CONTINUOUS SUPPLY OF SERVICE

[Mr. M. GOVINDARAJAN]

Service tax was introduced from the year 1994.  Only 3 services were included in the service tax net and now it has been spreaded to more services. Chapter V of the  Finance Act, 1994 provides for levy of service tax, crediting the service tax into the Central Government account etc.,   The service tax is payable on cash basis.  Invoices are to be raised within fourteen days of completion of service. The periodicity of service has not been defined by the Finance Act, 1994 or by the rules made there under.   Most of the services coming under the service tax net are for short periods. Only few services cover some what longer period. Telecom service is the one which is having longer duration of service. In this service the service begins from the date of application by the subscriber requesting to provide new phone connection to till the date of permanent disconnection of the telephone.  This is applicable to landline phones as well as post paid cellular phones. The service is further extended till the date of refund of deposit, if any, to the subscriber.

Telecom service providers engage entities to collect the bills on their behalf on commission basis.  Such agents collect service tax on commission paid to them under the ‘Business Auxiliary services’. The Revenue does not allow taking CENVAT credit for such service tax paid on input services in the contention that the collection of bills are post service activities.  However the appellate authorities decided in favor of the service providers since the said activity is related to the business.  Now the phrase ‘activities relating to business’ found in the definition of ‘input service’ under Rule 2(l) of CENVAT Credit Rules has been deleted. 

The Finance Minister introduced the new concept of paying service tax on accrual basis instead of payment basis from this financial year.  For this purpose ‘The Point of Taxation Rules, 2011’ has been framed vide Notification No. 18/2011-ST, dated 01.03.2011 which came into effect from 01.04.2011.This Rule has introduced the concept of ‘continuous supply of service’.

Rule 2(c) defines the term ‘continuous supply of service’ as any service which is provided, or to be provided continuously under a contract, for a period exceeding 3 months, or where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition.

The following services have been notified as ‘continuous supply of services’ in terms of clause 2(c) of the Point of Taxation Rules vide Notification No. 28/2011-ST, dated 01.04.2011:

(a) Telecommunication Services – Sec. 65 (105) (zzzx);

(b) Commercial or industrial construction – Sec. 65 (105) (zza);

(c) Construction of residential complex – Sec. 65 (105) (zzzh);

(d) Internet Telecommunications services – Sec. 65 (105) (zzzu);

(e) Works contract service – Sec. 65 (105) (zzzza)

The above said services will constitute ‘continuous supply of service’ irrespective of the period for which they are provided or agreed to be provided.   Other services will be considered continuous supply only if they are provided or agreed to be provided continuously for a period exceeding 3 months.

Rule 3 deals with determination of point of taxation. Rule 4 deals with determination of point of taxation in case of change in effective rate of tax. Rule 8 deals with determination of point of taxation in case of copy rights etc.,   Rule 6 deals with the determination of point of taxation in case of continuous supply of service.   This rule has been amended by the Point of Taxation (Amendment) Rules, 2011.  Rule 6 provides that notwithstanding anything contained in Rules 3, 4 or 8 in case of continuous supply of services, the ‘point of taxation’ shall be-

(a)  The time when the invoice for the service provided or to be provided is issued. Where the invoice is not issued within fourteen days of the completion of the provision of service, the point of taxation shall be the date of such completion.  Where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service;

(b)  In a case, where the person providing the service, receives a payment before the time specified in (a), the time, when he receives such payment, to the extent of such payment.   Where any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance. 

Thus Rule 6 has primacy over Rule 3, 4 and 8.

Rule 9 has given option to pay tax on payment basis as at present till 30.06.2011. The service provider, who provides continuous supply of service may better to give an option either to pay on payment basis till 30.06.2011 or with effect from 1.4.2011 on accrual basis.

The continuous service provider has to maintain two separate accounts, one for the service tax on payment basis up to 31.03.2011 or up to 30.06.2011 and another for the period after 1.4.2011 or 1.7.2011 for accrual basis.   The said service provider has to pay service tax on both methods till the collection of payment for invoices issued up to the period (either 31.3.2011 or 30.06.2011) for which option is exercised.   For example we may take the month of July 2011. The service provider has to pay service tax on accrual basis for the invoices raised during July 2011 + the payments received during July 2011 in respect of invoices issued up to the period (either 31.3.2011 or 30.06.2011) on payment basis.  This will be additional burden for the service provider. The service tax return, ST-3, is also required to be revised for such continuous supply of service to incorporate both the types of payments in the return.