Swachh Bharat Cess @ 0.5% on value of all taxable services levied from November 15, 2015

Dear Professional Colleague,

Swachh Bharat Cess @ 0.5% on value of all taxable services levied from November 15, 2015

Pursuing with Mr. Narendra Modi’s Dream of Swachh Bharat, in Union Budget 2015, a provision was made for levying a Swachh Bharat Cess (“SB Cess”) on all or any of the services, for the purposes of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto. However, the SB Cess was to be levied from such date as may be notified by the Central Government after the enactment of the Finance Bill, 2015.

SB Cess now made applicable from November 15, 2015 - Notification No. 21/2015-ST dated November 6, 2015:

After the Hon’ble President had given assent to the Finance Bill, 2015 on May 14, 2015, the Ministry of Finance, Department of Revenue vide Notification No. 14/2015-ST dated May 19, 2015 had notified increase in the rate of Service tax from 12.36% to flat 14% (Subsuming Education Cess and Secondary & Higher Secondary Education Cess) to be effective from June 1, 2015. But SB Cess was left to be notified at a later date.

Now, the Central Government vide Notification No. 21/2015-ST dated November 6, 2015 has appointed November 15, 2015 as the date from which, SB Cess shall be effective. SB Cess would be over and above the present 14% Service tax rate.

SB Cess at the rate of 0.5% will be levied on value of all taxable services - Notification No. 22/2015-ST dated November 6, 2015:

Section 119 of the Finance Act, 2015 (Chapter VI) that contains a provision of new levy of cess called the SB Cess, 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.

Therefore, the Central Government has also issued another Notification i.e. Notification No. 22/2015-ST dated November 6, 2015 to exempt all taxable services from payment of SB Cess which is in excess of 0.5% of the value of taxable services. In other words, w.e.f. November 15, 2015 ‘SB Cess’ @ 0.5% will be levied on value of all taxable services i.e. the effective rate of Service tax including SB Cess will be 14.5% from November 15, 2015.

No SB Cess on services specified under the Negative List of services or otherwise exempted by a notification issued under sub-section (1) of section 93 of the Finance Act, 1994:

Notification No. 22/2015-ST dated November 6, 2015 further provides that SB Cess shall not be leviable on services which are exempt from Service tax by a notification issued under Section 93(1) of the Finance Act, 1994 or otherwise not leviable to Service tax under Section 66B thereof.
Therefore, SB Cess @ 0.5% will be levied on value of all taxable services except the following:

• Negative List of Services under Section 66D of the Finance Act, 1994
• Services exempted by a notification issued under sub-section (1) of Section 93 of the Finance Act, 1994 i.e.-

- Mega Exempted Services vide Notification No. 25/2012-ST dated June 20, 2012.
- Services exempted as specified to certain extent under the Abatement Notification No. 26/2012-ST dated June 20, 2012

To access the Notifications, please click on the link below:

http://www.cbec.gov.in/htdocs-servicetax/st-notifications/st-notifications-2015/st21-2015

http://www.cbec.gov.in/htdocs-servicetax/st-notifications/st-notifications-2015/st22-2015

Open issues that require immediate clarification from the Board:

It is worth observing that the Government has not provided any further details of the levy of SB Cess. The continuous hike in Service tax rate from 12.36% to 14% and now 14.5% will definitely raise the burden of taxes on the ‘Aam Aadmi’. Further number of issues may crop up if no further clarification is issued, few of which are discussed as under:

1. Accounting head: What will be the accounting head for depositing SB Cess?

2. Availability of Cenvat credit of SB Cess in the hands of Manufacturer or Service Provider: Whether Cenvat credit of SB Cess would be available or not as there is no amendments proposed in the Cenvat Credit Rules, 2004 pertaining to availment of Cenvat credit of SB Cess?

If no credit is made available, it would directly add to the cost of goods and services. In case of export of goods or services, exporter would not be entitled for refund of SB Cess.

c)  Calculation of value of taxable services under Abatement Notification: How SB Cess would be dealt while availing the benefit of abatements by way of an exemption provided vide Abatement Notification No. 26/2012-ST dated June 20, 2012.For example, under GTA services, presently, abatement of 70% is available and accordingly, Service tax is required to paid on 30% of value of taxable service after exemption (abatement) of 70% as provided under the said Abatement Notification.

Hence, question is arising à What would be effective rate of Service Tax including SB Cess. Whether it would be leviable at 4.2% (i.e. 30% of 14%) + 0.5% = 4.7% or 30% of 14.5% = 4.35%?

