NOVEMBER 16, 2015

By S Sivakumar, LL.B, FCA, FCS, ACSI, MBA and R Dakshina Murthy, B.Com, LL.B, ML, Advocates, Bangalore

TO confuse and when asked to clarify, to confuse more, seems to the motto of the Central Board of Excise and Customs. How else can the Board explain the utter confusion that it has created, by the issuance of Notifications bearing Nos.23 to 25/2015-ST dt.12.11.2015 and the FAQ on SBC.

Before we get into a discussion on these clarificatory notifications, let us take a look at Section 119 of the Finance Act, 2015 which deals with Swachh Bharat Cess, which reads as under:

"CHAPTER VI

SWACHH BHARAT CESS

119. (1) This Chapter shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

(2) There shall be levied and collected in accordance with the provisions of this Chapter, a cess to be called the Swachh Bharat Cess, as service tax on all or any of the taxable services at the rate of two per cent.on the value of such services for the purposes of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto.

(3) The Swachh Bharat Cess leviable under sub-section (2) shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994, or under any other law for the time being in force.

(4) The proceeds of the Swachh Bharat Cess levied under sub-section (2) shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money of the Swachh Bharat Cess for such purposes specified in sub-section (2), as it may consider necessary.

(5) The provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, including those relating to refunds and exemptions from tax, interest and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Swachh Bharat Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under Chapter V of the Finance Act, 1994 or the rules made thereunder, as the case may be."

(emphasis supplied by us)

A bare reading of the above statutory provision makes it crystal clear that the SBC is collected as service tax and all the provisions as to levy and collection of service tax on taxable service is applicable to SBC. Thus, in effect, there is no difference between the service tax and SBC, in our opinion.

This being the case, the views taken by the Board in its FAQs section in Sl.No.7 reproduced below, would seem to be ultra vires of Section 119.

Q. 7 Whether SBC would be required to be mentioned separately in invoice?

Ans. SBC would be levied, charged, collected and paid to Government independent of service tax. This needs to be charged separately on the invoice, accounted for separately in the books of account and paid separately under separate accounting code which would be notified shortly. SBC may be charged separately after service tax as a different line item in invoice. It can be accounted and treated similarly to Education cesses.

In our view, the cess of 0.5% can be added to 14% and the overall service tax rate of 14.5% can be indicated, perhaps, with the following sentence - "service tax rate includes 0.5% towards SBC which is not cenvatable”.

Be that as it may….the question that next arises is whether, SBC is cenvatable. The Board, in its FAQ No. 14, has responded as under:

Q.14 Whether Cenvat Credit of the SBC is available?

Ans. SBC is not integrated in the Cenvat Credit Chain. Therefore, credit of SBC cannot be availed. Further, SBC cannot be paid by utilizing credit of any other duty or tax.

We find that this view is legally unacceptable. Once, Section 119 has stated that SBC will be levied and collected as service tax, the substantive law related to cenvatability of the SBC paid on input services cannot be questioned, on the basis that, Rule 3(1) of the Cenvat Credit Rules, 2004 does not mention SBC. As we know, the Cenvat Credit Rules, 2004 have been issued in terms of the powers conferred by Section 37 of the Central Excise Act, 1944 and Section 94 of the Finance Act, 1994. In the light of Section 119 of the Finance Act, 1994, with SBC being treated as service tax, there is no need for a separate mention of SBC in Rule 3(1) of the Cenvat Credit Rules, 2004 for the service receiver to avail of the cenvat credit of the SBC paid. And, we also need to bear in mind the well-established legal dictum that the Act would prevail over the Rules, in the event of a dispute.

Further even sub section (5) of Section 119 specifies that the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder apply in realtion to the levy and collection of SBC on taxable services as they apply in relation to levy and collection of tax on such taxable services. Once the SBC is charged and collected as service tax automatically the provisions of cenvat credit rules is applicable. Furtherin answer to question no.6 it has been clarified that "SBC would be calculated in the same way as service tax is calculated. Therefore SBC would be levied on the same taxable value as service tax".

We also find that, the levy of SBC in terms of the input services consumed by exporters of goods and services without allowing the benefit of cenvat credit, would clearly be violative of Article 286 of the Constitution, in terms of which, no law of a State shall impose, or authorise the imposition of a tax on the sale of goods where such sale takes place in the course of export of good out of, the territory of India. Denial of cenvat credit of the SBC paid on input services and consequently the refund thereof, vis-à-vis the exporters of goods (and services) could mean that the SBC component is to be exported, which is impermissible.

It is to be noted that conceptually the SBC is different from Education Cess. The former is to be treated as tax, in terms of Section 119 of the Finance Act, 2015, while education cess is a tax on tax. To treat education cess and SBC as equal in law, would be a mistake. We have reproduced Section 130 of the Finance Act, 2007, in terms of which, it is clear that, the secondary education cess (as well as the primary education cess) is a tax on tax.

