As per existing Rule 7 of the Point of Taxation Rules, 2011, the point of taxation is respect of persons required to pay tax as recipients of service under reverse charge mechanism is the date on which payment is made. However, the first proviso of said Rule mandates that where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this Rule did not exist, i.e., we need to fall back on Rule 3 of the Point of Taxation Rules which states that point of taxation shall be time when invoice for service provided or agreed to be provided is issued (completion of service where invoice is not issued within 30/45 days as the case may be) or date of payment whichever is earlier.
Thus, effectively as per said Rule, Point Of Taxation of services under Reverse Charge Mechanism is the date of payment of invoice or in case invoice is not paid within six months, the point of taxation would be the date of invoice.
Union Budget 2014-15 has amended the first proviso of Rule 7 to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier.
From the first blush, it appears that the only amendment made is curtailing of earlier time limit of six months for payment of invoice to three months. However, there is a positive side of amendment as well. Under the existing Rule, in case the payment is not made within six months the point of taxation is shifted to date of invoice and thus such person apart from payment of service tax was also obligated to pay interest thereon. However, under the new provision though the time limit has been curtailed to three months, but if this limit is breached the point of taxation would be the first day that occurs immediately after period of three months and POT is not shifted to date of invoice. This would avoid payment of interest for the intermittent period.
It is important to note here that this amendment will only apply to invoices issued after 1stOctober, 2014.