Finance Bill 2015 Enacted - CBEC needs to do some homework

By Vijay Kumar

FINANCE Bill 2015 was enacted yesterday. Enhanced rate of service tax is not with effect from yesterday - repeat - not with effect from the date of enactment, but only from a date to be notified. So, the Government can notify the new service tax rate of 14% any day now. It appears there is lot of confusion in the minds of taxpayers on applicability of 14% on the on-going transactions.

One may quickly refer to Rule 4 of the Point of Taxation Rules, 2011 and conclude that it takes care of the situation. But, the issue is not that simple.

First, lets us see Rule 4 of the POT Rules. It reads:

4. Determination of point of taxation in case of change in effective rate of tax.- Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax in respect of a service, shall be determined in the following manner, namely:

(a) in case a taxable service has been provided before the change in effective rate of tax,-

(i) where the invoice for the same has been issued and the payment received after the change in effective rate of tax, the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or

(ii) where the invoice has also been issued prior to change in effective rate of tax but the payment is received after the change in effective rate of tax, the point of taxation shall be the date of issuing of invoice; or

(iii) where the payment is also received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax, the point of taxation shall be the date of payment;

(b) in case a taxable service has been provided after the change in effective rate of tax,-

(i) where the payment for the invoice is also made after the change in effective rate of tax but the invoice has been issued prior to the change in effective rate of tax, the point of taxation shall be the date of payment; or

(ii) where the invoice has been issued and the payment for the invoice received before the change in effective rate of tax, the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or

(iii) where the invoice has also been raised after the change in effective rate of tax but the payment has been received before the change in effective rate of tax, the point of taxation shall be date of issuing of invoice.

As can be seen from the above, there are two situations. 1) Where taxable service has been provided before the change of rate and 2) Where the taxable service has been provided after the change of rate. So, first, one has to determine when the service is actually provided, i.e., before or after the change in rate. If that was so simple, perhaps, we don't need the POT Rules. Let us proceed by presuming that I can tell when actually my service is rendered - before or after the enhancement.

Case1: When service is rendered before the change in rate:

Case 2: When service is rendered after change in rate

However, after notifying the POT Rules, 2011, a new Section 67A has been inserted in the Finance Act, 1994 with effect from 28.05.2012, which reads as under:

67A. Date of determination of rate of tax, value of taxable service and rate of exchange. - The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

A plain reading of the above Section makes it clear that the rate of service tax to be applied is the rate in force at the time when the taxable service has been provided or agreed to be provided.

Please recall that for applying the provisions of Rule 4 above, one has to determine whether the service was provided before or after the change in rate. Once it is known, next step as per Section 67A is only to apply 12.36% if service is rendered or agreed to be rendered before enhancement and apply 14% if the service is rendered or agreed to be rendered after change in rate. No need to apply the criterion of issuing invoice or receiving payment. This makes Rule 4 of the POT Rules contradictory to Section 67A.

This situation has arisen perhaps because the Rules were notified in 2011 and the Section was inserted in 2012.

So, the Board needs to explain with proper illustrations the transition before notifying 14% rate in the light of Section 67A.

In the earlier round when the tax was enhanced from 10% to 12&%, Board had issued two circulars No.158 /9/2012-ST dated 08.05.2012 and No.154/5/2012-ST dated 28.03.2012, both of which were quashed by the Delhi High Court in 2013-TIOL-81-HC-DEL-ST.