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CBEC released a FAQ on 14.11.2015 which clarified that Swachh Bharat Cess (SBC) shall not be available as CENVAT Credit and liability of same cannot be discharged by utilizing CENVAT Credit.  Q.14 of FAQ dealing with the issue is reproduced 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."

It appears that CBEC is of the view that without amendment in rule of 3 of CENVAT Credit Rules, 2004 (CCR, 2004), CENVAT credit of SBC paid on input services shall not be allowed and the liability of same cannot be paid by utilizing CENVAT Credit. CBEC may also be relying on the fact that for education Cess (EC) and for Secondary and Higher Education Cess (SHEC), CENVAT Credit was specifically amended to allow their availment of CENVAT credit and utilization of CENVAT credit for discharge of their liabilities. However, no specific amendment has been carried out in CCR, 2004 for allowing CENVAT credit of SBC; therefore, SBC paid on input services shall not be available as CENVAT Credit.

However, in my opinion, section 119(5) of Finance Act, 2015 does not allow Central Government to keep SBC out of CENVAT Credit scheme. Before getting into details, I would like to highlight the fact that the provisions of Section 95(3) of Finance Act (No. 2) 2004 (applicable for education Cess), Section 140(3) of Finance Act, 2007 (applicable for Secondary and Higher Education Cess) and section 119(5) of Finance Act, 2015 (applicable for SBC) are identical, and the same is reproduced as under:

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 EC/SHEC/SBC 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 text, EC/SHEC/SBC shall be read as Education Cess for Section 95(3) of Finance Act (No. 2) 2004, as Secondary and Higher Education Cess for Section 140(3) of Finance Act, 2007, and as Swachh Bharat Cess for section 119(5) of Finance Act, 2015, emphasis supplied)

As per above text, “the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder” shall be applicable to EC, SHEC or SBC as they are applicable to service tax. It implies that:

i. EC, SHEC & SBC may be considered as separate levies from service tax (levied under separate charging sections), however, same legal framework as applied for service tax, shall be applied for levy and collection of EC, SHEC or SBC; Finance Act, 1994 and rules made thereunder for service tax shall apply to EC, SHEC or SBC

ii. Even Central Government has no power to create separate legal framework (by amending or not amending the rules) for levy and collection of these levies; However, necessary amendment(s) may be carried to rules to create same legal framework for EC, SHEC & SBC as applicable to service tax;

Therefore, it is the beyond the power of Central Government to even amend (or by not amending as they say) the CENVAT Credit Rules, 2004 to disallow the credit of SBC as parliament has already made the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder applicable to SBC.

At this stage, it would be interesting to have a look at nature of amendments already carried out in rules for EC, SHEC & SBC for service tax assesses. Such amendments have not created different provisions for EC/SHEC/SBC from service tax. Some of them are discussed as under:

(i) Amendment to Rule 3(1) of CCR, 2004 to allow credit of EC and SHEC and to rule 3(7)(b) of CCR, 2004 for restricting the utilization of EC for EC liability only and similar proposition for SHEC: Amendment in rule 3(1) of the CCR, 2004 for specifically providing for availability of CENVAT credit of EC and SHEC was of clarificatory nature. The purpose of said amendment was also to facilitate an amendment in rule 3(7)(b) of CCR, 2004 to restrict their utilization only for EC and SHEC liabilities respectively. This amendment to rule was not ultra vires of statutory provisions which provides that the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder as applicable to service tax shall be applicable to EC and SHEC. This amendment was not of such nature which affected the legal framework for EC/SHEC. As EC/SHEC was a parallel levy, therefore, parallel rule with same treatment as applicable for service tax was in accordance with the provision which provides for applicability of same rules as applicable to service tax.

(ii) Insertion of rule 6(7D) of Service Tax Rules, 1994 by Notification No. 25/2015-ST dated 12.11.2015: As per the said sub-rule, person opting to pay service tax under sub-rules (7), (7A) , (7B) or (7C) of rule 6 of Service Tax Rules, 1994  (as available for air travel agents, life insurance, foreign exchange and lottery) shall have the option of discharging SBC by paying the amount equivalent to amount payable under relevant sub-rule * 0.5/14.

