MAY 23, 2016

By Madhur Harlalka, B. Com., FCA, LL.B, CA

THE Finance Minister, Mr. Arun Jaitleyhas introduced the levy of a new cess namely ‘Krishi Kalyan Cess'(‘KKC'),while presenting the Union Budget 2016-17 on 29.02.2016. This new cess has been introduced with an objective to finance and promote initiatives to improve agriculture and farmer welfare in India or for any other purpose relating thereto.

This cess will be levied as service tax at 0.5% on all or any of the taxable services w.e.f June 1, 2016. With this, the effective rate of service tax will increase from 14.5% presently to 15%. However, unlike Swachh Bharat Cess (‘SBC'), cenvat credit of KKC paid on input services shall be allowed to be used for payment of KKC on output services provided by a service provider.

In the past one year, increase in rate of service tax and the introduction of various cesses such as the SBC and the KKC has caused considerable increase in the compliance burden for businesses especially the small businesses in India. While the rate of service tax was increased from 12% to 14% from June 1, 2015; SBC was introduced in the middle of the month from November 15, 2015 and now KKC has been introduced from June 1,2016 onwards. Thus, within one year, the effective rate of service tax has undergone a change three times!

Following are some of the practical difficulties faced by the trade and industry due to the above:

++ The Cenvat credit of Krishi Kalyan Cess will not be available to a manufacturer who has to pay Central Excise duty but does not provide any taxable output service. Thus, a manufacturer who consumes services on which KKC is charged will have to suffer the extra burden of the new cess which will increase the total cost of production due to the cascading effect of the taxes/cess. The manufacturer of goods would be at a disadvantageous position as compared to a provider of taxable output service as the manufacturer would have to bear the extra cost of this cess.

++ The businesses have to deal with the transitional matters such as services provided/billing done/monies received before or after date of new levies or increase in the service tax rates in various permutations and combinations.

++ The businesses will also have to make frequent changes in their accounting/ERP systems/invoicing. The big companies stand a better chance to make changes to their systems compared to small/medium-sized businesses without adequate staff and infrastructure.

++ The credit rules are different for taking and utilising credits for Service tax, SBC and KKC. While service tax credits can be used only for paying service tax and excise duty, SBC credit is not allowed at all and KKC credit is allowed only for payment of KKC by service providers.

++ Credits of service tax, excise duty and the erstwhile Education cess and Secondary and Higher education cess also cannot be used to pay SBC and KKC.

++ The service tax, SBC and KKC payments and utilisation of their respective credits would have to be accounted, paid in the service tax challans and captured in the service tax returns separately. Any small mistake in tracking of the above or credits utilised incorrectly due to clerical errors could lead to substantial penalties and interest.

++ As per the amended Rule 5 of the Point of Taxation Rules, 2011 (‘POTR'), in case of new levies such as KKC, any money received on or after rate increase for which services have been rendered and billings have been done prior to rate increase, the new service tax rate will be applicable. This scenario will be applicable for most of the businesses since there will always be bills receivable as at May 31, 2016 for services rendered and billings done priorto May 31, 2016. In such cases, when monies are received on or after June 1, 2016, the service provider will have to raise separate debit notes/invoices for each of their clients to recover the additional KKC applicable apart from running the risk of some clients not agreeing to pay the additional service tax in the form of KKC.

++ As per the amended Rule 7 of POTR, in case of reverse charge mechanism, if services have been rendered and billings have been done prior to May 31, 2016 but payment has not been made as on such date, the old rate of service tax will be applicable and not the new rate of service tax after rate increase or new levy. Thus, separate rules have been laid down for payment of service tax under forward charge and reverse charge, which further increases the compliance burden.

++ Till February 28, 2015, the excise and service tax rates were the same i.e. @ 12.36%. In a short span of fifteen months, there has been considerable disparity in the Central Excise rate i.e. 12.5% as against the Service tax rate of 15% post KKC levy from June 1, 2016. Thisincreases the scope of tax arbitrage by the businesses and also possible tax disputes between the tax payer and the tax authorities due to interpretational issues for certain overlapping transactions such as software services, packaging, job-working, printing, etc.

It is very obvious that all of the above put together is a huge and unnecessary compliance burden on businesses especially for small and medium size businesses in India which could have been easily avoided; not to mention impact on inflation, pricing and profitability of businesses due the increase in service tax rate especially for long-term committed contracts.

The above rate increases and compliances are directly at variance with the ‘Make in India', ‘Ease of Doing Business in India' and ‘Start-up India' initiatives of the Central Government.The above tax levies and complications are also not required especially at a time when the country is moving to the GST era which is supposed to be a simple, transparent and business friendly law with minimal rates.

It is recommended that the various cesses be merged into a higher rate of service tax and credits be allowed seamlessly for service providers and manufacturers alike and not have any disparity between service providers and manufacturers.