Changes in Rule 7 of Point of Taxation Rules, 2011

The Finance bill, 2016 has proposed an increase in the rate of service tax from 14.5% to 15% in the form of Krishi Kalyan Cess of 0.5%. The said increase will be effective from 01.06.2016. In the recent times, there has already been an enormous increase in the rate of service tax from 12.36% to 14.5%.

 

Now, while transitional phase, Rule 4 of POT Rules provided a shelter to the service providers that where service has already been provided and if the Invoice has been raised or payment is received in respect of service provided or agreed to be provided before the change in the rate of service tax, then the old rate of service tax will be applicable.

 

However, in case of service tax payable by recipient of service, Rule 7 of POT Rules applies which provides that if the payment of said bill is made after change in the effective rate of service tax, the service tax will be payable by new rate of service tax as the point of taxation in the said cases are date of payment.

 

First proviso to Rule 7 of POT Rules prescribes that in case the payment is not made within three months of the date of Invoice the point of taxation shall be the date immediately following the said period of three months and hence, according to above provisions of Rule 7 read with 1st proviso of POT Rules, in case service tax is payable by the recipient of service, the service tax would be payable on at applicable rate on the date of payment or the date after three month from the date of bill whichever is earlier.

 

Further, the recipient of service has been deprived from the benefit of Rule 4 of POT Rules because the Rule 7 of POT Rules has an overriding affect on the Rule 3, 4 and 8 of POT Rules. In this form, an undue hardship was being faced by the persons liable to pay tax under Reverse charge mechanism. In order to bring parity with the privilege being enjoyed by the service providers by virtue of Rule 4, the government of India vide notification no. 21/2012 S.T. dated 30.03.2016 has amended the Rule 7 of Point of Taxation Rules, 2011.

 

A detailed discussion in respect of the same is as under

 

Existing ProvisionAmended ProvisionConclusion
Notwithstanding anything contained in rules 3, 4, or 8, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made :

 

Provided that where the payment is not made within a period of three months of the date of invoice, the point of taxation shall be the date immediately following the said period of three months.

 

Provided further that in case of “associated enterprises”, where the person providing the service is located outside India, that point of taxation shall be the date of debit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

Notwithstanding anything contained in rules 3, 4, or 8, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made :

 

Provided that where the payment is not made within a period of three months of the date of invoice, the point of taxation shall be the date immediately following the said period of three months.

 

Provided further that in case of “associated enterprises”, where the person providing the service is located outside India, that point of taxation shall be the date of debit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

 

Provided also that where there is change in the liability or extent of liability of a person required to pay tax as recipient of service notified under sub-section (2) of section 68 of the Act, in case service has been provided and the invoice issued before the date of such change, but payment has not been made as on such date, the point of taxation shall be the date of issuance of invoice.”

 

 

 

 

Central government has inserted a new proviso which provides that in case of persons liable to pay tax under reverse charge mechanism, Point of Taxation shall be the date of issuance of invoice if the following conditions are satisfied.

 

1.       There should be a change in liability or extent of liability such as due to change in rate.

2.       Service has been provided and invoice has been issued before the date of such change.

 

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