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Service tax liability too fixed at invoice stage
April, 04th 2011

The Central Board of Excise and Customs has tweaked service tax rules, making service providers liable to pay tax as soon as they issue an invoice to their clients.

Under the earlier rules, service tax became due only when a provider received payment for the service. This was at variance with the taxation of goods.

States levy sales tax (value-added tax) on goods when the invoice is issued. Excise duty is also paid at the factory gate when the goods leave the factory on issuance of an invoice.

The new rules provide a consistent regime for taxation of goods and services and aim to set the stage for the Goods and Services Tax (GST), which the government intends to roll out from April 2012.

The Central Board of Excise and Customs had put out a draft of these rules for discussion in August last year. "The rules have been changed following public feedback," a finance ministry official said. In cases where an invoice is issued periodically or not issued within 14 days of completion of service, a service provider will have to pay tax on completion of the service.

For instance, in services such as telecommunications, construction and works contracts, service tax would become due after the completion of service or the date of completion mentioned in the contract.

The new rules, however, offer relief to individuals, proprietory or partnership firms that provide services such as architecture, interior decoration, chartered accountancy, cost accountancy, scientific or technical consultancy and legal services.

These service providers will be required to pay tax only after they receive payment. Although the government had begun taxing services in 1994, the need for rules aligning them with the taxation of goods was felt only now when the government is getting ready to roll out the GST.

The new rules will determine the clear time of delivery of a service and reduce chances of a dispute under the GST regime, which will allow states to tax services. "The introduction of point of taxation rules is an effort to align the way tax is paid on goods and services. However, the rules should have been kept simple as a harbinger of a simple GST," said Bipin Sapra, partner, Ernst & Young.

The Central Board of Excise and Customs has also simplified Cenvat credit rules in line with the changes. Service providers will now be able to claim credit for tax already paid on inputs on receipt of invoice as against on payment of value of taxable service along with service tax.

The government has also introduced three slabs for service tax on money changing but exempted inter-bank transactions. In high value transactions, the total service tax has been capped to a maximum of Rs 5,000. The Budget for 2011-12 had proposed a 0.1% levy on value of transaction, but the Indian Banks Association and forex dealers had protested against it.

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