Service tax collection on accrual basis in for review

| Updated on: Mar 21, 2011

The Finance Ministry has decided to take a relook at the recent move to collect service tax on an accrual basis. Indications are that the Finance Minister, Mr Pranab Mukherjee, may come up with some relief for service providers on this front during his reply to the discussions on the Finance Bill 2011 this week.

“We have received many representations on this new rule. We will take a relook and act accordingly”, official sources said.

The Centre had, in Budget 2011-12, announced a shift in the basis of collection of service tax from receipt basis to an accrual basis with effect from April 1. The Finance Ministry's decision to review this move comes in the wake of representations from many industry associations, who have suggested that status quo be maintained and service tax collections be continued on receipt basis.

For instance, the Federation of Indian Chambers of Commerce and Industry (FICCI) had suggested that the new rule (Point of Taxation rule) should not be introduced and status quo be maintained.

The point of taxation rule determines the point in time when the services would be deemed to be provided. As a general rule, the time of provision of service would be earliest of the date on which service is provided or to be provided; date on which invoice is issued; and date of receipt of payment for a taxable service.

Two sets of books of accounts

Highlighting some of the issues arising from the new rule, the Institute of Chartered Accountants of India (ICAI) has submitted to the Finance Ministry that this move would create working capital problems for small professionals and contractors as payments for their services are received after a gap of six months.

The new dispensation would also make things difficult for developers and builders, the CA Institute has pointed out. It may also compel service providers to maintain two sets of books of accounts, one on cash basis for income tax purposes and the other on accrual basis for service tax purposes.

The ICAI has, in its post-Budget memorandum, suggested that reasonable time be given to service providers to comply with the new rule. Professional service providers who largely maintain books on cash basis be given the option to adopt the system that they are following for income tax purposes for service tax also.

Both ICAI and the Confederation of Indian Industry (CII) have pointed out that the CENVAT credit mechanism has not been aligned with the new system. Although the payment of service tax would be on accrual basis, the credit thereof can be taken on payment basis, it was submitted.

“The point of taxation rules will largely impact taxpayers who follow cash basis of accounting. This would necessitate maintenance of documents in line with accrual system of accounting for service tax compliance purposes”, Mr Aseem Chawla, Tax Partner, Amarchand & Mangaldas told Business Line here.

Published on November 10, 2017

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