NOVEMBER 23, 2015

By Guruprasad G, CA and Nishit Gupta

AS part of a key move towards Swachh Bharat initiative, the Central Government ('CG'), vide Union Budget 2015 - 16, had proposed to introduce a new levy named as Swachh Bharat Cess ('SBC'), all the proceeds from which shall be credited to the Consolidated Fund of India, meant for financing and monitoring Swachh Bharat and related initiatives.

This new levy of SBC, being non-creditable, is perceived to be an additional cost to the service recipient. Such SBC has to be invariably paid to the credit of the CG in cash.

The CG vide Notification No. 22/2015 dated 06.11.2015 ('SBC Notification'), made the levy of SBC effective from 15.11.2015 on all taxable services except for those services which are exempt by virtue of notifications issued under Section 93(1) of the Finance Act, 1994 (the 'Finance Act') or otherwise not liable to Service Tax under Section 66B of the Finance Act.

The SBC Notification brought with it an array of widespread commotion among the Trade with respect to applicability of provisions of Chapter V of the Finance Act and also the Rules made there under to SBC owing to multiple possible interpretations. To some relief, the CG then issued subsequent notifications amending the original SBC notification and guidelines in the form of FAQ's with the intention to address the queries raised by the trade.

Though the FAQ's have served the purpose to an extent but there still exists lack of clarity on levy of SBC for a service exporter who operates from a SEZ Unit and a service exporter who operates from a STP unit. In the ensuing paragraphs an attempt is made to bring forth the applicability of SBC on procurement of input services by standalone SEZ vis-à-vis standalone STP unit.

SBC in the context of a SEZ Unit

A SEZ unit relies on Notification 12/2013-ST dated 01.07.2013 (the 'SEZ Notification') for claiming benefit of ab-initio exemption from the whole of Service Tax leviable on the services received by it.

It is pertinent to note that, the SEZ Notification is issued under Section 93(1) of the Finance Act as is evident from the preamble of the said Notification,in other words, services received by a SEZ unit for authorized operations is made exempt from Service Tax by way of the SEZ Notification which is issued under Section 93(1).

Therefore, on reading of the SBC Notification as stated in preceding paragraph together with SEZ Notification, it is possible to view that the services received by a SEZ Unit would also be exempt from the levy of SBC owing to the fact that SEZ exemption notification is being issued under Section 93(1).

SBC in the context of a STP Unit

Likewise, a STP unit relies on Notification 27/2012-CE(NT) dated 18.06.2012 (the 'STP Notification') read with Rule 5 of CENVAT Credit Rules, 2004 ('CCR') to claim refund of service tax paid on services procured for provision of their output service which is exported.

For reading a STP Notification, one has to refer the CCR as the said notification derives its powers from the rules prescribed therein. The benefit of exemption to an STP exporter is given only by way of refund of CENVAT Credit availed on the services procured by the exporter in relation to provision of its output service. In other words, the service provider charges service tax to the STP exporter, the STP exporter takes credit of the same in line with CCR and claims refund of the CENVAT Credit through the STP Notification as he is unable to utilize the CENVAT Credit owing to export of service.

In this scenario, the service provider will raise an invoice with both service tax and SBC element in the same, of which credit of Service Tax only can be availed and refund of only such credit can be claimed. In this situation, SBC will, invariably, be charged by the service provider, which being non-creditable, will become a cost to the STP exporter thereby increasing the cost of export.

Impact of SBC: STP Exporter v. SEZ Exporter

Notwithstanding the fact that SBC is a cost for any business, a business entity engaged in the business of software export under STP Scheme appears to be discriminated when compared with a similar business entity in similar software exports under SEZ Scheme. An STP unit may end up bearing the cost of SBC when compared to a SEZ unit as the latter would have an option to procure services SBC-free whereas the former cannot for the same output service.

Illustration:

The differential treatment accorded to a STP unit which is in the business of export of software when compared to a SEZ unit engaged in identical business is explained through the illustration given below:

A = Service Provider (having ab-initio exemption)

B = SEZ Unit

C = STP Unit

Output Service for B and C = Software Export (IT/ITES)

ST = Service Tax

Conclusion

There has been continuous evaluation by the businesses whether to operate as an SEZ or STP unit. One of the critical factors considered for such evaluation are the tax sops by way of exemption, refund or deferment extended by the Government to each of the class of exporters. With the present levy of SBC, the standalone SEZ unit has definitely scored an extra point (read as '0.5% of the taxable value of service procured' ) in the evaluation table over STP unit.

At this juncture, it is worth mentioning that, whilst the Trade engages for transition into the much awaited Goods and Service Tax ('GST'), any room for differential treatment for different class of exporters should be avoided. Further, till GST is enacted, the expectation of the trade, especially the STP units, would be to get relief from SBC on input services used for providing export services. Such reliefs, while making the export price internationally competitive, would also contribute to reduction of slump in exports from India.