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Changes in service tax rate and its impact on the industry

The service tax rate stands increased from 12.36% to 14% with effect from 1st June, 2015. All services including phone, travelling, professional fees, ecommerce, etc. will cost more from next month. So, citizens, let us warm up to cough up more money!

This apart, the service providers may have some doubts about the rate of tax in cases where service is provided, but invoicing is not done, Invoicing is done, amount is yet to be received, etc.

So the circular of service tax department gives different scenarios  about the applicability of old and new rates. Here is the simplified version of the same for your reference.

First of all, we have to understand that there are three events, namely,

  1. Date of provision of service
  2. Date of issue of invoice
  3. Date of payment

Applicability of old rate: If 2 or more of the above events take place on or before 1st June, the rate shall be 12.36%, otherwise new rates will be applicable.

This can also be explained through examples such as

  1. M/s LNM Private Limited received an invoice for Rs.100000 on 20th May 2015. The customer paid against this invoice on 25th May 2015. But the service will be provided on 5th June, 2015.  (Rate applicable – Invoice is raised and payment is received from 1st June 2015– apply old rate as 2 events have taken place before 1st June 2015)
  1. M/s KML Private Limited provided the service on 18th May 2015. But the invoice is raised on 4th June 2015. The payment is expected to be received around 20th June 2015. (Rate applicable – Invoice and payment against the invoice will take place after 1st June 2015 and hence apply new rate as 2 events takes place after 1st June 2015)
  1. M/s MML Private Limited provided the service on 19th May 2015 and payment is received (advance payment) on 15th May 2015. But the invoice will be raised on 6th June 2015. (Rate applicable – as 2 events have taken place before 1st June 2015, apply old rate, even if the invoice is raised after 1st June 2015)
  1. M/s KLM Private Limited received the service on 10th April 2015 and also got the invoice on 12th April 2015. However, the payment is made in instalments (EMI) over the next 10 months. (Rate applicable – old rate as 2 events have taken place before 1st June 2015)

table showing all possible combinations and respective rate of service tax applicable

 

 

 

 

 

Hopefully, the above examples would be sufficient to understand the provisions. However, how to prove to the department that the services are provided before June 2015? If the department won’t agree on this, what will happen?

So we suggest you to go for a conservative approach and apply service tax at new rate for all the invoices raised on or after 1st June 2015. In case you are able to prove that the service is already rendered and invoice is raised (in case of Instalment payment) or payment is received and service is provided, then only you apply old rates.

 

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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]