7th December, 2014
In most of the cases, the companies / assesses have a system of following the internal rate decided by their treasury department for recording the transactions of import and export of services across the border, however the settlement of bill while making payment to the service provider would happen at the prevailing RBI rates which goes on changing almost every day. As against this, for the purpose of making service tax payment, it was required to consider the custom notified rate of exchange.
This was proving difficult for the assessee and therefore in view of requests from the trade and industry to delink the conversion from the notified Customs rates of exchange as at present, following amended provisions are introduced with regard to relevant date of rate of exchange.
The Explanation to Section 67A is being amended to enable the Government to prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services.
To give effect to the above amended explanation, Notification No.19 /2014-Service Tax DT. 25/08/2014 was issued which came in to effect from 01.10.2014.
As per this notification, a new Rule 11 has been inserted in Service Tax Rules, 1994 which is as follows:
Rule 11. Determination of rate of exchange. – The rate of exchange for determination of value of taxable service shall be the applicable 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.
Therefore, the rate of exchange to be considered shall be as per generally accepted accounting principles (GAAP) on the date on which point of taxation arises as per Point of Taxation Rules, 2011.
GAAP are contained in “Accounting Standard 11(AS-11)” in Companies (Accounting Standards) Rules, 2006 issued by Central Government in December 2006 under Section 210A of Companies Act, 1956.
The following are the relevant aspects to be considered for this purpose –
The AS-11 is on ‘Effects of changes in Foreign Exchange Rates’. As per this, the initial recognition in the books of accounts shall be as under:
"A foreign currency transaction shall be recorded in the books of accounts based on the initial rate of exchange decided by the Treasury department of the company.”
The said exchange rate is being followed by various entities independently based on the source of information from Reserve Bank of India (RBI), Foreign Exchange Dealers' Association of India (FEDAI), State bank of India (SBI), etc., in line with the accounting policies adopted.
Based on the above analysis, the relevant date for rate of exchange to be considered on that date will be as follows:
As per Rule 7 of Point of Taxation Rules, 2011, when service receiver is liable to pay service tax under full reverse charge i.e. Import of Service, point of taxation is the date on which payment is made to the service provider.
But if the payment to the service provider is not made within 3 months from the date of invoice, the point of taxation shall be the date immediately following the said period of 3 months.
Therefore, the relevant date, keeping in mind the provisions under GAAP will be as under:
In case of Export of Service, it will be rate of exchange adopted in accounting on the date on which the Invoice is issued to the service receiver as per Rule 3 of Point of Taxation Rules, 2011 which should generally match with the date of provision of service.
Though the above changes are brought in on the request of the trade and industry, some confusion is most likely to prevail with regard to the methodology of considering rate of exchange which may invite unwanted litigation. To avoid this, it is expected that, CBEC will issue some clarification on this which will help to solve the initial teething troubles.