In the First Part “Demystifying Time of Supply of Services under Model GST Law” we have seen the various provisions for the time of supply for services under the Model GST Law. Now in the section of the article, we will see the impact of the rate change on the time of supply of services along with few open items for which we need to have clarity in the GST Bill. Section 14 of the Model GST Laws lays down the various provisions for the tax rate implications on the supply of services for tax rate changes.
Service Provided before the change of tax rate
Sub-Section 1 (a) of section 14, lays down the provision for the treatment of tax change in case the taxable service has been provided before the change in the effective tax rate.
For our analysis let’s consider a case that the tax rate till 30th Nov 2017 is 18% and from 1st Dec 2017 the tax rate is being increased to 18.5%.
Sub-Section 1 (a) of Section 14
(i) where the invoice for the same has been issued and the payment is also received
after the change in effective rate of tax, the time of supply shall be the date of receipt of
payment or the date of issue of invoice, whichever is earlier; or
Illustration -1
A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 5th Dec 2017 and completed the service on 20th Nov 2017 and received the payment on 10th Dec 2017.
In this case, the service has been provided before the change of the tax rate i.e prior to 1st Dec 2017 and the earliest date and the time of supply is 5th Dec 2017 as invoice is issued on 5th Dec 2017 and payment is received on 10th Dec 2017 (earliest of the invoice or the payment date). The tax rate applicable here is 18%.
Illustration -2
A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 15th Dec 2017 and completed the service on 20th Nov 2017 and received the payment on 7th Dec 2017.
In this case, the service has been provided before the change of the tax rate i.e prior to 1st Dec 2017 and the earliest date and the time of supply is 7th Dec 2017 as payment is received 7th Dec 2017 invoice is issued on 15th Dec 2017 (earliest of the invoice or the payment date). The tax rate applicable here is 18%.
Sub-Section 1 (a) of Section 14
(ii) where the invoice has been issued prior to the change in effective rate of tax but the
payment is received after the change in effective rate of tax, the time of supply shall be
the date of issue of invoice; or
If the invoice is issued prior to the date of the change in effective tax rate and service is completed before the same date, then the effective tax rate will be the older rate only.
Illustration -3
B Ltd enters into a contract to provide special security with C Ltd for their factory located in Badi from the period 1st Nov 2017 to 30th Nov 2017. B Ltd issues an invoice on 25th Nov 2017 and receives payment on 9th Dec 2017.
Invoice has been issued on 25th Nov 2017 and service is completed on 30th Nov 2017 and these two dates are before the date of effective change of tax rate, the time of supply for services is 25th Nov 2017, so the effective tax rate will be 18%.
Sub-Section 1 (a) of Section 14
(iii) where the payment is received before the change in effective rate of tax, but the
invoice for the same has been issued after the change in effective rate of tax, the time of
supply shall be the date of receipt of payment;
If service is completed and payment is also received before the tax rate change, then the tax rate applicable will be old rate only and not the new tax rate.
Illustration -4
B Ltd enters into a contract to provide special security with C Ltd for their factory located in Badi from the period 1st Nov 2017 to 30th Nov 2017. B Ltd receives payment on 19th Nov 2017 and issues an invoice on 4th Dec 2017.
Payment has been received on 19th Nov 2017 and service is completed on 30th Nov 2017 and these two dates are before the date of effective change of tax rate, the time of supply for services is 19th Nov 2017, so the effective tax rate will be 18%.
Service provided after the tax rate change
Sub-Section 1 (b) of section 14, lays down the provision for the treatment of tax change in case the taxable service has been provided / completed after the change in the effective tax rate.
For our analysis let’s consider a case that the tax rate till 30th Nov 2017 is 18% and from 1st Dec 2017 the tax rate is being increased to 18.5%.
Sub-Section 1 (b) of Section 14
(i) where the payment is received after the change in effective rate of tax but the
invoice has been issued prior to the change in effective rate of tax, the time of supply
shall be the date of receipt of payment; or
Illustration -5
X Ltd agrees to do preventive maintenance for all the critical machinery in the factory by 25th of Dec 2017 and accordingly it has received payment on 28th of Dec 2017 and issued an invoice on 27th of Nov 2017 on completion of service.
In the above case, the time of supply will be the date on which payment has been received i.e 28th Dec 2017 and the effective tax rate would be 18.5% as service is completed after the tax rate change.
Sub-Section 1 (b) of Section 14
(ii) where the invoice has been issued and the payment is received before the change in
effective rate of tax, the time of supply shall be the date of receipt of payment or date of
issue of invoice, whichever is earlier; or
In case if the invoice is issued and payment is also received before the date of tax rate change, then the time of supply of service will be earlier of the invoice date or payment receipt date and the tax rate applicable will be old rate only.
Illustration -6
A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 15th Nov 2017 and completed the service on 20th Dec 2017 and received the payment on 17th Nov 2017.
In the case, the effective tax rate would be 18%, as the time of supply is 15th Nov 2017, this is the earliest date of issue of invoice or receipt of payment.
Illustration -6
A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 10th Nov 2017 and completed the service on 20th Dec 2017 and received the payment on 7th Nov 2017.
In the case, the effective tax rate would be 18%, as the time of supply is 7th Nov 2017, this is the earliest date of issue of invoice or receipt of payment.
Sub-Section 1 (b) of Section 14
(iii) where the invoice has been issued after the change in effective rate of tax but the
payment is received before the change in effective rate of tax, the time of supply shall
be the date of issue of the invoice.
A Ltd agrees to do the service of diesel generator and accordingly it has issued an invoice on 10th Dec 2017 and completed the service on 20th Dec 2017 and received the payment on 7th Nov 2017.
In this case, the time of supply will be the issue of invoice date i.e 10th Dec 2017 and the tax rate will be 18.5%
Though the law is very clear on the time of supply of services in case of tax rate changes, the following are the challenges
- What should be the treatment in case if the payment received is partial to the contract value. In such cases, will the tax rates apply to the extent of the amount received? We need clarity on this, hope it will be taken into consideration.
- Though GST is dubbed to the ease of doing business but seeing the laws above, it is clear that is very complex and manual intervention is required as any of the accounting packages will not be able to handle this correctly. Persons handling this portion of the business have to be trained to ensure that there are no compliance issues.
- What should be the accounting treatment if there is change in financial year in case of Illustration 5 if we extrapolate the same with this example
As per law – (i) where the payment is received after the change in effective rate of tax but the invoice has been issued prior to the change in effective rate of tax, the time of supply shall be the date of receipt of payment; or
Assuming tax rate change is from 1st of April 2018 i.e from new financial year
X Ltd agrees to do preventive maintenance for all the critical machinery in the factory by 25th of April 2018 and accordingly it has received payment on 10th of April 2018 and issued an invoice on 27th March 2017.
In the above case, the time of supply will be the date on which payment has been received i.e 10th April 2018 and the effective tax rate would be 18.5% as service is completed after the tax rate change.
- Will there be similar rules for the supply of goods also, there can be cases like this when goods also ?
All the above issues need to be addressed before the GST bill is passed else we will have lot’s of confusion and leads to compliance issues.
Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
These interpretations and examples are based on the model law and may change based on the actual law passed.
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