A HUGE LOSS OF INTEREST TO SERVICE TAX DEPARTMENT

[KASTURI SETHI]

 It is a common practice that Service Tax assessees who provide ‘Renting of Immovable Property Services’ receive rent in advance  along with Service Tax but they deposit Service Tax in Govt. account on monthly basis or quarterly basis by 6^th of the following month or quarter, as the case may be, in terms of Rule 6 of Service Tax Rules, 1994. Thus they retain revenue  (Service Tax collected from the Service Receiver in advance)  in their own pocket without paying interest to Central Govt.   for one month  or three months, as the case may be, depending upon constitution of the firm. If it is one person company, an individual or proprietary firm or partnership firm or Hindu Undivided Family,  they  retain Govt. money (revenue)  for three months and in case of other assessees i.e. Ltd. Companies, etc.   they  retain in their kitty for one month. It is also a  practice that sometimes  rent is received in advance for   six months or a year. Some Service Providers (landlords)  also charge a hefty amount as security from the tenants (Service Receivers). In that situation, they retain revenue in their pocket  for more than six months or a year as they deposit the same into Central Govt. account as per stipulated date prescribed in Rule 6  of Service Tax Rules. Thus by keeping revenue  in their own  pockets they are enriched unjustifiably.  Nobody has any right to keep revenue (Govt. money) in one’s  own pocket even for a single day.  They are doing this  as per Rule 6 of Service Tax Rules, 1994 which is  reproduced below:-

 RULE [6. Payment of service tax. - [(1) The service tax shall be paid to the credit of the Central Government, -

(i)       by the 6th day of the month, if the duty is deposited electronically through internet banking; and

(ii)      by the 5th day of the month, in any other case,

immediately following the calendar month in which the [service is deemed to be provided as per the rules framed in this regard] :

Provided that where the [assessee is a one person company whose aggregate value of taxable services provided from one or more premises is fifty lakh rupees or less in the previous financial year, or is an individual or proprietary firm or partnership firm or Hindu Undivided Family] the service tax shall be paid to the credit of the Central Government by the 6th day of the month if the duty is deposited electronically through internet banking, or, in any other case, the 5th day of the month, as the case may be, immediately following the quarter in which the [service is deemed to be provided as per the rules framed in this regard] :

 Now as per  Explanation to Rule 3 of Point of Taxation Rules, 2011,  if any advance 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. Rule 3 of POTRs, 2011 is extracted as under :-

 RULE [3. Determination of point of taxation. - For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be,-

(a)   the time when the invoice for the service [provided or agreed to be provided] is issued :

[Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service.]

(b)  in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment :

[Provided that for the purposes of clauses (a) and (b), -

(i)  in case of continuous supply of service 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 receiver of service 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;

(ii)  wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of clause (a).]

Explanation - For the purpose of this rule, wherever 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 as per Rule 3 of POTRs,  in the cases  where advance amount is received  along with Service Tax or inclusive of Service Tax in the amount of lease or rent, the point of taxation is the date of receipt of advance. In other words, Service Tax is payable from the date of receipt of advance amount. It is practice that in  respect of ‘Renting of Immovable Property Services’ the Service Providers (Landlords) charge Service Tax separately in advance along with advance rent and retain that Govt. money in their kitty for one or three months without any payment of interest as  Rule 6 of Service Tax Rules allows them  to do so.    In this way,  a huge revenue loss in the form of loss of  interest running into hundreds of crores  is being caused to Govt. of India by the Service Providers of Renting of Immovable Property Services. It may also be applicable to other services also where advance Service Tax is being collected from the Service Receivers by the Service Providers. When Service Tax is collected in advance, nobody should be allowed to retain that money in his/her pocket without interest. Rather, that amount of Service Tax should be deposited immediately into Central Govt. Accounts without waiting for the period of one month or three months provided under Rule 6 of Service Tax Rules, 1994. This provision of schedule for fixed  the date was introduced much earlier to the introduction of Point of Taxation Rules, 2011. Thereafter, the provisions of Rule 6 have  neither been reviewed nor amended. In such a situation,  in order to avoid loss of interest, the due date should be fixed one or two days instead of one month or three months, at least not  more than one week irrespective of constitution of the Service Provider/Service Tax Assessee. In the era of high technology as well as internet banking there  should be  no problem for any assessee to deposit Service Tax on the same day i.e. on the day they collect Service Tax in advance from the Service Recipient. It is unjust enrichment being enjoyed by the Landlords (Owners of big showrooms as well as small showrooms)/Service Providers of renting of immovable property services duly authorized by Govt. under Rule 6 of Service Tax Rules. Rule 6 of Service Tax Rules is not in consonance with Rule 3 of Point of Taxation Rules, 2011.  Why the Govt. of India should suffer loss of revenue in the form of loss of interest running into hundreds of crores (roughly estimated) due to disharmony between these both rules  ?  Why any assessee should be allowed to enjoy such unjust enrichment at the cost of exchequer  ?   After all Service Tax thus collected and not deposited for one or three months or more period belongs to the public. Thus the dichotomy between both rules should be filled up.

 In view of above factual situation, Rule 6  of  Service Tax Rules   need to be amended urgently by the Board. This is my view as well as suggestion in the interest of nation.