Treatment of Education Cess - Decent notification for service providers

As per the amendment made by Finance Act’ 2015, the rate of service tax has been increased from 12.36% to 14% w.e.f. 01.06.2015.

In this respect the issue which arise is that “Whether the cenvat credit of education cess which is available on 31st May’ 2015 and cannot be fully used for the payment of service tax liability of May’ 2015, can be used for the payment of Service Tax?”

The present issue arise on account of the fact that as per Rule 3(7)(b) of Cenvat Credit Rules’ 2004, the cenvat on education cess is allowed only for the payment of education cess. Thus, w.e.f. 1st June’ 2015 when there is no cess payable then how such credit of unutilized education cess would be used.

This situation is solved partially for manufacturer by inserting Notification 12/2015 w.e.f. 30th April’ 2015. As per this notification, the balance of education cess can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act.

This notification is applicable only for manufacturer, thus, the service provider cannot take the benefit.

NOW 2 VIEWS ARE POSSIBLE

1. The cenvat credit of Education cess available on 31st May’ 2015 to be used for service tax liability of 14%.

In this respect it is mentioned that the relevant extracts from the speech of Finance Minister during the introduction of Finance Bill’ 2015 is as follows:

“The Service Tax rate is proposed to be increased from 12% plus Education Cesses to 14%. The ‘Education Cess’ and ‘Secondary and Higher Education Cess’ shall be subsumed in the revised rate of Service Tax. Thus, effective increase in Service Tax rate will be from existing rate of 12.36% (inclusive of cesses) to 14%.”

Thus, as per the intent, the rates of cess are subsumed in the rate of service tax and 14% is the consolidated rate including the cess. Consequently, the balance cess can be used against the payment of service tax liability of 14%.

2. The cenvat credit of balance Education cess cannot be used for service tax liability of 14%.

As per this view, the Cenvat Credit Rules’ 2004 pose restrictions on the use of cess for payment of liability of service tax. Thus, cenvat credit of balance Education cess cannot be used for service tax liability of 14% and is to be carried forward for payment of past liability (if arise in future).

The Ministry of Finance has avoided the above dispute partially by issuing a favourable Notification No.22/2015-Central Excise (N.T.), Dated 29th Oct’ 2015 for Service Providers.

The notification states as follows:-

“Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on INPUTS OR CAPITAL GOODS received in the premises of the provider of output service on or after the 1st day of June, 2015 can be utilized for payment of service tax on any output service:

Provided also that the credit of balance fifty per cent. Education Cess and Secondary and Higher Education Cess paid on capital goods received in the premises of the provider of output service in the financial year 2014-15 can be utilized for payment of service tax on any output service:

Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on INPUT SERVICE in respect of which the invoice, bill, challan or Service Tax Certificate for Transportation of Goods by Rail (referred to in rule 9), as the case may be, is received by the provider of output service on or after the 1st day of June, 2015 can be utilized for payment of service tax on any output service.”

Thus, as per the notification, the credit of Education Cess and S.H.E.C paid on Input Service in respect of which the invoice, etc is received by the service provider on or after the 1st day of June, 2015 can be utilized for payment of service tax on any output service.

It is pertinent to note the notification does not provide for utilization of the balance cenvat credit of education cess as on 31st May’ 2015, against the payment of service tax.

In this respect, the assessee can opt for any of the above stated view.

Stay Tuned. We’ll keep you updated.

Warm Regards
CA Raman Singla
Partner - Indirect Tax Professionals
Devalya Advisory LLP
30A, 1X, ILD Trade Centre, 
Sector 47, Sohna Road, Gurgaon
Web: www.indirecttaxprofessionals.com