Treatment of service tax paid at old rate

Written by Vivek Sharma | Vivek Sharma | Manav Saneja | Updated: Dec 21 2012, 07:09am hrs
Queries on taxation and service tax liabilities, addressed by Vivek Sharma & Manav Saneja of Ernst & Young

We received services from an architect firm prior to 31 March 2012 for designing our new office. Service Tax was charged at the rate of 10.3% on the invoice issued to us, which is still pending for payment. The architect firm has raised a supplementary invoice to recover additional service tax at 2.06% on the ground that the rate of tax has increased from 10.3% to 12.36%. Please clarify whether we are required to make such additional payment and whether Cenvat credit of the same shall be available to us.

Architect firms (proprietorship or partnership) were governed by Rule 7 of the Point of Taxation Rules, 2011 till 31 March 2012, where Service tax payment had to be discharged on receipt basis. However, this provision has been rescinded from 1 April 2012 and the point of taxation of such services would be as per Rule 4 of the Point of Taxation Rules, 2011.

In this regard, the Central Board of Excise and Customs (CBEC) had clarified that for invoices issued on or before 31 March 2012, the point of taxation shall continue to be the date of payment. The CBEC issued another clarification that in case of the specified services (which include architects services) where invoice has been raised prior to 1 April 2012 (when the rate of tax was 10.3%) but payment is received post 1st April 2012 (when the rate of tax is 12.36%), service tax would be charged at 12.36%. The circular also clarifies that supplementary invoices may be issued to reflect the correct rate of service tax, and Cenvat credit can be claimed on such supplementary invoices subject to the conditions prescribed in the Cenvat Credit Rules 2004. It is on the basis of such circular that your vendor has raised the supplementary invoice. Further, you can claim credit of such differential service tax paid based on the supplementary invoice.

FOC supplies

Were engaged in real estate development in Haryana. We often engage subcontractors to do certain services such as electrical and plumbing services. In most of these works contract, material is supplied by us to the subcontractor on Free of Cost basis. We would like to know whether under the negative list regime, wherein composition scheme has been replaced by a unified scheme, the value of goods procured by the service recipient from third parties, and supplied to a contractor on FOC should be included in the gross amount charged.

Under the earlier regime of taxation of services based on selective taxation (as applicable prior to July 1, 2012), works contract services were taxable at a composite rate of 4.94% which was applicable on the gross amount charged for the contract. The gross amount included the value of all the goods used in or in relation to the execution of a works contract, whether supplied under any other contract for a consideration or otherwise. However, there was ambiguity on the value of goods procured by the service recipient from third parties and later supplied to a contractor on a FOC basis should be included in the gross amount charged.

However, this ambiguity has been removed under the negative list regime. Under the current unified scheme, service tax is payable on prescribed percentages of total amount charged. The total amount charged will be the gross amount charged for the works contract in addition to the fair market value of all the goods and services supplied by the service recipient less the amount recovered by the service recipient for such goods and services and VAT/sales tax thereon. The fair market value will be determined on the basis of generally accepted accounting principles. Hence, under the new regime, there is clarity with regard to the inclusion of supplies made by the service recipient (whether procured from third parties or from service providers) in the total amount charged. Thus, you should discharge service tax on the gross value which shall include the value of the FoC supplies.

The replies do not constitute professional advice. Neither Ernst & Young nor FE is liable for any action taken on the basis of these replies. Readers may mail their queries to