Controversy regarding Rate of Service Tax

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Controversy regarding Rate of Service Tax
Whether as per Section 67A or as per Point of
Taxation Rules? Union Budget 2016 provides the
key.
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History of Section 67A

• Section 67A of the Finance Act, 1994 was
  introduced by The Finance Act, 2012 with effect
  from 28-05-2012 which is reproduced below
• "67A. The rate of service tax, value of a taxable
  service and rate of exchange, if any, shall be
  the rate of service tax or value of a taxable
  service or rate of exchange, as the case may be,
  in force or as applicable at the time when the
  taxable service has been provided or agreed to be
  provided.
• Explanation.For the purposes of this section,
  "rate of exchange" means the rate of exchange
  determined in accordance with such rules as may
  be prescribed".
• Plain reading of the above provision suggest that
  the rate of service tax prevailing on the date of
  provision of service shall be relevant for the
  purposes of determination of service tax
  liability. However, such an interpretation would
  make the Point of Taxation Rules, 2011 redundant
  for the purposes of determining service tax
  liability which was the main objective of framing
  such rules.
• After the insertion of section 67A, the assessee,
  professionals and the tax officers were confused
  and divided on the issue. A doubt rose in the
  minds of many that the above section has limited
  the scope of Point of Taxation Rules, 2011 (POT
  Rules) because it is well settled law that the
  provisions contained in the Act has overriding
  effect over the provisions contained in the Rules
  made thereunder. Many experts were of the view
  that the POT Rules was redundant to the extent of
  conflict with section 67A. So, it was being
  interpreted that as per section 67A, rate in
  force or the rate of service tax on the date of
  completion of provision of service shall be the
  applicable rate of service tax and the POT Rules
  remained relevant only for the purpose of
  determining the due date of payment of tax.

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Author's Interpretation of Existing Provision

• The most important factor for determining the
  rate of service tax is the point in timewhen the
  service has been provided or agreed to be
  provided. The powers to make rules to determine
  the point in time has been conferred on the
  Central Government under section 94 of the Act as
  under
• 94. Power to make rules. -
• (1) The Central Government may, by notification
  in the Official Gazette, make rules for carrying
  out the provisions of this Chapter.
• (2) In particular, and without prejudice to the
  generality of the foregoing power, such rules may
  provide for all or any of the following matters,
  namely -
• (a) collection and recovery of service tax under
  sections 66B and 68
• (hhh) the date for determination of rate of
  service tax and the place of provision of taxable
  service under section 66C
• In exercise of the powers conferred as above,
  under section 94(2)(a) and (hhh), the Central
  Government issued Notification No. 18/2011 dated
  01-03-2011 which is known as Point of Taxation
  Rules, 2011 and is made effective from
  01-04-2011.
• Under Rule 2(e) of POT Rules, the 'Point of
  Taxation' means the point in timewhen a
  service SHALL be DEEMED to have been provided.

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• The phrase appearing in section 67A, 'as
  applicable at the time when the taxable service
  has been provided or agreed to be provided' means
  the point in time when a service shall be deemed
  to have been provided after applying the relevant
  rules of the POT Rules.
• Last but not the least, the purpose of inserting
  section 67A was clearly mentioned in Explanatory
  Memorandum to Union Budget 2012-13 under Service
  Tax Point III (1) which is self explanatory and
  reproduced as below
• "A new section 67A is being inserted to prescribe
  that the value of taxable service (particularly
  in the case of import and export of taxable
  services) and the rate of tax shall be determined
  in terms of Point of Taxation Rules, 2011".
• Thus, on the basis of above analysis, it could be
  interpreted that if Section 67A is read in
  harmony with POT Rules, the service tax amount
  needs to be computed at the rate of service tax
  in force as per POT Rules and not on the date of
  provision of service per-se. But the controversy
  persisted leading to unnecessary litigation and
  uncertainty.
•  
• Proposed Amendment to Section 67A to Reduce
  Litigation Provide Certainty in Applicable Tax
  Rate
• In a welcome move towards reducing litigation and
  providing certainty to the applicable rate of
  service tax, the Union Budget 2016 presented by
  the Hon'ble Finance Minister Shri Arun Jaitley on
  29-02-2016 has proposed amendment to section 67A.
• As per Explanatory Notes to the Finance Bill,
  2016, clause 148 of the Bill seeks to amend
  section 67A of the Finance Act, 1994so as to
  insert a new sub-section (2) therein to empower
  the Central Government to prescribe the time or
  the point in time with respect to the rate of
  service tax.

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• The clause is reproduced below
• "148. In the 1994 Act, in section 67A, the
  existing section shall be renumbered as
  sub-section (1) thereof, and after sub-section
  (1) as so renumbered, the following sub-section
  shall be inserted, namely
• (2) The time or the point in time with respect to
  the rate of service tax shall be such as may be
  prescribed."
• Further, POT Rules is proposed to be amended vide
  Notification No. 10/2016-ST dated 01-03-2016
  whereby in the opening paragraph, after the words
  ?powers conferred under, the word, letters and
  signs "sub-section (2) of section 67A and" shall
  be inserted with effect from the date of
  enforcement of the Finance Act, 2016.
• After the proposed amendment, section 67A will be
  as below
• "67A. (1) The rate of service tax, value of a
  taxable service and rate of exchange, if
  any, shall be the rate of service tax or value of
  a taxable service or rate of exchange, as the
  case may be, in force or as applicable at the
  time when the taxable service has been provided
  or agreed to be provided.
• (2) The time or the point in time with respect to
  the rate of service tax shall be such as may be
  prescribed.
• Explanation.For the purposes of this section,
  "rate of exchange" means the rate of exchange
  determined in accordance with such rules as may
  be prescribed".
• The above amendment has specifically enabled the
  Central Government to make rules and has linked
  the POT Rules with section 67A which is expected
  to settle the disputes regarding applicability of
  rate of service tax. The POT Rules shall remain
  relevant for determining rate of service tax as
  well as due date of payment of tax. But again the
  question arises whether the said amendment can be
  applied prospectively treating the same as
  substantive amendment or retrospectively treating
  the same as clarificatory in nature.

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