Change in Service Tax Rate — Section 67A vs Rule 4 of Point of Taxation Rules

Introduction:

Finance Bill, 2015 has proposed to increase the service tax rate to 14% by amending Section 66B. The said bill has received President’s assent on 14/05/2015. The increased rate is going to be effective from 01.06.2015. As there is a change in rate of tax, the applicability of new service tax rate assumes significant importance. Further, there are conflicting provisions in the law creating much ambiguity on this issue.

Point of Taxation Rules, 2011:

Point of Taxation Rules, 2011 are brought into effect from April 2011 onwards to determine the point of taxation (POT) i.e. point of time when a service is deemed to have completed. This point of taxation when introduced has twofold objectives. One is that the applicable rate of service tax is one prevailing on date of POT. The other one is that service tax is payable immediately by 5^th/6^th of a month subsequent to the calendar month in which POT occurs.

Rule 5B of the Service Tax Rules, 1994 provides that rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided under the rules made in this regard. Consequently, Rule 4 of the Point of Taxation Rules, 2011 provides for determination of POT when there is a change in service tax rate.

The other rule of Service Tax Rules, 1994 that refers to Point of Taxation Rules, 2011 is Rule 6. This rule provides that service tax shall be paid by 5^th or 6^th of the month immediately following the month in which services are provided or deemed to be provided as per the rules framed in this regard. As Rule 6 still exists, it can be concluded without any doubt that Point of Taxation Rules, 2011 are still relevant for determining the due date for payment of service tax.

Coming to Rule 4 of the Point of Taxation Rules, 2011, it provides that applicability of service tax rate depending on timing of invoice and payment for the taxable service and they completely ignore the date on which service is provided. It provides as follows;

1. 1. Where services provided prior to change in service tax rate, new rate is applicable if invoice is issued or payment is received after the change in service tax rate. Otherwise old rate is applicable.
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3. 2. Where services are provided after the change in service tax rate, old rate is applicable if invoice is issued or payment is received before the change in service tax rate. Otherwise new rate is applicable.
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This rule has received much attention from the service sector and every one is aware that these rules are required to be referred to for changes in service tax rate. However, with effect from 18.05.2012, a new Section 67A is introduced in Finance Act, 1994 which also provides for determination of service tax rate. Further, with effect from same date, Rule 5B of the Service Tax Rules, 1994 which provides for determination of service tax rate with reference to the point of taxation rules is deleted. All these amendments cast doubt on relevance of the Rule 4 of the Point of Taxation Rules, 2011 after 18.05.2012. Let us have a look at the scope of Section 67A.

Scope of Section 67A:

Section 67A provides that—‘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.’

Thus in terms of this Section, the applicable rate of service tax shall be the one prevailing at the time when a taxable service is provided or agreed to be provided. This section is standalone and is not leaving anything to delegated legislation. No reference is given to any rules framed by Central Government.

The phrase ‘provided or agreed to be provided’ is also existing current levy section i.e. Section 66B as well as in the erstwhile Section 65 (105) of the Finance Act, 1994. The phrase ‘to be provided’ is added in levy section after the words ‘provided’ during the Finance Budget, 2005. It has been then clarified that the objective of the amendment is to link payment of service tax on the advances received for the services to be provided in future.

On a harmonious construction of Section 67A in line with charging Section 66B, similar interpretation can be adopted for the phrase ‘provided or agreed to be provided’ appearing in Section 67A.Thus it can be rationally concluded that in terms of Section 67A, the rate of service tax shall be the rate in force at the time when service is provided. Similarly, in a case where advance is received for a taxable service to be provided in future, it is the rate in force on the date on which the advance amount is received.

However, there is another school of thought on this issue as the Rule 4 of the Point of Taxation Rules, 2011 continued to exist even after insertion of Section 67A, the phrase ‘provided or agreed to be provided’ shall be interpreted in align with the Rule 4 of the Point of Taxation Rules, 2011.

Conflict between Section 67A and Point of Taxation Rules, 2011:

Going plain understanding of the language employed by Section 67A and Rule 4 of the Point of Taxation Rules, 2011, there is a clear conflict between the provisions as discussed above. This can be further appreciated by the following examples.

1. 1. X Ltd has provided consultancy services which got completed by May 15^th Invoice issued on 5^th June 2015 and payment received on 30^th June 2015. The new rate of service tax is applicable from 01.06.2015 onwards. What is the applicable rate of service tax?
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As per POT: Services are completed before the change in service tax rate. Invoice is issued and payment is received after the change in service tax rate i.e. in June month. In terms of Rule 4, new rate of service tax i.e. 14% is applicable. As point of taxation in this case falls under June Month, the due date for payment of service tax is on or before 6^th July, 2015.

As per Section 67A: In terms of Section 67A, rate prevailing at the time of provision of service is relevant. Service got completed by May 15^th 2015. The rate prevailing on this date i.e. 12% is applicable. However, the due date for payment of service tax is still driven by Point of Taxation Rules, 2011 only.

2. 2. X Ltd has provided consultancy services in June 2015 for an advance received in the month of May 2015 itself. X Ltd paid service tax on this amount by 6^th of June, 2015 at 12.36%. 14% rate of service tax is applicable from 01^st X Ltd is considering invoice issue on 30^th June, 2015. What is the applicable rate of service tax on this service?
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As per POT: Rate of service tax has increased to 14% before provision of taxable service. As payment alone is received before the change in rate of service tax, invoice is issued on 30^th June, the rate of tax applicable in this case is 14%. POT is June. Therefore service tax is payable by 6^th of July, 2015.

As per Section 67A: As advance money is received in the month of May itself, the services are agreed to be provided in the month of May itself. The rate prevailing at the time of receipt of advance is relevant i.e. 12.36%. However, the due date for payment of service tax is still driven by Point of Taxation Rules, 2011 only.

Conclusion:

Before parting, based on the above discussion it is clear that in view of the above referred conflicting provisions, ambiguity exists about the applicability of the new service tax rate. Therefore it is high time for the CBEC to clarify on this issue with proper illustrations. Otherwise this will lead to litigation.