Prior to introduction of Point of Taxation Rules, 2011 (POT Rules), Service Tax was required to be paid only after receipt of payment for the services from service receiver. Therefore the possibility of excess payment of Tax was very rare.

However with the introduction of POT Rules, service tax had to be paid even after the issue of invoice or receipt of payment etc., whichever is earlier.

This led to a situation of excess payment of service tax, in cases where the Service receiver defaulted in payment of the value of taxable services for various reasons.

In such circumstances self-adjustment of excess paid service tax was considered by the Government to be an easy tool available to the taxpayer, to recover such excess tax paid without resorting to the tedious refund procedure, that was both time consuming and uncertain.

As per Rule 6(4A) of the Service Tax Rules, 1994, where an assessee has paid to the credit of Central Government any amount in excess of the amount required to be paid towards service tax liability for a month or quarter, as the case may be, the assessee may adjust such excess amount paid by him against his service tax liability for the succeeding month or quarter, as the case may be.

The above proposition of self-adjustment of excess tax paid was first introduced with a monetary of limit of Rs. 50,000/- which was raised subsequently up to Rs 2,00,000/-

This was later on enlarged to an unlimited extent, in the wake of introduction of the negative list regime with effect from 01.04.2012 vide Notification No 03/2012-ST dated 17.03.2012.

It was subject to ensuring that the excess amount paid was not being self-adjusted on account of reasons of interpretation of law, taxability, valuation or applicability of any exemption Notification.

The above pre-conditions would look highly prohibitive and thus practically excess tax paid on these counts, are not adjustable and the only way out was the tedious refund route.

Therefore one can imagine the possibility of self-adjustment to occur only in the following circumstances, to name a few;

a) Imagine that you paid some tax in excess buy mistake and are not able to adjust the same in your subsequent returns due to the procedure hurdles.

b) There may be instances at times, where you have not been paid by the service receiver due to some contractual disputes and incomplete or deficient services.

c) There are also cases where in some clerical calculations mistakes result in excess payment of taxes

Suppose, the excess amount paid was not on account of any of the above situations covered under the said rule i.e sub-rule (4B) of Rule 6 ibid, then the assessee is free to self-adjust the said excess payment made towards service tax liability, in the subsequent tax period which may be monthly or quarterly as the case may be.

The law, thus strictly prohibits such self-adjustment later than the next tax period which appears to be very harsh for the following reasons;

a) The assessee, if fails to realize such excess payment made in the next tax period itself, then he has to muster again the equivalent of cash/credit to off-set his tax liability during the period anytime later than the succeeding tax period of excess payment.

b) To the contrary, if there is still a carryover of such payment made over the tax liability during the next tax paid, then it would appear that he can’t carry over further such excess payment made, endlessly to the next, next tax period but may have to claim it only as refund under Section 11B of the Act.

c)    Such excess payment, if to be claimed as refund, would require once again to be subjected to the time limit of one year prescribed under section 11(B), beyond which the same is barred by time.

There may be also instances where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason.

There may also be cases where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract.

In all such cases the assessee may take the credit of such excess service tax paid by him, subject to sub-rule (3) of Rule 6 ibid.as per which the assessee has to fulfill at least one of the following two conditions ;

1) Either he has refunded the payment or part thereof, so received along with the service tax to the person from whom it was received  or

2) He has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.

If the assessee has on his own paid service tax in advance, he is allowed to adjust such advance against his service tax liability for the subsequent period subject to certain conditions.

As per the rules , the assessee is required to intimate within a period of 15 days, the details of the amount of service tax paid in advance to the jurisdictional Superintendent of Central Excise and

also indicate the details of the advance payment made/ adjustment, in the subsequent return.

Also, notice the words, ‘for the subsequent period’ in the above sub-rule (3) against the words, ‘for the succeeding month or quarter’ of sub-rule (4A), practically make no difference, in so far as the restriction of the adjustment of excess tax paid being confined to the very next tax period/ tax return.

Therefore, the most crucial aspect concerning the excess payment, being either on account of Sub-rule (3) or sub-rule (4B) of Rule 6 ibid, should strictly not qualify as excess tax paid but merely as an amount paid towards the service tax head, and should be available for either adjustment at any time later or should be available as refund without time limit.

Similar to the above, is also the pre deposit in case of any appeal, where the deposit amount is once again paid only towards an account head designated as others, allowed to be claimed without any latches of time.

In terms of article 265 of the Constitution of India, since no tax can be collected except by an authority of law, such adhoc deposits after fulfillment of the purpose for which they were made, are either appropriated to the Government or refunded to the assessee,  suo moto without invoking any time limit under section 11B of Act 1944, which governs all refunds of taxes not due to the Government.

Going by the same analogy, it would appear that even such excess payment of amounts would also fall outside the ambit of any tax and hence would fail to attract any of the provisions of refund especially concerning time limit for a claim under the Act.

It would therefore follow from the above, that such excess payments when  not barred by any time limit for its claim by the assessee under the Act, the same is due to the assessee under Article 265 from the date of its deposit, if found to be excess.

Having said that, any adjustment of such excess payments made towards service tax, even though beyond the next tax period should not be still regarded as an offence committed by the assesse, if he so adjusts it since he is equally entitled to the refund, right from the date of its deposit going by the spirit of Article 265 of the Constitution of India,

However, there are instances where such excess payment adjusted by the assessee beyond the next period, are alleged to be unlawful and demands are made together with interest invoking in addition mandatory penalty equal to such amounts of alleged unauthorized adjustment.

And the excess payment claimed by the assesse as refund, beyond one year, even though by a separate claim of refund, is likely to run the risk of being hit by limitation of time.

A fair interpretation must mandate Rule 6(3) and (4A), to mean and cover such adjustments of amount paid in excess of the tax liability, even beyond the next tax period , but perhaps not later than a period of 3 years regardless of the wordings of said sub rule by insertion of a non obstante clause.

This would be in consonance with the spirit of Article 265 and the period of 3 years limitation would sound reasonable even as per the general clause Act, is the humble view of the Author.

Further, if this view is acceptable to the new GST regime, it would be a great boon to consider extension of the same to GST as well, as self-adjustment and Section 80 relief under the old Service Tax regime are still extolled away by many experts of taxation as two great virtues of benevolence of the Government, in the past.

Will the Government come up with a clarification on this issue, in line with the rulings of some of the appellate forums, including the BSNL and other cases that had already resonated the above point of view, is the fond hope of those tax payers, especially hit by the above double-jeopardy?