In other words, optional amount (instead of service tax @14%) payable under said sub-rules shall be increased proportionately in ratio of 0.5/14 for SBC. Thus, it is a case where rule was amended to make it applicable for SBC in the same manner in which it is applicable for service tax.

(iii) Notification Nos.23 & 24/2015-ST both dated 12.11.2015: Notification No.24/2015-ST dated 12.11.2015 provides that Notification No. 30/2012 - ST dated 20.06.2012 shall be applicable for the purposes of SBC mutatis mutandis. Similarly, Notification No. 23/2015-ST dated 12.11.2015 was issued to provide that Notification No.26/2012-ST dated 20.06.2012 and Service Tax (Determination of Value) Rules, 2006 shall be applicable for SBC.

If by virtue of section 119(5) of Finance Act, 2015, merely provisions of chapter V of Finance Act, 1994 were made applicable to SBC, in such case, Central Government would have power either to make applicable the same rules as applicable to service tax or to make new/amended rules.

However, as by virtue of section 119(5) of Finance Act, 2015, the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, have been made applicable to SBC, therefore, Central Government has no power to make modified/new rules (i.e. rules different from which are applicable for service tax) for SBC, therefore, these notification were of clarificatory in nature.

Thus, all these amendments to the rules as discussed hereinabove did not affect the legal framework for levy and collection of EC/SHEC/SBC. In other words, these amendments were not contrary to section 95(3) of FA, 2004 or Section 140(3) of FA, 2007 or section 119(5) of FA, 2015, as the case may be. However, amending CCR, 2004 for specifically denying the credit of SBC would be ultra vires of section 119(5) of Finance Act, 2015.

Further as per section 119(5) of Finance Act, 2015, rules notified under Finance Act, 1994 (which certainly includes CCR, 2004) shall be applicable for SBC as they apply to service tax. Therefore, even without any amendment to CCR, 2004, same shall apply to SBC, accordingly, SBC paid on input services shall be available as CENVAT Credit and liability of same can be discharged by utilizing CENVAT Credit.

Option available for Central Government to disallow the credit of SBC: As discussed hereinabove, there is no option with CG to specifically disallow the credit of SBC. As Section 119(5) of Finance Act, 2015 says, ‘whatever Central Government does with service tax (subject to rules making power granted under Finance Act, 1994), the same will also apply to SBC, different treatment cannot be provided to SBC.

Accordingly, CG may amend the CCR, 2004 so as to allow the credit of service tax and SBC to the extent of 14/14.5 of service tax and SBC paid on input services. The effect of such amendment would be:

(i) On both the components, credit would be allowed in 14/14.5 ratio. The net effect would be credit of Rs. 13.51 would be allowed for every Rs. 14 of service tax paid and similarly, credit of 0.4827 paisa would be allowed for every 0.50 paisa SBC paid on input services. In other words, credit of Rs.14 will be available for every Rs.14.5 paid as service tax (including SBC) on input service.

(ii) Same rule shall be applicable to service tax as well as to SBC as stipulated under section 119(5) of Finance Act, 2015, therefore, such amendment would not be ultra vires of said section.

If nomenclature is not important (actually, SBC is all about nomenclature only), then the purpose is achieved i.e. not to allow credit of 0.5 out of every service tax Rs.14.5 paid on input services.

The non-availability of CENVAT Credit on 0.5% tax - The implications: In the era of value added taxes, an increase in indirect tax does not affect the costs incurred in providing services. However, additional tax of 0.5% without credit benefit would increase the cost of providing services. Impact would be negligible if expenses towards input services are negligible. However, for assessee whose costs of providing services include substantial amount towards input services, increased cost of additional tax would certainly lower the profitability. For example: if an assessee discharges 80% of its service tax liability by utilization of CENVAT Credit on input services, its profitability would lower by 0.4% of gross receipts. And if net profit is 10%, profit would be declined by 4%.

In the end, levying 0.5% additional tax without including it into credit chain; would be equivalent to levying it @ 1% or even more. In other words, effective rate of service tax @ 14.5% (without credit of 0.5% additional tax) may, in actual, be more than the effective rate of service tax payable @ 15%.

By Vikas Khandelwal, FCA, B.Com (H), LL.B
The author is partner in Vikas Khandelwal & Company, Chartered Accountants, Delhi

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