Relevant date for receipts of payment towards service

Encashment of cheque, letter of credit etc involve some banking charges which are levied by the bankers while giving credit for the instrument. In that case, whether the full value of the instrument is the consideration is required to be analysed. A cheque or letter of credit or any other instrument is issued by the service receiver to the service provider for the consideration of the service provided to him. Amount of the cheque represent the value of the service received by him. Therefore, cheque collection charges levied by the bankers can not be deducted from the value as charge of the service tax is on gross amount. Cheque collection charge will be an expenditure incurred by the service provider in the course of providing service and also an input service, if taxable, eligible for Cenvat credit.

When the payment is received in currency, date of the receipt of such currency is the relevant date to determine the payment of service tax. Similarly, when book adjustments are made or account is deducted for the service, date of such adjustment or deduction will be relevant date. Receipt of a cheque by service provider whether amounts to the receipt of payment is required to be analysed. Cheque is only a revocable authority issued to a bank by service receiver to pay to the service provider a sum of money. Accordingly, no payment can be considered to have been received by the service provider until the cheque is presented to the bank, honored by the payer and the proceeds of the cheque are credited to the supplier’s bank account. Further, receipts issued for cheque are subject to realization. In other words, if cheque is not realized, receipts are void. Therefore, date of the cheque or receipt thereof is not relevant date to determine tax liability. However, it is difficult in practice for the service provider to ascertain when the sum, as stipulated on the cheque, is credited to his bank account since he does not know when the bank has cleared the cheque. Furthermore, most banks only reflect the cheque presentation date instead of the cheque clearance date in their bank statement. Therefore, the question remains as to what is the relevant date. The question becomes difficult to answer in the case cheque is dishonored subsequently.

The Finance Act provides for adjustment in case of advance payments. However, there is no provision for adjustment in tax liability for any other count. Therefore, if assessee makes adjustment in the tax liability for the subsequent period for the dishonored cheque of the preceding period, it will be without authority of law and may attract penal provisions of non payment of service tax. Further, the Finance Act does not provide for any refund in such scenario. Therefore, the service provider may be loser on both counts.

In view of the complex situation as narrated above, it is desirable that the service provider opt for payment of service tax on the collection basis. As service tax is payable 5th of the subsequent month by which time, usually, one will know about dishonored cheque. However, on 31 March every year, one has to discharge his service tax liability on 31st March itself instead of 5th day of the subsequent month, therefore, it will pose difficulty in the above approach and one has to pay service tax on the cheque deposited in the bank for collection without knowing whether cheque has been collected or dishonored.