Taxation of services in India has been a learning experience for not only the tax payers but also the tax administrators. The gradual expansion of the list of taxable services from an initial five to more than one hundred and fifteen has posed its own challenges. This has been compounded as a result of the very detailed definitions of taxable services that have been introduced together with the issuance of a plethora of circulars / clarifications by the Government on various matters of taxability, interpretation and so on.
To add to this complexity, various courts have interpreted the relevant tax provisions differently, leading to an unsettled position on several basic principles of service tax law. There was hence the need for a complete makeover of the provisions. A first step has been taken with the issuance of the draft Point of Taxation (for Services Provided or Received in India) Rules (POTR).
The preamble to the POTR states they have been issued to bring clarity and certainty, inter alia, in the levy and collection of service tax in the following situations:-
where there is a change in the rate of service tax (including withdrawal of an exemption)
where the tax has been imposed on new services for the first time and
a continuous supply of services The preamble also indicates that the draft Rules shift the point of taxation away from the receipt of payment for the service to either the supply of service (the word supply appearing for the first time in Indian law) or the invoice for the service or the receipt of payment, based on the various situations as contemplated therein, based essentially on an accrual concept. The preamble suggests that this is indeed likely to be the approach to taxation of supplies of goods and services in the forthcoming GST. In that sense therefore, these Rules are clearly a portent of things to come and a precursor to the GST.
Now, the proposed Rules have introduced the concept of point of taxation, meaning the time when the tax becomes payable to the Government. As indicated earlier, the point of taxation will no longer be solely based on the time of receipt of payment for the supply of taxable services and will be based on the provision of taxable service, the issuance of invoice or the receipt of payment, whichever is earlier, and the liability to pay tax would arise at this point. The Rules thereafter specify the point of taxation in various scenarios. These are explained below.
Regarding the tax treatment of advances, Rule 4 prescribes that in case of advances received for services to be provided at a future date, the point of taxation is the date on which such advance is received and hence the rate of tax is that applicable at the time of receipt of advance. However, interest free refundable deposits would not be covered within the ambit of this Rule.
Rule 5 addresses the point of taxation where there is a change in the rate of tax with regard to taxable services, whether exempt or otherwise, between the time of occurrence of different events, i.e. the provision of service, the issuance of invoice or the receipt of payment. Now, these events may occur either before the change in the rate of tax (Before) or after the change in the rate of tax (After).
Rule 6 addresses the point of taxation with regard to services brought to tax for the first time.
In all other situations, the tax will apply.
As can be seen, the above provisions of Rules 5 and 6 are very detailed and not easy to understand. Taxability, as well as the applicable rate of tax, will be determined as per these complex Rules and businesses need to contend with understanding and then implementing these Rules. This will clearly be a challenge.
Rule 7 is with regard to a continuous supply of service and states that such services are those that are supplied continuously for a period exceeding six months.
The point of taxation in such cases would be determined in the following manner:
if the date of payment is mentioned in the contract, the point of taxation would be the date when the payment becomes due
if the payment is linked to completion of a certain event, the point of taxation would be the time when such event is completed
if neither of the above two conditions is specified, the point of taxation would be the issuance of the invoice or the receipt of payment, whichever is earlier. The Rule also states that if any payment has been received in respect of a service before it becomes taxable, no tax would be charged even if the service is provided subsequently on a continuous basis.
Rules 8 and 9 of the POTR deal with specific situations regarding transactions between Associated Enterprises, as defined in the service tax provisions, as also with regard to transactions involving payment of royalty and similar outgoings and determine the point of taxation in an appropriate manner.
In conclusion, an analy-sis of the above draft Rules indicates that these envisage a material change in the manner of taxation of supplies of services.
It appears that the Government wishes to test the waters by introducing these draft Rules in the near future and to assess their implementation, prior to the introduction of the GST from April 2011. It will be interesting to note how the draft GST law, which is also understood to be ready for release soon, would incorporate appropriate pro-visions determining such poi-nts of taxation of supplies of services and, also, goods in the new dispensation.