Sections 65 and 66 of the Finance Act, 1994 have been the most overweight Sections of that Act and the Government keeps inventing clauses to feed them at regular intervals. After the kerfuffle over the levy of service tax on healthcare ended in its removal- albeit till GST kicks in, the Finance Minister deemed it fit to focus on point of taxation (POT) rules - a sort of a pre-cursor to the place of supply rules intended under the GST.

Notification No 18/2011 that introduced the POT rules flummoxed all since it was an amalgam of complexity, over-attention to detail and ingenuity. A few other Notifications and a TRU letter attempt to bring some sanity to the POT Rules. While the rules shall come into force from April 1, 2011, an option has been given in rule 9 to pay tax on payment basis, as at present, till June 30.

The constitutional validity of the POT rules is already being questioned. Service Tax has wide powers under the shadow of Finance Act 1994 the clauses of which were introduced via a Residual Entry in the Constitution of India. Section 94 of the Finance Act, 1994 powers the Central Government to make rules for collection and recovery of tax by way of a Notification in the Official Gazette which appears to be an administrative formality. The POT notifications will soon find their way into the Official Gazette in which case the constitutionality cannot be questioned.

Notifications

Notification No 18/2011 took ages to state that the point of taxation would be the date of issue of invoice or receipt of payment whichever is earlier. Notification No 25/2011 states this in as many words. In the case of continuous supply of services, the Notification clarifies that POT will be the time when the invoice is issued. It forces an invoice to be issued within 14 days of the completion of the service, failing which this deadline will trigger a payment of service tax.

A payment received before the date of issue of invoice would entail a payment of the tax. Notification No 28/2011 grants the status of continuous supply of services to telecommunication services, commercial or industrial construction service, construction of residential complex, internet telecommunication service and works contract service.

Rule 7 of 25/2011 provides a select few servicemen the luxury of paying service tax on receipt of the payment — individuals, proprietorships and partnership firms providing specified services (Chartered Accountant, Cost Accountant, Company Secretary, Architect, Interior Decorator, Legal, Scientific and Technical consultancy services). Amongst other service providers, consulting engineers could soon be litigating this proviso stating that one of the basic canons of taxation - equity has been violated. For the select few, the joy could be short-lived since these concessions could be done away with under GST. If GST too opts for cherry-picking between an accrual and a cash method for select service providers, unwelcome litigation is bound to follow.

Export of services

Export of services is exempt subject to the condition that the payment should be received in convertible foreign exchange. Until the payment is received, the provision of service, even if all other conditions are met, would not constitute export. In order to remove the hardship that will be caused due to accrual method, the point of taxation has been changed to the date of payment. Point of taxation was the only missing link in a legislation that contained Valuation Rules and Import and Export Rules. the Government should now determine whether the complex provisions would be carried over into GST or would be simplified. The latter is a desirable option which has never been exercised.

(The author is a Bangalore-based chartered accountant.)

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