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September, 18th 2014

Determination of Point of Taxation in case of specified services or persons (Rule 7 w.e.f. 1.4.2011)

Notification No. 25/2011-ST, dated 31.3.2011 Rule 7 had been replaced by a new provision whereby the point of taxation shall be the date of making or receiving the payment, as the case may be. This provision shall apply to the following:

(i) Export of services;

(ii) Persons, where the obligation to pay tax is on the service recipient in terms of rule 2(1)(d) of the Service Tax Rules, 1994 in respect of services notified under section 68(2) of the Finance Act, 1994.

(iii) Individuals, proprietorships and partnership firms providing specified services Chartered Accountant, Cost Accountant, Company Secretary, Architect, Interior Decorator, Legal, Scientific and Technical consultancy services). Consulting engineers were added vide Notification No. 41/2011-ST, dated 27.6.2011. The benefit shall not be available in case of any other service also supplied by the person concerned alongwith the specified services. This rule shall not be in force w.e.f. 1.4.2012 and payment shall be subject toRule 6(1) of Service Tax Rules, 1994, as amended.

Thus, w.e.f. 1.4.2012, all such service providers (CA, CS, etc.) irrespective of their being individual, proprietorship concern or partnership firm (including a limited liability partnership) shall be liable to come under Point of Taxation Rules, if their turnover in preceding financial year exceeds ₹ 50 lakhs.

Export of services is exempt subject, inter alia, to the condition that the payment should be received in convertible foreign exchange. Until the payment is received, the provision of service, even if all other conditions are met, would not constitute export. In order to remove the hardship that will be caused due to accrual method, the point of taxation has been changed to the date of payment. However, if the payment is not received within the period prescribed by RBI, the point of taxation shall be determined in the absence of this rule.

In the case of services where the recipient is obligated to pay service tax under rule 2(1)(d) ofService Tax Rules i.e. on reverse charge basis, the point of taxation shall be the date of making the payment. However, if the payment is not made within six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist. Moreover, in the case of associated enterprises, when the service provider is outside India, the point of taxation will be the earlier of the date of credit in the books of account of the service receiver or the date of making the payment.

W.e.f. 1.4.2012, the substituted Rule 7 provides for Point of Taxation in case of certain specified services or persons in relation to payment of service tax under reverse charge and in case of associate enterprises.

In case of payment of tax under reverse charge, 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, where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.

In case of “associated enterprises”, where the person providing the service is located outside India, the 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.

Amendment w.e.f. 01.10.2014

Vide Notification No. 13/2014-ST dated 11.07.2014, the first Proviso to rule 7 of the Point of Taxation Rules (POTR) has been amended to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. This amendment will apply only to invoices issued after 1st October, 2014.

Thus, POT in respect of the services covered under the reverse charge mechanism shall be earlier of:

  • the date of payment, or
  • the first day that occurs immediately after a period of three months from the date of invoice

The above amendment is applicable only to the invoices issued on or after 01.10.2014. POT in respect of the invoices issued before 01.10.2014 has to be determined in accordance with rule 7 as it presently exists.

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