Point of taxation under reverse charge

Rule 7: Point of Taxation Rules, 2011

Notwithstanding anything contained in rules 3,4, or 8, the point of taxation in respect of the persons required to pay tax as recipients of service under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Act, shall be the date on which payment is made:

Provided that where the payment is not made within a period of three months of the date of invoice, the point of taxation shall be the date immediately following the said period of three months:

Provided further that in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be the date of debit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

Critical Analysis:-

The above-amended provision is applicable only to those invoices which has been issued after 01-10-2014. In Section 68(2) of the Finance Act deals with certain services to pay service tax on reverse charge (ie. Service Receiver is liable to pay service tax), This rule starts with the word Notwithstanding anything contained in rule 3,4, or 8 which means rule 7 only is applicable to reverse charge cases.

If payment made within 3 months from the date of invoice then Point of Taxation will be the Date of Payment made, or if payment is not made within 3 months then Point of Taxation will the day that occurs immediately after a period of three months from the date of invoice.

But in case of associated enterprises there is a proviso which states that when service provider is located outside India, then POT will the date of debit in the books of account of the person receiving the service or date of payment whichever is earlier. The thing to be noted is if service provider of associated enterprise is not located outside India then the second proviso to rule 7 is not applicable.

Example

A Ltd. imported business support service from B Ltd on 18.10.2015. Invoice for the service was raised on 20.11.2015 for $1,50,000 . POT if A Ltd. will pay the invoice amount either of the following dates.

10-12-2015
15-04-2016
In case of scenario 1 POT will be 10-12-2015 because payment made by A Ltd. within 3 months from the date of Invoice, but in case of scenario 2 POT will be 13-02-2016.

Practical Issue

1) If Services have been provided and also invoice issued by the service provider before SBC and KKC the new levy but payment is made to the service provider after new levy of SBC and KKC came into force, now the question arises whether service receiver is to pay Service Tax of new levy, which is clarified by Notification No 21/2016 ST dated 30.03.2016 by inserting third proviso, which states that POT shall be date of issuance of Invoice.