I am directed to say that some doubts have been raised regarding payment of service tax in cases where a lumpsum payment for a service to be provided in future over a certain period of time, is made in advance before the date on which the particular service came under the tax net, but the entire or part of such service is provided after the date on which it became taxable. The doubt appears to have arisen as Rule 6(1) of Service Tax Rules, 1994, provides for payment of tax on the value of service received during a month/quarter, and in the instant case, no payment is received after the date on which the tax came into force (for example a case where payments for coaching service is received before 1-7-2003 i.e. the date on which this service became taxable, but the entire or part of coaching is provided after that date).

2. In this regard it may be noted that rule 6 only prescribes the procedure of payment of tax. The liability to tax is created by section 66 of the Finance Act, 1994 as amended from time to time. The liability to pay tax is fastened on the service provider by section 68 of the said Act. These two sections read together imply that service tax is payable by the service provider on the value of taxable services. Thus if a service provided is taxable, tax has to be paid on its value. Section 67 also clarifies value of service as the amount charged for the taxable service by the service provider. In other words, an amount becomes value of taxable service only when it has a nexus with the service provided. That is the reason why the expression used in rule 6 is “value of taxable services” and not amount. The implication is that the tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received. Thus, rule 6(1) can not be read in isolation. When read alongwith the provisions of the Act, it becomes clear that where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis.

3. In this context, attention is invited to para 2.3.1 of circular No.59/8/2003 dated 20-6-2003 wherein it was clarified that in view of the notification 11/2003-ST dated 20-6-2003, no service tax would be payable where maintenance contracts are entered into before 1-7-2003, provided the invoices are raised and paid prior to 1-7-2003. It was further mentioned in the circular that similar would be the situation in case of continuing services. By continuing services what was meant was continuing maintenance services where there is an ongoing contract under which regular periodical payments are made. That para 2.3.1 was only in the context of maintenance and repair service is also quite clear from the heading, “MAINTENANCE AND REPAIR SERVICES” of para 2.3 in that circular. No similar exemption has been granted to any other service in case of advance payments.

4. Receipt of this letter may please be acknowledged.

(Gautam Ray)
Joint Secretary (TRU)

F. No. B3/7/2003-TRU (part)