ISSUES FOR AMENDMENTS OR CLARIFICATION BY THE CBEC – UNION BUDGET 2015
Amidst huge expectations, the Hon’ble Finance Minister Shri. Arun Jaitley presented the first full-year Union Budget of the Hon’ble Prime Minister Shri. Narendra Modi's Government on February 28, 2015, Saturday in the backdrop of easing inflation and interest rates but continued growth challenges which the Government needs to address.
While considering Goods and Service Tax (“GST”) as a ‘game changing reform’, Shri. Arun Jaitley said that ‘GST will put in place a state-of-the-art indirect tax system by 1st April, 2016’.
We are discussing herewith some of the key concerns on Union Budget 2015, which needs to be addressed/ clarified by the Central Board of Excise and Customs (“the CBEC or “the Board”):
1. Withdrawal of Education Cess ("EC") and Secondary and Higher Education Cess ("SHEC") [collectively referred to as “Cess”] – A Double-Edged Sword
With the underlying theme of setting the stage for Goods and Services Tax (“GST”), the Union Budget, 2015 has proposed to do away with the Cess. While withdrawal of Cess on Excise duty has been made effective from March 1, 2015, as a parallel change, Cess on Service tax has also been proposed to be withdrawn from the date to be notified after enactment of the Finance Bill, 2015. It is worthwhile here to note that there is no proposal to do away with the Cess on Customs duty and hence Cess on Customs duty will continue to be levied.
Key Concerns: The said amendment brings many unaddressed issues presenting the Industry at large with a bouquet of concerns.
The provisions of Rule 3(7)(b) of the Cenvat Credit Rules, 2004 (“the Credit Rules”) permit utilisation of Cenvat credit of Excise duty/ Service tax for payment of Cess but not vice versa:
“Provided that the credit of the education cess on excisable goods and the education cess on taxable services can be utilized, either for payment of the education cess on excisable goods or for the payment of the education cess on taxable services:
Provided further that the credit of the Secondary and Higher Education Cess on excisable goods and the Secondary and Higher Education Cess on taxable services can be utilized, either for payment of the Secondary and Higher Education Cess on excisable goods or for the payment of the Secondary and Higher Education Cess on taxable services.....”
In the light of the stated provisions under Rule 3(7)(b) of the Credit Rules, following questions are left unanswered:
a) What will be the fate of balance of Cess lying unutilized in the hands of manufacturer as on March 1, 2015 and service provider (from a date to be notified)?
With the Cess on Excise duty being withdrawn effective from March 1, 2015, the major issue which crops up is the destiny of the amount of Cess lying unutilized in the hands of the manufacturers. While the service providers are in a position to utilize the existing balance of unutilised Cess lying in their hands before the enactment of the Finance Bill, 2015 but what will happen to amount of Cess lying unutilized after enactment of Finance Bill, 2015.
b) What happen for Cess charged on the excisable goods in transit, received in the factory after March 1, 2015?
It is likely that there may be a situation of excisable goods in transit as on March 1, 2015, which will involve an element of Cess as the supplier of raw material would have charged Cess. Now, what will happen for such Cess already charged on excisable goods received on or after March 1, 2015.
c) Time lag between effective dates of withdrawal of Cess under the Service Tax and the Central Excise – Accumulation of Credit in the hands of manufacturers.
Since Cess on Service tax will continue, albeit for some time, a service provider shall charge Cess to the manufacturer. In terms of the Credit Rules, while the manufacturer shall be entitled to avail Credit of such Cess, the question is as to how the manufacturer will utilize Credit of such Cess.
With no Cess on Excise duty, the manufacturer will merely accumulate such Credit of Cess without any option for its utilization.
d) Accumulation of Cess distributed by an Input Service Distributor (“ISD”) to manufacturing Unit
As an ISD distributes Cess portion also to the factory or the plant, on the services received by it, which will only accumulate at the factory or plant in the absence of any provision for its utilization.
e) What will be the treatment of balance 50% of the Credit of Cess on the Capital goods?
In case of Capital goods, 50% of the Cenvat credit is taken in the current year and balance 50% Cenvat credit is taken in subsequent financial year. Now, in a situation where Capital goods are purchased during the financial year 2014-15, 50% of Cenvat credit of Cess is taken in the current year and balance 50% Cenvat credit of Cess on Capital goods would be taken in the subsequent financial year i.e. 2015-16. Accordingly, the assessee would confront the problem of utilizing the additional 50% Credit of Cess w.e.f March 1, 2015 (manufacturer) and from a date to be notified for service provider.
Clarification/ Suggestion: The stated amendment involves multiple unaddressed issues which warrant immediate attention of the Board. The Board should come to the rescue of the industry by bringing in suitable amendment in the Credit Rules to address the above concerns and provide means of utilization of Credit of Cess. Alternatively, allowing refund of the accumulated Cess would perhaps be another solution. However, refund may prove to be a daunting solution keeping in mind the number of issues embracing the procedure of getting refund from the Department.
