Point of Taxation rules changes w.e.f October 1, 2014

As per existing Rule 7 of the Point of Taxation Rules, 2011, the point of taxation is respect of persons required to pay tax as recipients of service under reverse charge mechanism is the date on which payment is made. However, the first proviso of said Rule mandates that where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this Rule did not exist, i.e., we need to fall back on Rule 3 of the Point of Taxation Rules which states that point of taxation shall be time when invoice for service provided or agreed to be provided is issued (completion of service where invoice is not issued within 30/45 days as the case may be) or date of payment which ever is earlier. 

Thus, effectively as per said Rule, Point Of Taxation of services under Reverse Charge Mechanism is the date of payment of invoice or in case invoice is not paid within six months, the point of taxation would be the date of invoice. 

Union Budget 2014-15 has amended the first proviso of Rule 7 to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. 

From the first blush, it appears that the only amendment made is curtailing of earlier time limit of six months for payment of invoice to three months. However, there is a positive side of amendment as well. Under the existing Rule, in case the payment is not made within six months the point of taxation is shifted to date of invoice and thus such person apart from payment of service tax was also obligated to pay interest thereon. However, under the new provision though the time limit has been curtailed to three months, but if this limit is breached the point of taxation would be the first day that occurs immediately after period of three months and POT is not shifted to date of invoice. This would avoid payment of interest for the intermittent period. 

It is important to note here that this amendment will only apply to invoices issued after 1st October, 2014. 

The impact of change is illustrated as under:-

CASE	Date of invoice	Payment Date	POT as per existing Rule	POT as per new Rule
1. Payment made within six months but beyond three months of date of invoice.	16th  May	12th November	12th  November (i.e., date of payment as payment made within six months)	16th  August (i.e., date immediately after period of three months from date of invoice)
2. Payment made after six months of date of invoice.	16th  May	30th November	16th  May (i.e., date of invoice as payment made after six months)	16th  August (i.e., date immediately after period of three months from date of invoice)
3. Payment made within three months of date of invoice.	16th  May	14th  August	14th  August	14th  August

Further, a transitional Rule (new Rule 10) has also been inserted in the Point of Taxation Rules. The same is reproduced below:-

Notwithstanding anything contained in the first proviso to Rule 7, if the invoice in respect of a service, for which point of taxation is determinable under rule 7 has been issued before the 1st day of October, 2014 but payment has not been made as on the said day, the point of taxation shall,–

(a) if payment is made within a period of six months of the date of invoice, be the date on which payment is made;

(b) if payment is not made within a period of six months of the date of invoice, be determined as if rule 7 and this rule do not exist.

The practical application of above Rule is tabulated below:-

S. No	Date of Invoice	Date of payment	Point of Taxation
1	28-09-2014	05-10-2014	05-10-2014 (i.e., Date of payment, as pay- ment made within six months) – As per Rule 10
2	15-04-2014	20-10-2014	15-04-2014 (i.e., Date of invoice, as payment not made within six months) – As per Rule 10
3	02-10-2014	05-11-2014	05-11-2014 (i.e., Date of payment, as same is made within three months) – As per amended Rule 7 (Rule 10 applies only on invoices issued before 01-10-2014.)

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