NOVEMBER 08, 2015

By Madhur Harlalka, B. Com, FCA, LL.B.

SECTION 119 of Finance Act, 2015 levied Swachh Bharat Cess ('SBC') as a service tax on all or any of the services to promote and finance the Swachh Bharat or related initiatives of the Central Government. The SBC was proposed to be levied at the rate of 2% on the value of taxable services from a date to be notified.

The Government, vide Notification No.21/2015 – ST dated 06th November, 2015 has notified 15th November, 2015 as the date from which SBC will be levied on all services.

Further, vide Notification No.22/2015 – ST dated 6th November 2015 (w.e.f 15th November, 2015), the rate of Swachh Bharat Cess has been reduced to 0.5% on the value of taxable services. The Notification further exempts the levy of Swachh Bharat Cess on exempted services.

SBC snapshot & contentious issues

•  The effective rate of Service tax will increase from the present 14% to 14.5% from November 15, 2015 onwards.

•  SBC will be applicable only on services and not on excise and customs duty.

•  SBC will not be applicable on services mentioned in the Negative List.

•  No specific amendment is made to the Cenvat Credit Rules, 2004 ('CCR'). Hence SBC is to be paid in cash and existing service tax credit cannot be used to pay SBC.

•  Similarly, credit of SBC may not be allowed for payment of SBC or service tax. This will lead to cascading effect of SBC paid on services.

•  SBC will lead to increase in the overall cost of services not only due to rate increase but also due to the fact that input credit of SBC is not allowed. Unless the Cenvat Credit Rules are amended, this would be regressive in nature and would directly operate against the principles of GST towards which India is heading to.

•  SBC will lead to increased blocking of working capital for those assessees who have to pay service tax on accrual basis.

•  SBC will have to be separately shown in the invoice, separately accounted and collected by the assessee and has to be separately disclosed while making payment in the service tax payment challan.

•  The accounting code to be mentioned in the challan while making SBC payment is yet to be notified by the Government .

•  SBC will not apply on services which are exempt from service tax such as services specified under Mega Exemption Notification, services received by SEZ, etc.

•  SBC will apply for services under Reverse Charge Mechanism also.

•  For services rendered before November 15, but billing done after November 15, the issue is whether Rule 4 of Point of Taxation Rules, 2011 ('POTR') will apply or Section 67A of the Finance Act, 1994 would apply. As per Rule 4 of POTR, in case of effective change in rate of tax, if any two out of three (i.e. billing, rendering of service and receipt of money) events occur after rate increase, then the new rate will apply. However, as per Section 67A, the rate of service tax as applicable on date of rendering of services would apply. This issue has been contentious and there is no clarification yet from the Government. Although legally, Section 67A would prevail over Rule 4 of POTR which means that if services are rendered prior to rate increase, old rate will apply . However, practically, assessees have been following Rule 4 of POTR in such cases.

•  Assuming Rule 4 of POTR applies, following would be the summary of applicability of SBC:

•  In case of reverse charge mechanism, as per Rule 7 of POTR, point of taxation is date of payment to the vendor if paid within three months of invoice date, else it is date immediately after expiry of three months from date of invoice. Hence, if services are rendered prior to November 15 but billing and payment is done after November 15, the new rate will apply.

•  SBC will also apply to services under abatement scheme. For eg: Taxable value of GTA services is 30%. Service tax of 14.5% will apply on the same. Similarly, applicability of SBC on abatement for works contract services, restaurant services, etc. as per the service tax valuation rules will apply.

•  For services such as Insurance, Air Travel agent, purchase and sale of foreign currency and selling and distributing agent of lottery, service tax is paid at an optional compounding rate; however for SBC, value of taxable services may have to be calculated. Suitable amendment in Rule 6 of Service Tax Rules, 1994 could be expected for these services.

•  SBC may not apply for payment of 7 % "amount" on value of exempt services under Rule 6 of CCR. This is because SBC is levied as a "service tax" and cannot be said to be an "amount".

•  All provisions of the current service tax law and rules made thereunder including those pertaining to refunds and exemptions from tax, interest and penalty will apply to SBC as applicable on service tax.

•  The decision of the Government to levy SBC at this crucial juncture might create a hue and cry in trade and industry. This is due to the fact that India is on the threshold of the landmark GST era from April 1, 2016. Perhaps, this is an indirect indication of the fact that GST deadline of April 2016 could be possibly breached and hence SBC has been levied.

•  It is bound to create compliance and accounting issues due to introduction of SBC in the middle of the month which could have been avoided by the Government.

(The author is a Bangalore based Practising Chartered Accountant.)