An earlier article in this column had discussed the Point of Taxation Rules 2011 (POTR), which have come into force from the 1st July this year. As is well known, the POTR has essentially shifted the basis of payment of service tax from receipt of consideration i.e. cash basis to any of receipt of consideration, date of raising of invoice and completion of milestones i.e. on the basis of accruals. This article deals with some residual challenges that POTR pose in discharging the liability to the tax, notwithstanding that the shifting of the basis for payment of tax as above is in line with global best practice and is a necessary precursor to the GST.
The POTR define the point of tax as the point in time when a service shall be deemed to have been provided. Further, POTR define the point of taxation as the earlier of the issuance of invoice or receipt of consideration and, where the above invoice is not issued within 14 days of the completion of the provision of the service, the date of such completion of service. The fundamental problem which continues to pose challenges, as a result of the above provision, is the determination of completion of service in order to determine the resultant point of taxation, in situations where the invoice is not raised within 14 days of such completion. There are several services with regard to which the determination of completion of service presents difficulties. These continue to remain notwithstanding that the Central Board of Excise and Customs had issued a circular on 18th July to clarify that completion of a service would not only include the completion of such a service but also the completion of all auxiliary and related activities pertaining to the above service, which would enable the service provider to raise the invoice. Thus, while the above circular is indeed welcome, it does not address the problem of determination of completion of a service.
To illustrate the point, there could be arrangements where payments for services are dependent or contingent upon the happening of events. Now, such events could have occurred at a point of time, as a result of which the service tax is required to be paid as per the POTR, but either the service provider or the service recipient or both may be unaware that such events have indeed taken place. As a consequence, there could be inadvertent delays in payment of the tax. Similarly, there could be situations where the service recipient could require the service provider to provide additional services or to provide clarifications relating to the already provided services. There could be a lack of clarity in determining as to when the service is supposed to have been completed in such situations. The POTR also envisage a sub category of service called —Continuous Supply of Services (CSS), which are typically defined as services continuously provided under a contract for a period exceeding 3 months and lay down the point of taxation in relation to such CSS. Here again, there could be several situations where the date of completion of such services cannot be determined with any degree of certainty.
While the above are some situations where the determination of completion of service poses difficulties, there are other situations where the raising of an invoice, which is required within a fortnight of completion of service, as per the POTR, proves problematic within the aforesaid time period. For instance, the service recipient may require the service provider to provide details of the services provided on an ongoing basis for approval, prior to an invoice being raised in that regard. Typically in such situations, the client would not grant such approval within the aforesaid time period and hence while the services undoubtedly stand completed, the delay in raising of the invoice beyond the period of 14 days would mean that the tax becomes due from the date of completion of services. This could lead to delays in payment of the underlying service taxes. There could be several other such instances of delayed raising of invoices. The idea here is to not labour the point but to merely illustrate the fact that the POTR continue to pose challenges regarding the need to pay tax upon completion of services in several situations. Now, there are leading management consultancy and engineering consultancy organizations which raise a significant quantum of invoices annually throughout the organisation at various locations. These organisations’ business model requires services to be contractually provided to numerous clients through several offices on an all India basis, all of which are required to be consistently billed out to clients and monies realized on a timely basis. Nevertheless, the POTR pose challenges to these organizations in view of the requirement to pay the tax upon completion of service, should the invoice not be raised within 14 days thereof. It cannot be that such organisations will end up paying penalties for late payment of taxes as a matter of course, in view of the challenges highlighted above. Hence, it is only in order that the Government reviews the POTR in a holistic manner and identifies ways and means of either determining the completion of service on a reasonable and implementable basis or dispensing altogether with the need to pay the tax based upon such completion of service and hence limit the point of taxation to either the issuance of the invoice or the receipt of consideration for service, whichever is earlier. Of course, adequate safeguards need to be built in and such dispensation ought to be granted based on clearly defined parameters.
It is illustrative here to look at how the point of taxation for services is laid out in the VST/GST legislations in various countries. In Australia and New Zealand, the point of taxation is the earlier of the issuance of invoice or receipt of consideration and the issuance of invoice is not linked to the provision of a service, although a tax invoice must be issued within 28 days once the service recipient requests it. In Singapore, the point of taxation is the earlier of the issuance of invoice or the receipt of consideration, similar to both Australia/New Zealand, and a tax invoice is required to be issued within 30 days of the time of supply. In Canada, the point of taxation is the earliest of several events but the issuance of invoice is again not linked to the provision of service. In addition to the global practices as illustrated above, it is also useful to draw a parallel with Central Excise law, where while the taxable event is that of ‘manufacture’ of goods, the duty is payable only at the time of removal of such goods from the factory of manufacture and no time limits are prescribed for such removals. Thus, while the point of the tax is manufacture and the tax accrues thereafter, its collection is nevertheless postponed till physical removal. A similar provision could be in order in relation to service taxation as well. Hence, while the taxable event could continue to be the provision of service, the POTR, which determine the date on which the tax becomes payable, can be appropriately modified in the manner suggested so as to remedy the problems identified here in above.
The author is executive director, PricewaterhouseCoopers Pvt Ltd