MARCH 02, 2016

By Monarch Bhatt, Advocate  

THE chapter VI of the Finance Bill, 2016 provides for the levy and collection of "KrishiKalyanCess" (KKC) at the rate of 0.5% on all or any of the taxable services with effect from 01st day of June, 2016. The KKC is new levy and for collection of any new levy, there was no provision in the Point of Taxation Rules (POT) till 29th day of February, 2016. To overcome this situation the notification number 10/2016-Service Tax dated 01st March, 2016 has been introduced to amend rule 5 of POT. The notification provides for addition of two explanations after clause (b) of rule 5 of POT. The amended rule 5 of POT reads as under.

RULE 5. Payment of tax in case of new services. -

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.

Explanation 1.- This rule shall apply mutatis mutandis in case of new levy on services.

Explanation2.- New levy or tax shall be payable on all the cases other than specified above".

As per explanation 1 to amended rule 5, this rule shall be applicable in case of new levy also. Therefore, new proposed "KrishiKalyanCess" will be collected as per rule 5. Further as per explanation 2, KKC will be payable in all the cases other than those mentioned in clause (a) and (b). Therefore, as per the amended provisions government seeks to collect KKCeven in the cases, where service has been rendered prior to 01/06/2016 and receipt of payment as well as issue of invoice is after 01/06/2016. Similarly, in all other cases government want to collect KKC such as advances are received prior to 01/06/2016 but services are rendered after 01/06/2016 and invoice has not been issued by 14/06/2016. Likewise, in all other cases which are not covered under clause (a) and (b),assessee is liable to discharge the KKC.

It is to be noted that amendment has also been proposed to be made under section 67A wherein, existing provisions of section 67A will be read as sub-section (1) and new sub-section (2) will be added. The proposed Section 67A will be read as under from the date of enactment of Finance Bill, 2016.

"SECTION 67A. Date of determination of rate of tax, value of taxable service and rate of exchange. -

(1) The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Explanation. - For the purposes of this section, "rate of exchange" means the rate of exchange determined in accordance with such rules as may be prescribed.

(2) The time or the point in time with respect to the rate of service tax shall be such as may be prescribed."

Therefore, the amendment has been proposed to be made under section 67A which is for the valuation of service, which says that to determine time forapplying the rate of service tax, one shall refer to POT and tax shall be paid as provided under POT wherein, POT has already been amended, as we have seen above.

It is to be noted that no amendment has been proposed to be made under section 66B which is charging section and same section 66B applies to determine the leviablity of KKC also. The section 66B reads as under.

"SECTION 66B. Charge of service tax on and after Finance Act, 2012. - There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed."

Under service tax, charge is created by section 66B. As per section 66B, service becomes chargeable for the payment of service tax only when it is "provided" or "agreed to be provided". The term "agreed to be provided" has also been clarified in the Service Tax Education Guide issued at the time of introduction of negative list of services wherein, it states that receipt of advances for services agreed to be provided become taxable before the actual provision of service. Therefore, the phrase ‘agreed to be provided' to be considered as the moment when assessee receives advances. Hence, "rendition of service" or "the receipt of advances for rendering of service" is the trigger to attract the tax liability. Hence, levy of service tax is determined by section 66B.Further, section says service tax shall be collected in a manner as may be prescribed. The manner for collection of service tax has been prescribed under POT. Therefore, as per charging section 66B, service must be leviable to tax and then only tax can be collected as per POT.

Now, as per section 66B if service has been provided or money has been received for the provision of service prior to 01/06/2016, KKC will not be leviable as during the relevant time there was no levy at all. Hence, moot question arises here is that merely by adding an explanation to the POT without amending the charging section66B, KKC can be collected in a cases where it is not leviable at all?

In my view the answer to the above question is "NO" as "levy" and "collection" are two different terms.Merely making an amendment in the provisions relating to collection, without amending the provisions relating to the levy,taxes cannot be collected.

The term "levy" and "collection" are distinctly different from each other. In support of this, I also rely upon Article 265 of the constitution. The article 265 of the constitution reads as under.

"265. Taxes not to be imposed save by authority of law. – No tax shall be levied or collected except by authority of law."

Here, in the constitution also it has used both the terms, which implies that "levy" and "collection" are two different terms. As per Article 265, one cannot levy the taxes except by the authority of law as well as one cannot collect the taxes except by the authority of law. Therefore, levy and collection both shall be by the authority of law. In the present case, KKC was not levied by the government prior to 01/06/2016, therefore collection of KKC without levy on the services rendered or advances received prior to 01/06/2016 is not in line with the constitution.

The term "levy" means charging of tax or imposition of tax. "Collect" means the physical realisation of tax which is levied or charged. Both terms are distinctly different from each other and exigibility to tax is not the same as liability to pay tax; that the former depends on charge created by the statute and later on computation in accordance with the provisions of statute and rules made thereunder. The collection of tax is always at subsequent stage then levy. The point of collection does not affect the leviability. The point of collection is merely for the administrative convenience. Under taxing statute, one must first determine the levy and once there is levy, then only one can apply the provisions for collection of taxes. Till the time there is no levy, you cannot collect the taxes at all.

The POT has been introduced for the "collection" of tax. It determines at which point assessee is liable to discharge their tax liability. Therefore, POT merely deals with the collection of taxes. However, till the time service does not get triggered by charging section,there is no need to apply for the POT at all because till the time there is no levy you can not apply the rules for the collection of taxes.

Therefore before determining the KKC liability, one must determine whether at the time of rendering of service or at the time of receipt of advances,KKC was leviable or not. If KKCis not leviable at the time of levy, based on the amendment to POT it cannot be collected. Hence in my view,explanation 2 added to collect tax in all other cases, other than those mentioned in clause (a) and (b)is completely bad in law and ultra viresas it is not in line with the provisions relating to the levy.