Thursday 3 March 2011

Point(less) of Taxation Rules, 2011

As expected, the Union Budget 2011 has brought with it a horde of changes to be made to the existing tax system. Some of the changes are welcome while others are plain ridiculous. One of these is the 'Point of Taxation Rules,' pertaining to taxability of services, brought in vide Notification 18/2011-ST, dated 1-3-2011. Set to come into force on 1-4-2011, these rules fix the point of time of 'when' a service is said to be provided. The more important of these rules are discussed below.

Rule 3 lays down that a service will be deemed to be provided on the earliest of the following dates:

i) The date on which the service is actually provided
ii) The date on which the invoice is issued
iii) The date on which payment is made

Rule 4 (notwithstanding Rule 3), regarding determination of point of taxation in case of change of rate of tax, is a fantastic means of creating utter chaos. This rule lays down that in case a taxable service has been provided before any change in the rate of tax, the point of taxation will be:
i)  the date of payment or issuing of invoice, whichever is earlier, where invoice has been issued and payment has been received after change of rate
ii) the date of issue of invoice, where the invoice has been issued prior to change in tax rate but the payment is received after the change of rate.
iii) the date of payment, where the payment is received before the change of rate, but the invoice has been issued after the change of rate.
The rule also goes on to state that in case a taxable service has been provided after any change in the rate of tax, the point of taxation will be:

i) the date of payment, where the invoice has been issued prior to change of rate but the payment is made after change of rate.

ii) the date payment or issuing of invoice, whichever is earlier, where both events have occurred after change of rate.

iii) the date of issue of invoice, where invoice is issued after the change of rate but payment has been received before the change of rate.

Rule 6 lays down that in case of a continuous supply of service, every instance of periodical billing will determine the point of taxation of such service provided during such period, if such period is specified in the contract.

As of today, collection of tax is on cash basis. Service tax is payable once the payment is received by the service provider. These rules will make the service provider liable to pay tax once the service is provided, whether or not payment has been received. Though the intention of the rules is to ensure that tax is paid at the earliest, this is certainly not a smart move because of the following reasons:

1. Undue pressure to make payment will be created on the service receiver. The service receiver may not necessarily make immediate payment after the service is provided to him, owing to personal / financial constraints. Depending upon the requirement of the receiver, the service may need to be quantified first before any payment is made.

2. Moreover, the payment may very well be in instalments. The entire payment need not be made at once. If the payment is made in instalments, what will be the point of taxation; the date of the first instalment or the date of the last instalment? Also, what will happen if some instalments are paid before the change in rate and some are paid after?
3. As is the accepted norm, the service is provided first and payment is made later. However, if the rules come into effect, service providers will start demanding payment before actual provision of any service. The quality of service provided thereafter may not be up to the mark, since the payment is already received by them.
4. The service receiver will be left with no means to ensure that the service is wholly and satisfactorily provided to him. Litigation will certainly increase in such cases, increasing the existing burden on the administrative machinery.

5. What about that invoices that are raised before 1-4-2011 but the payment is received after this date? Will the Rules be applicable to such invoices?

6. Where a service is continuously provided, it often happens that the invoices issued and payments made are based on the requirement and convenience of parties. How will the point of taxation be determined where no specific agreement with regard to period of billing exists?

7. The accounting norms will be turned upside down. There may be several attempts to change the dates of payments / issuance of invoices / provision of services in order to escape any higher rates of tax prescribed after the taxable service has been provided. The balance sheets in such cases may not tally with the returns, leading to further confusion.

Looking at the kind of hardship that will be caused to the service providers as well as service receivers, these rules are bound to be a source of much debate. Whether or not the rules come into force, the intense discussion on their implementation will certainly uphold the debating tradition followed every year after the announcement of the Budget. 

1 comment:

  1. We must care for each other more, and tax each other less :D Good start, Dani:)

    ReplyDelete