Hitherto, the obligation to pay service tax was only when the consideration for services rendered was received. With the notification of the Point of Taxation Rules, 2011, with effect from April 1, 2011, service providers are required to pay service tax in the tax period in which either (a) the service is provided or (b) the invoice is issued or (c) the payment is received.

The ostensible reason for the change is that under Central Excise/VAT law, the liability to pay tax occurs in the tax period in which the goods are cleared/sold and with the impending implementation of GST, the liability to pay service tax is aligned with that of the excise legislation.

Besides, it is argued that internationally the obligation to pay tax is on effecting the supply of goods or services.

Harsh proposal

While Central excise levy is on relatively large manufacturers with annual clearance exceeding Rs 150 lakh, service tax levy is applicable to very small service providers.

The annual threshold exemption in service tax is only Rs 10 lakh. It would be harsh to require the small service providers to pay up on issue of invoice even without receiving payment.

Besides, there is no requirement to pay excise duty or VAT on advance payment received. The obligation to pay excise duty is at the time of clearance of goods and under VAT, the obligation is when the goods are sold. Therefore, there is no case for requirement to pay service tax on advance payment received.

Our tax authorities take reasonable pride that they are quick to adopt acceptable international practices in tax administration.

The Export of Service Rules and Import of Service Rule is a case in point.

One good international practice that requires to be adopted is the ‘Cash Accounting Scheme for VAT' applicable in the United Kingdom, for small dealers. This scheme applies to dealers whose estimated annual turnover is not more than £1.35 million. While a dealer paying VAT on accrual basis claims input tax credit on accounting of the purchase bills, a dealer opting for Cash Accounting System can claim input tax credit only on payment of the bills of the suppliers.

The Finance minister was gracious in recognising service providers with annual billing of less than Rs 60 lakh as small service providers by granting concession of 3 per cent on interest payable, extension of time for payment of tax under Section 78 of the Finance Act and exempting the small dealers from the rigour of departmental audit.

It is therefore imperative that service providers with annual value of taxable service of less than Rs 60 lakh be permitted to continue with the present system of payment of service tax on receipt of payment from the service receivers with a stipulation that they can avail CENVAT Credit of service tax paid on payment of value of services received.

(The author is a Madurai-based tax consultant.)

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