NOVEMBER 16, 2015

By Naresh K Sheth, CA & Shraddha Mehta, CA

SWACHH Bharat Cess (‘SBC') is levied u/s 119 of the Finance Act, 2015 read with Notifications No. 21/2015-ST and 22/2015-ST both dated 06.11.2015.

Finance Ministry has come out with three more notifications 23, 24 and 25/2015-ST, all dated 12.11.2015 and a Press release on the same day clarifying doubts raised in respect of SBC levy.

One sincerely appreciates the promptness with which the clarification came out. It clarifies most of the doubts raised by trade and industry on SBC levy. However, there still remains an ambiguity on Point of Taxation (‘POT') for SBC.

Clarification of Ministry on POT:

Relevant extract of clarification is as under:

"As regards point of taxation, since the levy has come for the first time and all services (except those services which are in the negative list or are wholly exempt from payment of service tax) are being taxed, it is new levy, which was not in existence earlier. Rule 5 of point of taxation would be applicable in this case."

Rule 5 of Point of Taxation Rules, 2011 (POTR):

Payment of tax in case of new services –

"5. Where a service is taxed for the first time, then, -

a) No tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;

b) No tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time."

Implications of Ministry's clarification on POT:

If one accepts the Ministry's clarification that Rule 5 of POTR applies to SBC, then SBC will also apply to:

a) All payments received by service provider on or after 15.11.2015 even where service is completed and invoice is raised before 15.11.2015.

Simply put, all service transactions concluded before 15.11.2015 will also be liable to SBC if consideration for same is realized on or after 15.11.2015. All old outstanding as on 14.11.2015 realized on or after 15.11.2015 will be liable to SBC even if the SBC levy is to come into effect from 15.11.2015. Even outstanding recovery of 30.09.2010 (service tax recovery of same is time barred) will be liable to SBC if realized on or after 15.11.2015!

b) Payments received in advance but invoice for services raised after 14 days will be liable to SBC. This will adversely affect service providers providing works contract service, construction service, mandap keeper service, hiring, etc. where advances are normally taken while accepting the service mandate and invoices are raised on completion of service.

Thus, Ministry's clarification tends to lead to an absurd situation of making statutorily prescribed effective date of SBC levy (i.e. 15.11.2015) practically redundant.

Serious doubts:

Following questions arise on correctness of Ministry's clarification dated 12.11.2015:

a) Whether POTRcan be appliedto SBC in the first place?

b) Whether Rule 5 of POTR applies to SBC?

c) Whether Rule 5 of POTR can override Section 119 of the Finance Act, 2015 and Notification No. 21/2015-ST dated 06.11.2015?

d) Whether SBC levy can operate retrospectively?

Applicability of POTR to SBC:

POTR are made pursuant to Section 94(a) and 94(hhh) of the FA, 1994wherein Government is empowered to make Rules for:

++Collection and recovery of service tax under sections 66 or 68.

++ Date for determination of rate of service tax.

It is abundantly clear that ‘SBC' is not a ‘service tax'. It is a cess over and above service tax. POTR is enacted and can be applied only to service tax and not to SBC.

Applicability of Rule 5 of POTR to SBC:

Even if one presumes that POTR applies to SBC, there is a serious doubt as to applicability of Rule 5 of POTR to SBC.

Heading and title of Rule 5 suggests that Rule 5 applies to payment of tax in case of new services.

Rule 5 begins with an expression "Where service is taxed for the first time, then …"

SBC is a separate levy u/s 119 under Chapter VI of the FA, 2015 and not a ‘tax' as defined u/s 65B(50) of the FA, 1994.

In fact, Rule 5 applies only to services which were in negative list or not taxable u/s 66B of the FA, 1994 and which are made taxable for the first time.

Even if one treats SBC as tax, it is abundantly clear that Rule 5 applies to only "new services" or "where service is taxed for the first time".

SBC is an additional levy on existing taxable services. The "levy" is new and not the "services". SBC is a further levy on services which are already taxable. It is, therefore, patently wrong to apply Rule 5 of POTR to services which were already under tax net.

Conflict between Rule 5 of POTRand Section 119 of the Act

Even one assumes (though patently wrong) that Rule of POTRapplies; whether it can override express provision of Section 119 of the FA, 2015 read with notification no. 21/2015 – ST dated 06.11.2015?

Can delegated legislation (POTR) go beyond the FA, 1994? Whether effective date (i.e. 15.11.2015) stipulated by law can be made redundant by Rule?

Answer to all the above questions is "BIG NO".

Can SBC levy operate retrospectively?

Notification No. 21/2015–ST dated 06.11.2015 read with section 119 of the FA, 2015 mandates levy of SBC w.e.f. 15.11.2015. If Rule 5 of POTR is applied to SBC, levy of SBC becomes open-ended and will apply retrospectively. It will apply to service transaction concluded on or before 14.11.2015 where SBC levy was not on statute book. It is settled legal principle that Rule cannot expand scope of levy contemplated by law.

Should SBC apply to services provided on or before 14.11.2015?

In view of above, following transactions should not be liable to SBC:

a) Services provided on or before 14.11.2015 and billed on or before said date.

b) Advances received on or before 14.11.2015.

Conclusion:

Five notifications and a lengthy Press Release but some nagging doubts remain.

India Inc. isn't happy with course correction in spurts but wants a comprehensive clarification so that they are able to concentrate more on their businesses rather than drain their resources on frivolous litigation.

If this is what the Year of Taxpayer Services portends, assessees would prefer not to have any in the future!