Prior to 2011-12 [see end note 1] service tax was payable on receipt basis in the calendar month or quarter, depending on the class of the assessee, immediately following the calendar month or quarter in which the payments are received towards the value of taxable services. The payment [see end note 2] could be by cheque, credit card, deduction from account, issue of credit notes or debit notes, and also by book adjustments.
Cenvat credit of the service tax paid on an input service was allowed [see end note 3] upon such payment, on the basis of the invoice raised. It may be noted that payment of invoice value and not merely the service tax component of the invoice, which was a pre-requisite to taking Cenvat credit.
From 2011-12 onwards [see end note 4], the point of taxation has been moved, broadly speaking, to the date of invoice or the date of receipt of payment, whichever is earlier. Though credit is now allowed on the basis of the invoice, even if no payment has been made, the credit taken needs to be reversed if the payment of value of input service and the service tax paid or payable as indicated in the invoice is not made within three months of the date of the invoice. Thus the requirement for payment of the invoice value rather than only the service tax component has continued even though an extra time period appears to have been allowed for such payment.
Two questions arise in this context. Firstly, why should a law relating to levy and collection of service tax mandate payment of the full invoice value for allowing Cenvat credit. While there could be a concern about someone taking credit for an amount beyond what has been paid as service tax into the treasury, payment of the remaining amount would appear to be a matter to be settled either between the parties concerned or under a law governing commerce or business.
Secondly, what happens if the entire invoice value is not settled in one go? There are varying commercial practices adopted for settlement of payments amongst parties having regular business dealings. For example, the commercial practice is to deduct a small percentage (usually between 5-10%) of the invoice as retention money, to be returned only after completion of the entire contract. Though the full value of the invoice may be passed for payment and the value of the works is included by the service recipient in the value of work-in-progress, etc. the payment is released against the invoice only after deducting the retention. There could also be net settlement amongst parties after adjustments for amounts payable to the service recipient, payments received from third parties on behalf of the service recipient, etc. What is the legal position relating to availability of Cenvat credit in these cases?
CESTAT, New Delhi [see end note 5] recently dealt with both the aforesaid questions while deciding on whether Cenvat credit is allowable on the basis of invoices where a percentage of the billed amount is retained as performance guarantee. In this case, the department sought to disallow proportionate Cenvat credit to the extent the billed amount had been retained. The Tribunal held that so long as the service charges as well as the service tax have been paid in any of the prescribed manners the credit should be allowed.
The Tribunal also partly answered the first question above by holding that the policy rationale behind the relevant provisions of the Cenvat Credit Rules [see end note 6] was to prevent a situation where credit is availed by the service provider on receipt of invoice, even though he has not paid the service tax for the reason that there is delay in receipt of payment by him from the service recipient. But this still does not explain why the invoice value rather than only the service tax component is required to be paid, nor does it explain why a similar dispensation is being continued even in the new regime!
It is necessary here to keep in mind that in India, taxation is not merely viewed as a tool to raise resources to meet budgetary needs, but also as an instrument of fiscal policy to influence socio-economic behaviour. Sometimes the legislative provisions cross-reference or reinforce each other so as to achieve certain common objectives even without explicitly stating so.
For example, the provisions relating to MRP [see end note 7] based valuation under central excise law seek to ride on the Legal Metrology Act, 2011 so as to reduce valuation disputes. However, the penal provisions for alteration of MRP, etc. under central excise law reinforce the provisions of the latter Act, thereby enhancing consumer protection.
Similarly, denial of Cenvat credit under service tax provisions in case of non-payment of the invoice value within prescribed time limit could be part of policy disincentives against delays in payments to Micro, Small and Medium Enterprises (MSMEs). The Government has stipulated provisions for timely and prompt payment for the goods and services supplied by MSMEs under the MSMEs Development Act, 2006 [see end note 8]. Such timely payment also lowers the credit risk to MSMEs which may even be granted collateral free loans in terms of RBI guidelines [see end note 9]. However even this unstated explanation is only partial as it still does not explain such mandate for non-MSME cases.
In any case, it is a settled principle that a notification/rule is to be construed according to its language and there is no room for intendment while interpreting it. Hence it can be said that the questions relating to availability of Cenvat Credit on partially paid invoices have not been settled as yet.
[ The author is a Director, Tax Practice, Lakshmikumaran & Sridharan, New Delhi ]
End Notes:
- Under Rule 6 of the Service Tax Rules, 1994.
- Refer Explanation to Section 67 of the Finance Act, 1994. In the case of associated enterprises, debit or credit to any account (even if it be a suspense account) in the books of a person liable to pay service tax, shall amount to payment.
- Under Rule 4(7) of the Cenvat Credit Rules, 2004.
- Under the Point of Taxation Rules, 2011 notified effect with effect from 1-4-2011.
- Order No. 56583/2013 dated 15-5-2013 in the case of Hindustan Zinc Limited.
- As they existed during the period prior to 2011-12
- Maximum Retail Price
- As per Section 15 of the said Act, the buyer is required to make payment on or before the date agreed upon with the supplier or, where there is no such agreement before the appointed day. The agreement between seller and buyer shall not exceed more than 45 days. The delayed payments are subject to compound interest with monthly rests at thrice the Bank Rate notified by the Reserve Bank of India.
- Refer discussion at http://rbi.org.in/scripts/FAQView.aspx?Id=84