Service Tax Authorities have issued Notification 19/2014 wrt the exchange rate to be adopted for computation of service tax liability on forex remittances under reverse charge mechanism (import of services) wef October 1, 2014. In this regard, we request you to note the following:
The conversion rate to be adopted for computation of service tax liability shall be the rate of exchange as per the generally accepted accounting principles on the date when point of taxation arises in terms of the Point of Taxation Rules, 2011;
Date of Payment Exchange Rate
Within 3 months from the date of invoice Date of Payment of value of service
After 3 months from the date of invoice Date of Invoice
Our Comments
The service tax was being paid on import of services based on the value accounted in the books of accounts. There was no necessity to amend the rules to link the same with the exchange rates notified by the customs authorities. Having realized the mistake, the Finance minister in the Budget 2014 announced that rules would be issued to prescribe the rate of exchange to be applied for computation of service tax on forex payments. The aforementioned amendments have been introduced in the service tax rules based on the announcements made in the Budget. The said amendment would have certain amount of nuisance value to the extent of
- Point of Taxation on reverse charge mechanism arises on the date of payment of value of service (unless the invoice is remitted within 3 months from the date of invoice); and
- While the term generally accepted accounting principles has not been defined, it would be safe to make reference to Accounting Standard 11 issued by the Institute of Chartered Accountants of India which deals with “The Effects of Changes in Foreign Exchange Rates”. As per the said Accounting Standard, a foreign exchange transaction should be recorded by applying the exchange rate which is effective at the date of the transaction (para 9);
- Thus, for computing the service tax liability, the exchange rate to be used would be the rate applicable on the date of transaction (date of payment / date of invoice) when the service tax liability arises.
Date of Payment Exchange Rate
Within 3 months from the date of invoice Date of Payment of value of service
After 3 months from the date of invoice Date of Invoice
Our Comments
The service tax was being paid on import of services based on the value accounted in the books of accounts. There was no necessity to amend the rules to link the same with the exchange rates notified by the customs authorities. Having realized the mistake, the Finance minister in the Budget 2014 announced that rules would be issued to prescribe the rate of exchange to be applied for computation of service tax on forex payments. The aforementioned amendments have been introduced in the service tax rules based on the announcements made in the Budget. The said amendment would have certain amount of nuisance value to the extent of
- What is the meaning of Generally Accepted Accounting Principles (Accounting Standards are applicable only to entities which are required to get their accounts audited);
- The exchange rate is linked to the date on which service tax liability arises as per the Point of Taxation Rules, 2011. What will happen if the assessee wishes to remit the service tax liability in advance ie even before the service tax becomes due as per the provisions of Point of Taxation Rules; and
- Reconciliation between the forex outflow as per the books of accounts (based on the invoice date) and forex outflow on which service tax has been paid (based on the payment date).
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