Government will get Service Tax in the exchequer on due date from Service provider, there will be no corresponding impact on exchequer when CENVAT credit of service tax is availed by recipient as per rule 4(7) after receipt of such Invoice. However, what is the logic in providing THREE MONTHS time limit in the said rule 4(7) for making payment to service provider and if payment is not made within three months, then CENVAT is required to be reversed. Therefore when one side exchequer has already received Service tax from service provider will it not be a case of “Unjust Enrichment” on the part of Government when CENVAT credit of such tax already paid to exchequer is again recovered from recipient on the ground that he has not paid the value of services to the service provider? Although provision of restoration of such credit is made in the CCR once the payment of value of services is made to service provider, but till such time Government will be unjustly enriched to the extent benefit of interest on such Cenvat recovered under rule 4(7) beyond three months period.
Non payment of value of services and service tax thereon as indicated in Bill to the service provider will be a matter of commercial dispute between two parties but why Government wants to become party to this dispute by bringing this provision is not understood when they have already received the tax in exchequer.
Will CBEC like to clarify on these aspects which appears to be difficult to operate.