A very interesting legal point has arisen after the introduction of the Point of Taxation Rules, 2011 (POT) which is thought provoking and requires deliberation. In the prelude to POT vide Notification No. 18/2011-ST dated 1 st March 2011 it is stated that POT has been made for the purpose of collection of service tax and determination of rate of service tax. However, Rule 2(e) of the POTR states that the “point of taxation” means the point in time when a service shall be deemed to have been provided. This means that the taxable event is determined by the POT.
We all know that the charging section determines the taxable event. We all along understood that Section 66 of the Finance Act, 1994 (Act) is the charging section which determines the taxable event. As per Section 66 of the Act there shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve percent of the value of taxable services referred to in section 65(105)(a)…(zzzzu) and collected in such manner as may be prescribed .
The charging Section 66 of the Act levies a tax of 12% on the value of taxable service and specified that the collection should be in the manner as prescribed. Accordingly collection of service tax is prescribed in Rule 6 of the Service Tax Rules, 1994 (STR) which specified that the service tax is to be paid on the 6 th day of the month immediately following the calendar month in which the service is deemed to be provided as per the rules framed in this regard by the service provider.
In view of the above, it may be submitted that the taxable event is continued to be the provision of service which determines the levy of tax under charging section 66 of the Act. The method of collection of the tax is prescribed under Rule 6 of the STR read with POT. Hence it may be contended that POT prescribes only the manner of collection of tax and does not determine the taxable event i.e., the provision of service which triggers the levy of tax. Accordingly the definition of point of taxation under Rule 2(e) of the POT to mean the point of time when the service is deemed to have been provided is not legally correct. As per the object and purpose of the POT the definition under Rule 2(e) of the POTwould be the point in time to determine the manner of collection of service tax .
POT in conjunction with Rule 6 of the STR determines the manner of collection of service tax, in the same line as Rule 4 & 8 of the Central Excise Rules, 2002 (CER) determines the manner of collection of excise duty on clearance of the goods. It is not obvious from Rule 4 & 8 of the CER as to what rate should be applicable for payment of excise duty. Hence Rule 5 of the CER has been introduced to clarify that the rate of duty should be the rate as prevailing on the date of clearance from the factory.
In the case of Central Excise, the taxable event is the manufacture of the goods but the excise duty is paid at the time of clearance of the goods. Charging section under the Central Excise is Section 3 of the Central Excise Act, 1944 (CEA). Levy means the imposition of duty and that can only be done in the charging section wherein the charge has been created.Hence as per my understanding the levy cannot be in the manner prescribed. Hon'ble Supreme Court in the case of CCE, Hyderabad Vs Vazir Sultan Tobacco Ltd - 2002-TIOL-215-SC-CX in the context of central excise has held that the words ‘in such manner as may be prescribed' qualify the word "collected" and not the word "levied". While the levy is created by Section 3 itself, the collection of the duty is left to be regulated by the Rules made under the Act.
In the case of service tax the taxable event is providing the service. The charging section for service tax is Section 66 of the Act which levies a tax of 12% on the value of taxable service and specified that the collection should be in the manner as prescribed. This is similar to Section 3 of the CEA as explained above applicable for excise duty.
In order to determine the manner of collection of service tax and the applicable rate of service tax POT has been introduced which can be equated with the Rule 4, 5 & 8 of CER for determination of manner of payment of excise duty. Hence, the definition of point of taxation under Rule 2(e) of the POTR to mean the point of time when the service is deemed to have been provided is not legally correct. POTR only determines the point in time for collection of service tax.
Now, in the backdrop of the above explanation, let us examine the purport of Rule 5 of the POTR which is reproduced below:
Rule 5 of the (POT): Payment of tax in cases of new services:
Where a service, not being a service covered by rule 6, is taxed for the first time, then, -
(a) No tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service becomes taxable;
(b) 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.
As is evident from Rule 5(a) above, if the invoice is issued and the payment is received against such invoice before the service becomes taxable, no tax is payable. However, this is obvious because if the service is not taxable the question of liability to pay tax does not arise as there is no levy of the tax under section 66 of the Act.
Now in the case of Rule 5(b) above, it is stated that if the payment is received before the service becomes taxable and the invoice is issued within 14 days from the date of completion of service, then no tax is payable. As per my understanding, such a provision is not legally valid. Here it speaks of a situation where the service is provided during the period when such service is taxable and hence the issuing of invoice as per Rule 4A of STR is mentioned . If the service is provided during the period when such service is taxable, then charging section 66 of the Act applies and there should be a levy of service tax on such provision of service. Hence even if the payment is received before the provision of taxable service, since the service is provided during the period when such service is taxable, it is not correct to state that no tax is payable if the invoice is issued within 14 days from the completion of taxable service. The provision of POTR cannot override the charging section 66 of the Act which determines the levy of tax.
Moreover, the second proviso to Rule 6(1) of the STR has been deleted. Prior to its deletion it reads as under:
“Provided further, that notwithstanding the time of receipt of payment towards the value of the services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable.”
The above deleted provision explicitly mentions that if the service is not taxable at any point of time then mere collection of the consideration for that provision of service is not liable to service tax for the simple reason that there has to be a levy at the first place which happens when the taxable event has taken place. It is consistent with the provision of section 66 of the Act. Perhaps the deleted portion is taken care of in Rule 5(a) of POT.
Similarly in a contrary situation like in Rule 5(b) of POT where the collection of the consideration takes place before the provision of taxable service and the invoice is issued within 14 days of the provision of taxable service, there should be a liability to pay service tax on the amount collected in advance for provision of service when the same has become taxable. However, Rule 5(b) of POT states that no tax is to be paid in such a circumstances. As per my understanding such provision of law is legally not correct and ultra vires section 66 of the Act
.... to be followed
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