2. Swachh Bharat Cess – Impact on ‘Aam Aadmi’
Pursuing with Mr. Narendra Modi’s Dream of Swachh Bharat, a new Chapter VI has been inserted in the Finance Bill, 2015 that contains a new levy of Cess called the ‘Swachh Bharat Cess’ (“SB Cess”). This Chapter empowers the Central Government to impose Cess on all or any of the taxable services at the rate of 2% of the value of such services, for the purpose of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto.
Clause 117 of Finance Bill, 2015 reads as 'there shall be levied and collected in accordance with the provisions of this chapter, a cess to be called the Swachh Bharat Cess, as service tax on all or any of the taxable services at the rate of two percent on the value of such services…'.
The SB Cess shall be levied from such date as may be notified by the Central Government after the enactment of the Finance Bill, 2015. The SB Cess will be levied in addition to any cess/ Service Tax collected on such services under the provisions of Chapter V of the Finance Act, 1994 (“the Finance Act”).
Key Concerns: It is worth observing that the Government has not given any further details of the levy of SB Cess. As a matter of course, SB Cess will increase the rate on taxable services and in effect the Service tax rate will increase up to 16%, rather than 14%, as stated by the Hon’ble Finance Minister in his Budget Speech. The hike in Service tax rate will definitely raise the burden of tax on the ‘Aam Aadmi’. Further numbers of questions are haunting the minds of the assessee as follows:
a) What all services are going to be covered under the levy of SB Cess? In the absence of clearly defined provisions, it is likely that the SB Cess may re-ignite the tussle on ‘classification’ of services.
b) Whether Cenvat credit of SB Cess would be available or not because there are no amendments proposed in the Credit Rules?
c) Whether there will be restriction as regards utilisation of SB Cess as was in case of EC and SHEC?
Clarification/ Suggestion: With the aim of Mr. Narendra Modi’s Government to introduce GST by April 1, 2016, the logic of introducing such a levy under the banner of SB Cess where the same is not proposed to be subsumed in the Constitution (122nd Amendment) Bill, 2014 in GST presented in the Lok Sabha on December 19, 2014, will definitely create hue and cry among the Trade.
As SB Cess awaits its introduction, a detailed clarification on the various aspects of applicability of SB Cess will surely be welcomed by the Industry at large.
3. Non-excisable goods included within the ambit of ‘exempted goods’ - but only for the purpose of Rule 6(1) of the Credit Rules
Vide Notification No. 6/2015-CE(NT) dated March 1, 2015, Explanations to Rule 6(1) of the Credit Rules have been inserted to state that for the purpose of this Rule, exempted goods and final products shall include Non-excisable goods cleared for a consideration from the factory.
The Explanations inserted to Rule 6(1) of the Credit Rules reads as under:
"Explanation 1: - for the purposes of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a consideration from the factory.
Explanation 2: - value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the excise act and the rules made thereunder."
Key Concerns: Though an Explanation has been added under Rule 6(1) of the Credit Rules, but the stated explanation may open up fresh issues of litigation in the following matters:
a) Consideration – Monetary or non-monetary: In the absence of any definition of the term ‘Consideration’, application of the stated Explanation under Rule 6(1) of the Credit Rules will pose another problem to the assessees.
b) Definition of ‘Exempted goods’ under Rule 2(d) of the Credit Rules not amended - The present Explanations inserted in Rule 6(1) of the Credit Rules have been clearly stated to be ‘for the purpose of this Rule'. However, the definition of ‘Exempted goods’ under Rule 2(d) of the Credit Rules has not been amended simultaneously.
Clarification/ Suggestion: The clear clarification of the terms used and corresponding valuation in the stated Explanations to Rule 6(1) of the Credit Rules is very much required from the Board so as not to create another area of future litigation.
4. Ease of Business: Service tax registration within 2 working days – but only for single premises
The Hon’ble Finance Minister in his Budget, 2015 Speech has stated that “To further facilitate the ease of doing business, online central excise and service tax registration will be done in two working days…”
Accordingly, vide Notification No. 5/2015-ST dated March 1, 2015 (effective from March 1, 2015), Rule 4 of the Service Tax Rules, 1994 has been amended to provide that the CBEC shall, by way of an Order, specify the conditions, safeguards and procedure for registration in Service tax.
In this regard Order No. 1/15-ST dated February 28, 2015, effective from March 1, 2015 (“the Order”) has been issued, prescribing documentation, time limits and procedure for registration for single premises. It has also been prescribed that henceforth registration for single premises shall be granted within 2 days of filing of application.
Key Concerns: The speech of the Hon’ble Finance Minister gave an impression that all sorts of Service tax and Central Excise registration would be granted within 2 working days. Had that been the intention, the Order would not have dealt only with the procedure for registration specifically for single premises.
This can be taken to construe that the assessee applying for Centralised registration would not be eligible for benefit of ‘ease of doing business’ as contemplated by the Hon’ble Finance Minister.
Clarification/ Suggestion: The Board needs to clarify whether Centralised registration under Service tax would also be granted within 2 working days or not.
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