As per our understanding, it should be 4.35% as taxable value after abatement i.e. 30% for GTA Service for chargeability of Service Tax and SB Cess would be SAME in terms of sub-section (5) of Section 119 of the Finance Act, 2015, which states that “the provisions of Chapter V of the Finance Act, 1994 and the rules made there under, 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 Swachh Bharat Cess 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 there under, as the case may be.”

However, it is better that a proper clarification is issued in this regard. 

d)  Treatment of SB Cess on ongoing transactions: With the Service tax rate (including SB Cess) of 14.5% becoming effective from November 15, 2015, there are chances of turmoil being faced by the service provider in respect of the ongoing transactions for which either certain advance payment is received prior to November 15, 2015 but the completion of provision of service may take place post November 15, 2015 or vice versa.

Tussle between Rule 4 of the Point of Taxation Rules, 2011 and Section 67A of the Finance Act, 1994 will again crop up but, we are of the considered view that SB Cess should be levied on value of taxable services rendered on or after November 15, 2015.

e)  Implication of SB Cess on services specified under Rule 6 of Service Tax Rules, 1994: Implication of SB Cess while computing Service tax on services specified under Rule 6 of the Service Tax Rules, 1994 namely air travel agent, insurance premium, purchase and sale of foreign currency needs to be clarified as there is no specific exemption for such services.

Other important points for immediate digest:

1. No SB Cess on goods: SB Cess is levied under Chapter VI of the Finance Act, 1994 and is applicable only on provision of taxable services. Hence, no SB Cess shall be imposed on the goods manufactured.

2. Computation of tax under Works contract: In terms of Rule 2A of the Service Tax (Determination of Value) Rules, 2006, tax needs to be applied on the value so arrived at the rate of 14.5%. Accordingly, effective rate of tax would be as under:

• In case of original works: 5.8% (14.5%*40%); and
• Other than original works: 10.15% (14.5%*70%)

c)  Computation of tax on Restaurant and Outdoor catering services: In terms of Rule 2C of the Service Tax (Determination of Value) Rules, 2006, tax needs to be applied on the value so arrived at the rate of 14.5%. Accordingly, effective rate of tax would be as under:

• In case of Restaurant services: 5.8% (14.5%*40%); and
• In case of Outdoor catering services: 8.7% (14.5%*60%)

d) Computation of tax under Reverse Charge Mechanism: SB cess along with Service tax shall be paid on services under Reverse Charge Mechanism as SB Cess is applicable on all taxable services.

e) SB Cess to be charged and shown separately in Invoice: SB Cess would be over and above the present 14% Service tax rate. Hence, SB Cess needs to be charged separately on the invoice, needs to be accounted separately in the books of account and needs to be paid separately under separate accounting head which may be notified separately.With the aim of Mr. Narendra Modi’s Government to introduce GST by April 1, 2016 wherein all the Cesses on goods and services will be subsumed under the GST, the logic of introducing such a levy under the banner of SB Cess just few months before, will definitely create hue and cry among the Trade.

As SB Cess awaits its introduction, in days to come, an immediate detailed clarification on the various aspects of applicability of SB Cess and availability of its credit will surely be welcomed by the industry at large.

Relevant Provisions pertaining to SB Cess in Chapter VI of the Finance Act, 2015:

THE FINANCE ACT, 2015 - CHAPTER VI

SWACHH BHARAT CESS

“119. (1) This Chapter shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

(2) 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 per cent. on the value of such services for the purposes of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto.

(3) The Swachh Bharat Cess leviable under sub-section (2) shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994 (32 of 1994), or under any other law for the time being in force.

(4) The proceeds of the Swachh Bharat Cess levied under sub-section (2) shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money of the Swachh Bharat Cess for such purposes specified in sub-section (2), as it may consider necessary.

(5) The provisions of Chapter V of the Finance Act, 1994 and the rules made there under, 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 Swachh Bharat Cess 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 there under, as the case may be.”
Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.

We take this opportunity to wish you and your family a very joyous & prosperous Diwali. May this Diwali light up new dreams, bring fresh hope and fill your days with pleasant surprises and alluring moments.
HAPPY DIWALI!!

Thanks & Best Regards,                                                    

Bimal Jain
FCA, FCS, LLB, B.Com (Hons)

Author of a book on Goods and Services Tax, titled, "GOODS AND SERVICES TAX – INTRODUCTION AND WAY FORWARD" (1st Edition)

A2Z TAXCORP LLP

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