Point of taxation rules ( POT rules) : The ultimate guide with example

Service tax rate is changed from 12.36% to 14%. To determine service tax liability on or after change of rate, point of taxation rules of service tax plays the main role.

We all know that service tax should be paid by 6th of following month when service is deemed to provided.So which rule decides when is service deemed to be provided? of course, POT rules.

Point of taxation rules use:

It decides taxable event date and due date of payment of service tax. As per rule 6(1) of service tax rules, service tax shall be deemed to paid to the credit of government by 6th of the month /quarter immediately following the month/quarter in which service is deemed to be provided.

Point of taxation covers following rules:

Rule 2A of POT rules : Meaning of date of payment

Rule 3 of POT rules: Determination of point of taxation.

Rule 4 of POT rules: Point of taxation when there is change in effective rate of tax

Rule 5 of POT rules: point of taxation when service is taxed first time.

Rule 7 of POT rules: Point of taxation for specified services – reverse charge mechanism.

Rule 8 of POT rules: Royalty services POT rules

Rule 8A of POT rules: best of judgement rule ( residual rule)

Rule 9 of POT rules:Transitional provisions

We will understand one by one rule with example.

Rule 3 of POT rules:Determination of point of taxation:

As per rule 3 of POT rules,

POT is earlier of the following

1. When invoice is issued within due date of issue of invoice
2. When payment is actually received by service provider

Due date of issue of invoice:

Invoice should be issued within 30 days from the date of completion of service.

There is another condition that when invoice is not issued within due date,

POT is earlier of the following:

1. When payment is actually received by service provider
2. Date of completion of service

Let it understand with POT chart:

Date of payment meaning under POT rules ( Rule 2A):

Date of payment for payment  shall be earlier date from the following

1. Date when payment is entered in the books of accounts
2. Date when the bank account of the person is credited. or cash received.

But date of payment is date of credit in bank account when

1. There is change in effective rate of tax or the service is taxed first time during the period of credit in books of accounts and credit in bank account
2. The payment is credited after 4 working days from the date when there is change in effective rate of tax or the service is taxed first time.

understand with example:

Suppose date of credit in bank account is 12/11/14 then 9/11/14 shall be considered as date of payment for POT purpose.

You may think why it is important. It is important because rate of duty is determined as per POT rule. When date of payment is before date of change of duty, old rate will be considered for service tax purpose.

Kindly note that this rule is applicable for bank payment only and not when payment is received by cash.

Rule 4 of Point of taxation rules: POT when there is change in effective rate of tax:

This rule will be applied when there is change in effective rate of tax. New service tax rate 14% is applicable from 1st June, 2015. Now many assessee has the question about charging service tax at 12.36% or 14% in following events:

1. When service is provided before 1st june, 2015 and invoice is issued after 1st june, 2015?
2. What if service is provided and invoice is issued before 1st June, 2015 but payment is received after june 1st, 2015?
3. What service tax rate should be considered when invoice is raised and payment is received before 1st june, 2015 but service is provided after 1st June, 2015?

We can use rule 4 of POT rule to determine point of taxation in above cases.

Note : First june should be considered as date of change of effective rate of tax.

To make it simple, we can see that majority is prevailed here.

Consider three factors:

1. Date of provision of service
2. Date of payment received
3. Date of invoice issued.

When two factors are before the date of change in service tax rate, old rate will be considered. If two factors are on or after the date of change in service tax, new rate will be applicable.

Swachh bharat cess is levied on 15/11/2015 and service tax rate is increased to 14% to 14.5%.

Decide when to charge 14.5% rate from the following table:

Rule 5 : Point of taxation when service is taxed first time:

When service is taxed first time, no service tax should be payable

1. when invoice has been issued and payment received for such invoice before the service becomes taxable.
2. if the payment has been received before the service becomes taxable and invoice has been issued within 14 days from the date when the service is taxed first time.

Rule 7: Point of taxation when service tax is payable under reverse charge mechanism:

when service receiver is liable to pay service tax under RCM, the point of taxation shall be the date when the payment is made. There is one condition in this rule that the payment should be made within six months of date of invoice.

So if you are liable to pay service tax under RCM, consider the date of payment to the service provide to determine when to pay service tax to government department. It will be 6th/7th of  next month or next month from the end of quarter.

Rule 8: point of taxation for royalties, copyrights etc. :

Rule 8 applies when amount received for royalties, patent, copyrights etc. The whole amount is not receivable in these cases. The amount is some percentage of sales amount or sale value of copies sold.

In this case, service shall be deemed to have been provided at earlier of the following:

1. Payment received or benefit is received
2. Invoice is raised.

Rule 8A: Residual rule- best of judgement:

This rule is residual rule. When assessee has not information available for payment received or date of invoice ( one or both), the central excise officer require to concern person produce such books of accounts or documents which are necessary and after taking into accounts all the facts and rate prevailing at that time, shall by order in writing, after  giving opportunity of being heard, determine the point of taxation to the best of his judgement.