The Finance Act, 2005 has inserted Explanation 3 in Section 67 of the Act so as to clarify that the gross amount charged for taxable services shall include any amount received towards the taxable service received before, during or after provision of such service. This Explanation came in to effect from 16.06.2005. The ministry has since clarified as follows:-
(1) Amendments have been made in Section 65(105), Section 67 and rule 6 of Service Tax Rules, 1994 to link payment of Service tax with the receipt of payment for taxable services provided or advance payment received towards taxable service to be provided in future. When payments relatable to taxable service are received during the course of provision of service, service tax is liable to be paid to the extent of receipt of payment. In other words, a person is liable to pay the tax as soon as the consideration towards the taxable service is received.
(2) In case of continuous supply of services (Such as construction services where the payment is based on the percentage of completion of contract) which are provided for a period of time and the consideration (payment), the whole or part of it, is determined as payable, periodically from time to time, the services are treated as provided separately and successively each time the payment is due or each time the payment is received by the service provider.
(3) However, when advance payment is received for a service which is non taxable at the time of receipt of payment but becomes taxable during the course of provision of service, such payment would have to be apportioned appropriately between the two periods and that part of service provided on or after the service becomes taxable service, is only liable for service tax. Similarly, when payment is received on advance for service to be provided but subsequently the services are not actually provided, then in such cases service tax paid is liable to be refunded.