OCTOBER 09, 2017

By Lakshmi Ratna Kancherla, Advocate

IN the present article, an attempt is made to analyse "at what point in time" the input tax credit in respect of tax paid services is available to a registered person under the GST Law.

In the service sector, it is common to collect a lumpsum amount for services to be provided over a period of time ranging from six months to three years. In such cases, the suppliers' (service provider) issue invoice, charges and collects the tax to be deposited to the Government. The question is the point in time when the credit of such tax is available to the recipient.

An examination of the position under the erstwhile law and the GST Law is carried out infra -

Credit of Input Service - Position under the Erstwhile Law (Finance Act, 1994 & CCR, 2004)

Under the erstwhile law i.e., the Finance Act, 1994 (hereinafter referred to as "Finance Act") read with Rule 4(7) of the CENVAT Credit Rules, 2004, the service provider/manufacturer was entitled to avail the credit of the Service Tax paid on input service immediately on or after the day on which, invoice [ Under the Service Tax Law, invoice was required to be issued within thirty days from the date of provision of service in terms of Rule 3 of the Point of Taxation Rules, 2011.] , bill or as the case may be challan is received. Among others, the credit was allowed subject to the condition that the value of service and service tax has been paid within a period of 90 days.

Prior to 2011 i.e., before introduction of the Point of Taxation Rules, 2011, the credit in respect of the input service was allowed on or after the day on which payment was made of the value of service and service tax as indicated in the invoice.

Credit of Input Service-Position under the Goods and Service Tax Law

Section 16 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as "CGST Act") lays down the conditions for taking input tax credit. Section 16(2)(b) of the CGST Act, provides that no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless he has received the goods or services or both.

A perusal of the erstwhile law and the GST Law indicates that this condition of "receipt of service" is a new concept introduced in the GST to determine admissibility of credit.

This brings us to the pertinent question viz. "when is service received?" for the purpose of Section 16 in a situation the supplier collects payment for the service in advance for the services to be provided over a period of time and issues invoice and discharges appropriate GST on such amounts received. It is to be noted that most of time the invoice is issued much before the provision of service has commenced.

Reference may be made to Explanation to Section 13 (2) of the CGST Act which lays down provisions in respect of time of supply of services. The relevant extract is as follows:

"(2) The time of supply of services shall be the earliest of the following dates, namely :-

(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or

(b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or

(c) …………

………….

Explanation. -For the purposes of clauses (a) and (b) -

(i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment;"

A perusal of the above indicates that, in order to determine the time when the service is provided, the supply shall be deemed to have been made to the extent covered by the invoice. The Legislature appears to have included the said provision out of abundant caution so that no assessee claims the very fact that supply of service has taken place even if the situation has not arisen.

Accordingly, the registered person should be entitled to avail the credit of the input service in the situation in hand, taking a cue from the Explanation to Section 13 on the basis that service is deemed to have been provided on receipt of invoice or on the date of making the payment itself .

However, in the absence of any reference of the said Explanation to Section 16(2)(b) of CGST Act, 2017, it is not possible apply the same for the purpose of taking credit unless the registered assessee satisfies the condition of receipt of service.

It is pertinent to note that there is a similar provision under Explanation to Section 12(2) of the CGST Act, which has been envisaged for determining time of supply of goods as well. In fact, application of the similar provision for goods may not be acceptable since conventionally "receipt" of goods is equated to actual receipt. Hence, where receipt of goods is equated to actual receipt, it may not be acceptable to adopt a different yardstick for services.

The fact remains that unlike goods, services are intangible and the only measurable means would either be making of payment or receipt of invoice as available under the erstwhile law. The services are deemed to have been provided and consumed simultaneously hence there is no question of any deferment of the receipt. Hence, the assessees should be entitled to take the credit on receipt of the invoice even in a situation where the actual provision of service may take place at a later point in time.

Keeping in view the anomaly as indicated above and the fertile minds of the audit parties and the revenue officer, strictly interpreting the provision, there are chances of the credit not being allowed in such cases.

The legislature is thus required to suitably amend the provision pertaining to receipt of services by issuing suitable amendment / clarification in this regard considering the time limit in taking credit and due to the fact that it will not be commercially viable for any assessee to defer availment of credit which is otherwise legally permissible.

(The views in this article are strictly personal)