130. (1) The Secondary and Higher Education Cess levied under section 126, in the case of all services which are taxable services, shall be a tax (in this section referred to as the Secondary and Higher Education Cess on taxable services) at the rate of one per cent., calculated on the tax which is levied and collected under section 66 of the Finance Act, 1994.

(2) The Secondary and Higher Education Cess on taxable services shall be in addition to the tax chargeable on such taxable services, under Chapter V of the Finance Act, 1994 and the Education Cess chargeable under section 95 of the Finance (No. 2) Act, 2004. (3) The provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, including those relating to refunds and exemptions from tax and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Secondary and Higher Education Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under Chapter V of the Finance Act, 1994 or the rules made thereunder, as the case may be.

In the above context, the question No.10 of the Frequently Answered Questions issued by CBEC is reproduced

Q.10 Whether SBC is a "Cess"on tax and we need to calculate SBC @ 0.5% on the amount of service tax like we were earlier doing for calculating education cess and SHE Cess?

Ans. No, SBC is not a cess on Service Tax. SBC shall be levied @0.5% on the value of taxable services.

Hence it is clear that the Government has given only the nomenclature as Cess but actually the SBC is imposed and collected as service tax on the taxable services.

Yet another area in which the CBEC has erred is in respect of the applicability of the Point of Taxation Rules vis-à-vis the SBC. Question No. 15 of the FAQs and the CBEC's answer are given below:

Q.15 What would be the point of taxation for Swachh Bharat Cess?

Ans. As regards Point of Taxation, since this levy has come for the first time, all services (except those services which are in the Negative List or are wholly exempt from service tax) are being subjected to SBC for the first time. SBC, therefore, is a new levy, which was not in existence earlier. Hence, rule 5 of the Point of Taxation Rules would be applicable in this case. Therefore, in cases where payment has been received and invoice is raised before the service becomes taxable, i.e. prior to 15th November, 2015, there is no lability of Swachh Bharat Cess. In cases where payment has been received before the service became taxable and invoice is raised within 14 days, i.e. upto 29th November, 2015, even then the service tax liability does not arise. Swachh Bharat Cess will be payable on services which are provided on or after 15th Nov, 2015, invoice in respect of which is issued on or after that date and in payment is also received on or after that date. Swachh Bharat Cess will also be payable where service is provided on or after 15th Nov, 2015 but payment is received prior to that date and invoice in respect of such service is not issued by 29th Nov, 2015.

In our opinion, the above referred view of the CBEC vis-à-vis the POT Rules in the context of the introduction of SBC is incorrect. In terms of Section 66B of the Finance Act, 1994, the charging section, the levy of service tax is on the value of service provided or agreed to be provided in the taxable territory and its collection may be fixed or shifted to any stage or point, in any manner, as prescribed by the Rules made in this behalf. It is then clear that the CBEC's view that, SBC can be levied in respect of services provider on or before 15-11-2015 in cases where invoices are not raised within 14 days or when the payment received on or after 15-11-2015, goes against the charging Section 66B, for the simple reason that SBC was not applicable when the taxable services were rendered, i.e when the taxable event took place.

Before concluding...

The Board's clarifications in respect of services for which abatement is claimed as well as in respect of service tax liability on the service receiver under the Reverse Charge Mechanism, are on expected lines. The Government for the purpose of collecting taxes is considering the SBC as service tax and has included the said SBC amount for calculating services under reverse charge mechanism/works contract and other services. When it comes to including the SBC for granting abatement the Government intends to include the same so that they get more revenue but when it comes granting cenvat credit they treat that the SBC is not cenvatable. This discriminative approach of the Government amounts to "Heads I win tails you lose”.

Cess, as commonly understood, is always calculated on the basic tax. This logic was clear in the context of the levy of primary and education cesses which were levied on the service tax collected. It is perhaps for the first time that one is coming across a cess being levied on the value of the services. May be, because of this, that the Parliament mentioned SBC as service tax. Given this, our great Babus in the Finance Ministry are precluded from treating SBC as not forming part of the service tax, insofar as the credit mechanism is concerned. In our strong view, it is legally impermissible for the Board to state that, SBC cannot be paid through cenvat credit or for that matter, cenvat credit cannot be taken on the SBC element and this does not even need an amendment to the Cenvat Credit Rules.

One is rather amused by the reference to 14 days, in Question No. 15 of the FAQs. Does the Board not remember that, the time limit of 14 days for issuance of the invoice, vis-à-vis Rule 3 of the Point of Taxation Rules, 2011 was increased to 30 days with effect from 1-4-2012.

It seems that the Board firmly believes that that the best way to clarify would be to create more confusion. This is what is seemingly achieved by the issuance of the clarificatory notifications and FAQ, which as aforesaid, go beyond the statutory provisions. This is one clear instance of how the Babus are capable of creating confusion under the pretext of ‘ease of doing business', even going against the statute laid down by the Parliament. This does not augur well, especially, at a time when India is desperately seeking foreign investment by promising ‘ease of doing business' in India.