Explanatory Notes to Draft Point of Taxation Rules

Rule 1: Preliminary

Rule 2: Contains the definitions for the Rules.

Rule 3: Provides that the taxable event shall be the provision of service, including future provision. This would mean that the service, even though promised to be provided at a future date, shall be taxable. The rule also lays down that, if the service provider issues an invoice or receives any payment before providing service, the service, to the extent of the amount mentioned in the invoice, or the amount of payment, shall be deemed to have been provided. It means that the service provider shall be liable to pay the tax to the extent of amount mentioned in invoice, or the payment received, even if the service has not been provided at that point of time.

Rule 4: Prescribes that rate of tax applicable in the case of advances received shall be the rate applicable when the advance is received. This essentially clarifies the treatment of advances, and is in line with the provisions in these Rules that the tax payment shall be linked to the issuance of invoice, or the payment received, whichever is earlier. This would bring in certainty that once tax is charged on payment / invoiced amount, such determination of tax would be final & there would be no need to re-open the same. However, interest free deposits shall not be covered within the ambit of this rule.

Rule 5: Determines the point of taxation where there is a change in rate of tax. In other words, it prescribes the applicable of rate of tax in the cases where the tax rate changes between the occurrence of different events, viz., provision of service, issuance of invoice, and receipt of payment. This Rule only covers the change in rate of tax, including any service which was exempt and becomes taxable, and does not cover the services which become taxable for the first time. The provisions of this rule can be summarized in tabular form as shown below (Please note that the words ‘Before’ and ‘After’ mean “before the change in tax rates” or “after the change in tax rates”, as the case may be).

PROVISION OF SERVICE	ISSUE OF INVOICE	PAYMENT	POINT OF TAXATION	Remarks
Before	After	After	Date of invoice or payment, whichever is earlier	As service was already taxable, and the tax point is invoice/ payment, tax charged on revised rate.
Before	Before	Within 30 days of invoice	Date of invoice	If payment not received within 30 Days, invoice is invalid and date of payment shall be the effective date for determining the rate of tax.
After	Before	After	Date of payment	A supplementary /additional invoice will need to be issued for recovery of tax.
After	Before	Before	Date of payment or invoice, whichever is earlier.	Takes care of services like public performance, airline ticketing etc.

The principle followed in the above rule is that wherever two points of taxation have occurred, whether before the change in tax rate or after the change in tax rate, the earlier event of the two would be the point of taxation, with the exception of clause (ii), where a deviation has been made. For this clause too, although the point of taxation would be the date of invoice, the same would be invalid if the payment has not been received within 30 days.

Rule 6: Rule 6 is specifically provided for conditions where a service (which is not a continuous supply of service) is charged to tax for the first time i.e. becomes taxable for the first time. The rule provides that:-

(a) If an invoice has been issued and payment received before a service becomes taxable, no tax would be charged even if the service is provided after the same has become taxable. This provision is consistent with the other similar provisions in these rules, and ensures that a financial transaction which has achieved finality before a service was taxable shall not be reopened for collection of tax.

(b) If any payment has been received prior to a service being chargeable to tax, no tax shall be chargeable if an invoice has been issued within 14 days of receipt of payment. The period of 14 days is the period also prescribed in Rule 4A of Service Tax Rules, 1994 and ensures that a payment is not shown as having been made earlier than it was actually made.

(c) The rule also clearly lays down that any service, which is a not a continuous supply of service, if provided before the service becomes chargeable to tax, shall not be subjected to tax.

Rule 7: Rule 7 deals with the continuous supply of services (eg., construction services, maintenance and repair services etc.), According to the proposed definition in rule 2 of these rules, ‘continuous supply of service’ refers to services that are supplied continuously for a period exceeding six months or services that are specified by the Govt. as continuous supply of services, subject to prescribed conditions, if any.

The proposed rule essentially prescribes that the rate of tax will be the rate applicable on the date the payment becomes due as per the contract, or, if the payment is linked to completion of certain events (milestones), when those milestones are completed. If none of the above two conditions is specified in a long term contract, then the service provider is required to pay the service tax at the time of raising of invoice, or receipt of payment, whichever is earlier.

This rule also provides that if any payment has been received in respect of non-taxable service, before it becomes taxable, the same would not be charged to tax, even if the service is provided subsequently

The only exception in this case pertains to the services in continuous supply of service a part of which is being provided before the service becomes taxable, (i.e the service becomes taxable during the currency of provision of service but payment for which is received after the service becomes taxable). Certain examples of this are

(a) The payment for construction services is made before the tax becomes applicable but the construction is started after the service becomes taxable.

(b) Part of the construction is done before the service becomes taxable but payment for the same is received after the service becomes taxable

(c) Water supply has been made in the month of March & April, the bill is raised in month of May, but the service has become taxable in the month of April

Similar situations can be interpolated in other services which are supplied continuously.

In such cases, tax is liable to be paid on the basis of raising of invoice or the date provided for payment in the contract or the actual payment, as the case may be.. This Rule is drafted keeping in view the fact that the extent of service provided during a particular period of time in continuous supply of the service is difficult to determine.

Further, alternatively, payment received in respect of payments received prior to service becoming taxable, but where the service may be provided subsequently, will also not be taxable.

It has been prescribed that the clauses of the rule shall be read sequentially. Thus, if there is a date of payment prescribed in the contract, the tax becomes due on that day irrespective of the fact if the payment has been received or not. In case, the date of payment is not prescribed in the contract, but payment is linked to achievement of milestones, then the tax becomes payable even if no payment has been received by the service provider. However, if no date of payment is prescribed in the contract, or if the payment is not linked to achievement of any milestones, then the tax would be payable whenever the service provider issues an invoice, or receives a payment (whichever is earlier).

Rule 8 and 9: Provides for points of taxation for “associated enterprises” and the treatment of royalties and similar payments.

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