NOVEMBER 19, 2015

By Vikas Khandelwal

THE Press Release dated 12.11.2015 on SBC appears to contradict Q.14 of the FAQ released by CBEC on 14.11.2015.

The relevant extracts from both the documents is reproduced below:

Extract of Press release dated 12.11.2015

"Thus, it may be seen that all issues relating to Swachh Bharat Cess are addressed in the Service Tax provisions itself by virtue of the applicability of Chapter V of the Finance Act, 1994 and the rules made thereunder."

FAQ released by CBEC on 14.11.2015

"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 beavailed. Further, SBC cannot be paid by utilizing credit of any other duty or tax."

In my opinion, the press release correctly states that all provisions of Chapter V of Finance Act, 1994 and the rules made thereunder are applicable for Swachh Bharat Cess (‘SBC'), which finds support from section 119(5) of Finance Act, 1994. The same is reproduced as under:

"(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)

No amendment is required in CCR, 2004: CBEC may be indicating that without amendment in CCR, 2004, credit of SBC is not available. Therefore, the reasoning behind the non availability of SBC as CENVAT Credit is that the rule 3(1) (ixb) of CCR, 2004 allows the credit of service tax leviable under section 66B of the Finance Act, 2004. Therefore, credit shall be available only in respect of tax paid under the said section and SBC is not payable under the said section. Therefore, without specific provisions in this regard in CCR, 2004, credit of SBC shall not be allowed.

However, section 119(5) of Finance Act 2015 specifically provides that all the provisions of Chapter V of Finance Act, 1994 and rules made thereunder shall apply in relation to levy and collection of SBC as they apply in relation to levy and collection of tax on such taxable services under chapter V of finance act 1994 and rules made thereunder.

Therefore, the words "service tax" or "service tax payable under section 66B" (or similar words which refer to tax payable under chapter V of Finance Act, 1994 or rules made thereunder) in Chapter V of Finance Act, 1994 and rules made thereunder, shall be read as "SBC payable under section 119(b) of Finance Act 2015".

In other words, for the purpose of levy and collection of SBC, the words ‘service tax" or "service tax payable under section 66B" in any provisions of chapter V of Finance Act, 1994 and rules made thereunder Shall be read as "SBC".

Accordingly, in rule 3(1)(ixb) of CCR, 2004 also, the words ‘service tax……"shall be read as "SBC payable under section 119(1) of Finance Act, 2015". Consequently, CENVAT Credit of SBC shall be available.

If CCR, 2004 is required to be amended, even amendment is not enough: Central Government borrows the power from section 94 of Finance Act, 1994 for notifying the CCR, 2004 (to the extent applicable for service providers).

If it can be said that section 94 of Finance Act, 1994 is not applicable to SBC, only in such situation, provisions of CCR, 2004 are not applicable to SBC. In other words, if section 94 is applicable for SBC, in such case, it cannot be said that rules notified under such section (including CCR, 2004) is not applicable to SBC. Here, it is pertinent to recall that section 119(5) makes all provisions of chapter V of Finance Act, 1994 or rules made thereunder, applicable to SBC. Therefore, applicability of section 94 (to the extent it empowers Central Government to notify CENVAT Credit Rules) to SBC leads to applicability of CCR, 2004 also to SBC.

If SBC cannot be made Cenvatable, Credit of education cess was ultra vires: There is still one ground for which it can be said that section 94 and corresponding rules are not applicable to SBC. As per section 119(5) of Finance Act, 2015, the provisions of Chapter V of Finance act 1994 and rules made thereunder related with "levy and collection"of service tax have been made applicable to SBC.

If it is said that section 94 of Finance Act, 1994 (to the extent it empowers Central government to notify CENVAT Credit Rules, 1994) is not applicable to ‘SBC' as those are not concerning with ‘levy and collection' of service tax, consequently, CCR, 2004 shall also not be applicable to SBC.

Before discussing non-sustainability of this ground, I would like to mention that in such scenario, credit of education cess allowed by Central Government by amending CCR, 2004 will be considered as ultra vires ofsection 94 of Finance Act, 1994 as said section did not give power to Central Government to notify rule to allow credit of education cess. Why?

The provisions contained in section 119(5) of Finance Act 2015 for SBC cess are identical to provisions of section 95(3) of Finance Act (No. 2) 2004 for education cess. If section 94 of Finance Act, 1994 (to the extent it empowers Central government to notify CENVAT Credit Rules, 1994) is not applicable for SBC, the same will also not be applicable for education cess. Thus, credit of education cess would be ultra vires of section 94. However,as section 119(5) of Finance Act, 2015 is identical to section 95(3) of Finance Act (No. 2) 2004, therefore, if section 94 is applicable to education cess, it will also be applicable to SBC. And if section 94 is applicable for SBC, in such case, it would be an absurd interpretation if we say rules notified under said section for service tax including CCR, 2004, shall not be applicable for SBC.

The purpose of CCR, 2004 and they are concerned with ‘levy and collection'

As per section 119(5) of Finance Act, 2015, the provisions concerning with ‘levy and collection' of service tax shall be applicable to ‘levy and collection' of SBC. CCR, 2004 are certainly a set of rules which facilitates following:

(i) Scheme of collection of service tax as a value added tax,

(ii) refund of service tax paid on input services for exporters.

Therefore, CCR, 2004 contains provisions which deal with ‘levy and collection' of service tax and refund of service tax paid on input services by an exporter. As provisions relating to all these matters as applicable to service tax have been made applicable to SBC, therefore, credit of SBC shall also be available.

Contrary to FAQ released by CBEC, legal position based on interpretation of statutory provisions as discussed hereinabove, certain issues with respect of SBC can be summarised as under:

1. CENVAT Credit can be claimed by service provider on SBC paid on input services;

2. CENVAT Credit of SB cess can be utilised

3. Refund of CENVAT Credit can be filed by exporter of services