NOVEMBER 12, 2015

By Naresh K Sheth, CA & Shraddha Mehta, CA

Preamble and Background:

SECTION 119 was inserted by Finance Act 2015 w.e.f 14.05.2015 wherein Government assumed power to levy Swachh Bharat Cess ('SBC') at 2% on value of all or specified taxable services from the date to be notified.

All provisions of Chapter V of the Finance Act, 1994 and rules made thereunder, including those relating to refunds and exemption from tax, interest and imposition of penalty are made applicable to collection and levy of SBC.

Notifications No. 21/2015 - ST and 22/2015 - ST both dated 06.11.2015:

The Government, vide Notification No. 21/2015 - ST dated 06.11.2015, notified the levy of SBC on all taxable services w.e.f 15.11.2015. Simultaneously an exemption was granted in respect of SBC vide Notification No.22/2015 - ST dated 06.11.2015.In nutshell, SBC of 0.5% is levied on value of all taxable services w.e.f 15.11.2015.

This amendment has many ramifications apart from increase in minor tax incidence.

Abrupt and sudden introduction:

The question that arises is as to was there any need to introduce such a Cess when GST is on anvil and whether such Cess would continue in GST regime also. One is further perplexed about effective date of such levy i.e. 15th November 2015 and that too Sunday!!!! Why SBC is made effective from odd date instead of a proper cut-off date i.e. first of quarter either 1st October 2015 or 01st January 2016 or at least beginning of month? This type of effective date makes life of assessee, consultant and tax officers miserable.

The service tax returns (ST-3) will have to be modified and even code for payment of SBC will have to be notified. Hope the same will be done within time!

Solace is that SBC is 0.5% only due to an exemption and not 2% as the enactment says. The way in which the law was enacted indications were that SBC would be on select services. However, the world now knows that it is not so!

SBC and RCM:

The service receiver discharging service tax liability under RCM will also be liable to SBC on payments effected by them on or after 15.11.2015.

Point of taxation and Effective date of levy:

Any service provided on or after 15.11.2015 will be liable to SBC. In other words, any service for which point of taxation ('POT') arises on or after 15.11.2015 will be liable to SBC.

The question arises whether levy of SBC results into change in effective rate of tax and consequently Rule 4 of Point of Taxation Rules, 2011 ('POTR') is triggered for determining POT in respect of transaction concluded before 15.11. 2015?

Section 65B(50) defines "tax" to mean service tax leviable u/s 66B of the Act. SBC is a Cess levied u/s 119 of the Act and not a tax levied u/s 66B of the Act. Levy of SBC does not amount to change in effective rate of tax. Hence, Rule 4 of POTR does not get triggered in such a case.

Rule 3 determines POT for tax payable under straight charge. Rule 7 determines POT in respect of Reverse Charge Mechanism ('RCM') on transactions with associated enterprise (service provider located outside India) and also on transactions with other parties.

If POT for service arises before 15.11.2015, SBC will not apply. If POT happens to be on or after 15.11.2015, SBC will apply.The matrix of various situations is as under:

Transaction of Service Provided (Rule 3 of POTR):

RCM on transaction with associated enterprise (Rule 7 of POTR):

RCM on transaction with other parties (Rule 7 of POTR):

Effective tax rate after SBC:

Service liable to full rate of tax

Effective tax rate would be 14.50% on value of taxable services provided on or after 15.11.2015.

Service entitled to Abatement:

Abatement is a partial exemption and hence abatement benefit will be available in respect of SBC also. A statement of effective rate (after factoring SBC) is as follows:

Services valued as per Valuation Rules:

In case of services valued in terms of Service tax (Determination of Value) Rules, 2006 ('Valuation Rules'), SBC would be 0.5% of the value of the service as determined under Valuation Rules.

Service liable to tax at alternate rate of tax as specified under Rule 6 of Service Tax Rules, 1994 ('STR'):

Service tax Rules provides for service tax payment at alternate rate of tax on following services:

SBC is payable on the value of the taxable services. In above cases, it is difficult to work out value of the services. There could be confusion for working out service tax as stated in the example of air travel agent selling international tickets given below:

CBEC should come out with immediate clarification on how to discharge SBC on above referred special rated services.

Cenvat Credit of SBC:

Rule 3(1)(ixa) and (ixb) of CCR allows the provider of output service to cenvat credit of service tax leviable under section 66A and 66B of the Finance Act, 1994. Hence, only service tax levied under section 66A or 66B of the Finance Act is Cenvatable.

SBC is levied under section 119 of the Finance Act 2015. Hence, as per CCR, SBC is not Cenvatable as it is not levied under 66A or 66B of the Finance Act.

As the law stands today, SBC is not Cenvatable. It would add to the cost of goods and services procured by manufacturer or service provider.

In all fairness, Government should amend CCR to enable service provider to take cenvat credit of SBC. This will be in consonance with sound principles of value added tax. It will avoid double taxation and cascading effect of tax.

SBC and Payment under Rule 6(3)(i) of CCR:

Whether service provider providing exempt and taxable services opting to pay 7% on exempt services under Rule 6(3)(i) CCR is liable to pay SBC on such amount?

SBC is payable on the value of the taxable services. An amount payable under Rule 6(3)(i) of CCR is not value of services. Hence, such amount should not be liable to SBC.

Refund of SBC for exporter of service or goods:

SBC is not Cenvatable and hence exporter claiming refund under Rule 5 of CCR [read with Notification No.27/2012-CE (NT) dated 12.06.2012] will not be entitled to refund of SBC.

A service exporter claiming rebate under Notification No.39/2012-ST dated 20.06.2012 will be entitled to refund or rebate of SBC as said notification specifically provides for rebate of service tax and Cess.

An exporter of goods claiming rebate of service tax under Notification No. 41/2012-ST dated 29.06.2012 will not be entitled to rebate of SBC as said notification grants rebate only in respect of service tax.

SBC and Rule 4A of STR:

Service provider will be required to charge service tax and SBC separately in the invoice. The collections and payments of service tax and SBC will have to be separately accounted for. Many taxpayers (especially large ones) will have to modify or upgrade their billing and accounting software. The period is too short i.e. hardly nine days out of which 4-5 days are Diwali days. Is it fair to push taxpayers so hard?

Conclusion:

SBC is a Diwali gift by tax bureaucracy to the nation and citizens do not have any option but to accept it.

If this is what is meant by "Acche Din" and "ease of doing business", then perhaps we all need to redefine the meaning of these words in the days to come!