POINT OF TAXATION RULES, 2011 – AN OVERVIEW

                         The Hon’ble Finance Minister for the year 2011-12 has brought a new Rule called as ‘Point of Taxation Rules, 2011’ (‘Rule’ for short) for adoption of point of taxation rules which would shift the basis for tax collection from ‘cash’ towards ‘accrual’ basis as with Central Excise Duty, vide Notification No. 18/2011-Service Tax, dated 01.03.2011.   The object of the said Rules is for the purpose of collection of service tax and determination of rate of service tax.   The Rule shall come into force with effect from 01.04.2011.  Nothing contained in these Rules shall be applicable in case of invoices issued prior to the date from which these rules become effective.

                        The term ‘point of taxation’ is defined by Rule 2(3) as the point in time when a service shall be deemed to have been provided.

DETERMINATION OF POINT OF TAXATION:

                        Rule 3 deals with the determination of point of taxation.  The point of taxation shall be determined in the following manner:

• a provision of service shall be treated as having taken place at the time when service is provided or to be provided;
• if, before the time specified the person providing service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

The explanation 1 to this rule 2 provides that wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.  

                        The explanation 2 to Rule 2 provides that in respect of services taxable under Section 66A of the Finance Act, 1944, the point of taxation shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier. 

The Rule deals with the point of taxation in the following circumstances:

• Determination of point of taxation in case of change of rate of tax;
• Determination of point of taxation in case of continuous supply of service;
• Determination of point of taxation in case of associated enterprises;
• Determination of point of taxation in case of copy rights etc.,

DETERMINATION OF POINT OF TAXATION IN CASE OF CHANGE OF RATE OF TAX:

                        Rule 4 deals with the determination of  point of taxation in case of change of rate of tax.  Notwithstanding anything contained in Rule 3, the point of taxation in cases where there is a change of rate of tax in respect of a service, shall be determined in the following circumstances:

a)      In case a taxable service has been provided before the change of rate;

b)      In case a taxable service has been provided after the change of rate.

In case a taxable service has been provided before the change of rate the point of taxation is determined as follows:

• Where the invoice for the same has been issued and the payment received after the change of rate, the point of taxation shall be the date of payment or issuing of invoices, whichever is earlier; or
• Where the invoice has also been issued prior to change in tax rate but the payment is received after the change of rate, the point of taxation shall be the date of issuing of invoice; or
• Where the payment is also received before the change of rate, but the invoice for the same has been issued after the change of rate, the point of taxation shall be the date of payment.

In case a taxable service has been provided after the change of rate the point of taxation is determined as follows:

• Where the payment for the invoice is also made after the change in tax rate but the invoice has been issued prior to the change of tax rate, the point of taxation shall be the date of payment; or
• Where the invoice has been issued and the payment for the invoice received before the change of tax rate, the point of taxation shall be date of receipt of payment or date of issuance of invoice, whichever is earlier; or
• Where the invoice has also been raised after the change of rate but the payment has been received before the change of rate, the point of taxation shall be date of issuing of invoice.

DETERMINATION OF POINT OF TAXATION IN CASE OF CONTINUOUS SUPPLY OF SERVICE:

                        Some services are continuing one like Telecommunications. Rule 2© defines the terms ‘continuous supply of service’ as any service which is provided or to be provided continuously under a contract, for a period exceeding 3 months, or where the Central Government, by a Notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition.  Rule 6 deals with the determination of point of taxation in such cases.  The point of taxation in such cases is determined as follows:

1. In case of continuous supply of service, the whole or part of which is determined or payable periodically or from time to time, shall be treated as separately provided at the date on which the payment is liable to be made by the service provider, if such date is specified in the contract;
2. If, before the time specified in (1) above, the person providing the service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

The explanation 1 to this Rule provides that wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.   The explanation 2 to this Rule provides that in respect of services taxable under Section 66A of the Act, the point of taxation shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

DETERMINATION OF POINT OF TAXATION IN CASE OF ASSOCIATED ENTERPRISES:

                        The term ‘associated enterprises’ has not been defined by the Rule.  But it takes the definition for the term in Section 92A of the Income Tax Act, 1961.  Rule 7 deals with the determination of point of taxation in case of associated enterprises.   Rule 7 provides that the point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or invoice under Rule 4A of the Service Tax Rules, 1994 has been issued, or the date of debit or credit in books of accounts of the person liable to pay service tax, whichever is earlier.

DETERMINATION OF POINT OF TAXATION IN CASE OF COPYRIGHTS ETC:

                        Rule 8 deals with this.  It provides that in respect of royalties and payments pertaining to copyrights, trademarks, designs or patents, where the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration, the service shall be treated as having been provided each time when a payment in respect of such use or the benefit is received by the provider in respect thereof, or an invoice is issued by the provider, whichever is earlier. 

PAYMENT OF TAX IN CASES OF NEW SERVICES:

                        Rule 6 deals with this subject.  Where a service, not being a service covered by Rule 6 (continuous supply of service), is taxed for the time, then no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable and no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within the period referred to in Rule 4A of the Service Tax Rules, 1994.