Applicability of rate of service tax in case of advance payment received and issuance of invoices later on

[samiuddin ansari]

Dear experts,

My query is one of my friend's firm was visited by Audit team for EA-2000 audit for the period from 2014-15, 2015-16 & 2016-17, he is providing works contract service to many body corporate and non body corporate business firms. In some cases, he had received advance payment from the clients. By following the provisions of Point of taxation rules, 2011, he made payment of service tax at appropriate existing rate i.e. 12.36% to the service tax department and also reflected in his ST-3 Returns. However, on completion of service in piece meal, he issued RA bills simultaneously mentioning there in service tax at existing rate, say 14.50% including cess. In fact, he did not discharge tax liability but availed as set off being already tax payment made on original advance amount. The audit team while examining the same, has raised an objection and stated to make payment of differential amount service tax i.e 02.14 % (14.50%-12.36%) with interest. Since, my friend's contention is such that he has already discharged the tax liability at the applicable rate when he received the payment from clients, he need not to pay again the differential amount of tax as mentioned above. Please solicits your valuable views and comments on issue supported with cases, circular, clarification etc.

[KASTURI SETHI]

Dear Querist,

My views are as under:-

The Department's objection is correct. The Department's viewpoint is in consonance with Section 67 A of the Finance Act, 1994 which is reproduced below for ready reference :-

SECTION [67A. Date of determination of rate of tax, value of taxable service and rate of exchange. - [(1) The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.]

[Explanation. - For the purposes of this section, “rate of exchange” means the rate of exchange determined in accordance with such rules as may be prescribed].

[(2) The time or the point in time with respect to the rate of service tax shall be such as may be prescribed.

(i) RULE [3.Determination of point of taxation. - For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be,-

(a) -----------

(b)----------

(i) --------

(ii) --------

Explanation - For the purpose of this rule, 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.].

Your attention is also drawn to the words, "Unless otherwise provided" mentioned in Rule 3 above.

If we read both above Section and rules conjointly, it is clear that rate of tax will be applicable which was in force at the time of providing service. Thus differential amount has to be deposited/paid into Central Govt. account along with interest.

Needless to say that Rules cannot override the Act. Rules cannot be read in isolation. Rules are not independent of the Act. If law is clear there is no need of resorting to case law or circular.

Views of other experts are also solicited.

AI Summary

Point of taxation requires tax at the rate prevailing when the service is provided; differential tax on advances is payable. Advance receipts are a point of taxation at the date of receipt, but the applicable service tax rate is the rate in force when the taxable service is provided; any differential between tax paid on advances and the rate at provision must be deposited with interest, since rules cannot override the statute.