How point of taxation rule under service tax law affects your taxation under Income tax Act !

Print PDF

Have you thought of how change in Point of Taxation Rule under Service Tax law will affect tax payers under Income Tax Act.I would suggest , you read my previous posting  Why service tax not collected can not be disallowed u/s 43B ?  This is no more valid on account of amendment in point of taxation under service tax rules.

In simple terms , amendment to point of taxation rule has brought one fundamental change –whether one receives payments related to service tax from clients or not , one shall be liable for paying service tax on that amount.In a way , this amendment has brought service tax liability at par with  sales tax, in which a sellers of goods has to pay whether or not he receives the sales tax tax.

So how does the amendment to point of taxation rule affect ones income?

Till now , it was practice that in case there is outstanding amount of service charges from your clients including, such amounts were being passed on directly through balance sheet as debtors with corresponding amount of service tax on “such dues “ under liability head.

The income tax department has tried to invoke section 43B  of the I T Act saying that the service tax amount should first be routed through P & L account and then on account of non-payment of service tax , it should have been disallowed.

However, Tribunal & High Courts have come to rescue of taxpayers saying if there is no liability to make the payment to the credit of Central Government because of non receipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of Clause (a) of Section 43B because that clause specifically mentions “sum payable by the Assessee“. So, in such case , disallowance   u/s 43B of such service tax amount which is yet to be collected is bad in law.

The double whammy  of law

Now service provider will have to pay service tax irrespective of whether the amounts of service bill received or not. If it is not paid , not only under the service tax laws , one shall be liable to pay interest and penalty , but also his income under income tax law may go up due to section 43B of the I T Act.

Please state your view !