Service Tax - 10% or 12%? - Delhi HC quashes Two CBEC Circulars
WITH effect from 01.04.2012, the rate of service tax was enhanced to 12% from 10%. As per Rule 7 (c) of the Point of Taxation Rules, 2011, in case of 8 specified services provided by the individuals or proprietary firms or partnership firms, the Point of Taxation shall be the date on which payment is received or made, as the case may be.
This Rule has been amended vide Notification No 4/2012 ST dated 17.03.2012, effective from 01.04.2012. The effect of the amendment is that under the new Rule 7 of the POT Rules, the point of taxation is date of receipt of payment only for the service tax payable under reverse charge, i.e., under Section 68(2) of the Finance Act, 1994.
Then, what happened to the 8 specified services provided by the individuals, firms etc? Actually, the "facility of treating the date of receipt of payment" as point of taxation has been extended from 8 services to all the services provided by individuals, partnership firms, or proprietary firms having turnover of less than 50 lakhs in a Financial Year, by simultaneously inserting a proviso in Rule 6(1) of the Service Tax Rule, 1994w.e.f. 01.04.2012 as under:
Provided also that in case of individuals and partnership firms whose aggregate value of taxable services provided from one or more premises is fifty lakh rupees or less in the previous financial year, the service provider shall have the option to pay tax on taxable services provided or to be provided by him up to a total of rupees fifty lakhs in the current financial year, by the dates specified in this sub-rule with respect to the month or quarter, as the case may be, in which payment is received.”
In this backdrop, Board had issued a clarification vide Circular No 154/2012 dated 28.03.2012 that:
For invoices issued on or before 31st March 2012, the point of taxation shall continue to be governed by the Rule 7 as it stands till the said date. Thus in respect of invoices issued on or before 31st March 2012 the point of taxation shall be the date of payment.
According to the above clarification, in respect of Chartered Accountant Service, which is one of the 8 specified services, though the service was rendered on or before 31 st March 2012 and invoice was also issued on or before 31.03.2012, if the payment is received on or after 01.04.2012, the rate of service tax applicable will be 12%, but not 10%.
Reiterating the above clarification, the CBEC vide another Circular No 158/2012 dated 08.05.2012 further advised the service providers to issue supplementary invoices to collect the differential 2% service tax.
Thus, because of increase in tax rate, what is supposed to be a boon for specified services has turned out to be a bane, because, while all other service providers who issued invoices at 10% can pay service tax only at the rate of 10% (because of Rule 4 of the POT Rules, 2011), the specified service providers have to pay service tax at 12%, as the POT is "date of receipt of payment" for them.
Had it been a reduction in tax rate, the service providers would have happily accepted the above position, but because of increase in tax rate from 10% to 12%, they are now affected adversely and therefore the Delhi Chartered Accountants Society challenged the above two Circulars before the Delhi High Court. In a judgement delivered on 1st February 2013, the High Court held that both the Circulars are contrary to the statutory provisions of the Finance Act, 1994 and the Point of Taxation Rules, 2011 and quashed them. While quashing the Circulars as contrary to the provisions , the High Court was comparing the old and new Rule 7 of the Point of Taxation Rules, 2011 ( i.e., upto 31.03.2012 and after) and held that the new Rule 7 does not provide for the contingency that has arisen in the present case. And apparently, it was not brought to the notice of the Court that there is a proviso to Rule 6(1) of the Service Tax Rules, 1994, which was inserted simultaneously, consequent to the re-drafting of Rule 7 with effect from 01.04.2012.
We bring you today this High Court judgement delivered on Friday.