Dr. Sanjiv Agarwal, FCA, FCS

Sanjiv Agarwal PhotoThe Union Budget has introduced two new cesses in the name and style of Infrastructure Cess and Krishi Kalyan Cess, former in the nature of excise duty and later as Service Tax. Clean Energy Cess has been renamed as Clean Environment Cess while enhancing the cess by 100 percent. These cesses, in nutshell are as follows:

CessW.e.f.Target (Rs.)
Clean Environment Cess01.03.201626150 crore
Infrastructure Cess01.03.20163000 crore
Krishi Kalyan Cess01.06.20165000 crore

However, to reduce multiplicity of taxes, associated cascading and to reduce cost of collection, the Budget also seeks to abolish or scrap 13 cesses levied by various ministries wherein revenue collection is less than Rs. 50 crore in a year. By saying so, Government concedes that cesses add to multiplicity of taxes and to cascading effect. It appears that the new cesses have the sole objective of revenue collection and it remains a mystery as to whether these cesses are spent for the desired objectives.

Krishi Kalyan Cess (KKC) as New Cess

The Union Budget, 2016 proposes in Finance Bill, 2016 to impose a new Cess, called the Krishi Kalyan Cess, @ 0.5% on all or any taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The Cess will come into force with effect from 1st June, 2016. Input Tax credit of this cess will be available for payment of this cess.

The proceeds of the cess will go to consolidated Fund of India and shall be appropriated by the Parliament of India. All provisions of Service Tax shall apply to KKC.

Krishi Kalyan Cess (KKC)
OnAll taxable services
AuthorityClause 158; Chapter VI of Finance Bill, 2016
@0.50 percent of value of services
W.e.f.01.06.2016
AsService Tax
ForImprovement of agriculture and welfare of farmers
Cenvat CreditAllowable
Budget TargetRs. 5000 crore

Statutory Provisions / Objective

Clause 158 in Chapter VI of the Finance Bill, 2016 contains the proposed statutory provision on KKC.

The ‘statement of objects and reasons’ provides that clause 158 of the Bill seeks to insert new Chapter VI so as to levy a cess to be called the Krishi Kalyan Cess, as service tax on all or any of the taxable service for the purposes of the Union for financing and promoting initiatives to improve agriculture or the for any other purpose relating thereto.

The CBEC’s clarificatory letter on Budget clarification (vide DOF No. 334/8/2016-TRU dated 29.02.2016) states that clause 158 is the enabling provision for levy of KKC. It states as follows –

“Enabling provision for levy of Krishi Kalyan Cess:

Krishi Kalyan Cess is proposed to be levied with effect from 1st June, 2016 on any or all the taxable services at the rate of 0.5% on the value of such taxable services. Credit of Krishi Kalyan Cess paid on input services shall be allowed to be used for payment of the proposed Cess on the service provided by a service provider.”

KKC shall be levied as Service Tax on all or any taxable services at the rate of 0.5 percent on the value of taxable services. KKC has been levied for the purpose of financing and promoting initiatives to improve agriculture or for any other purpose relating to it. KKC shall be in addition to any cess or Service Tax leviable on such taxable services under Chapter V of Finance Act, 1994. The proceeds of KKC shall be credited to the Consolidated Fund of India and subject to appropriation by Parliament by law. Central Government can utilize the KKC money for specified purposes. KKC shall be subject to provisions and rules as applicable to Service Tax under Finance Act, 1994.

KKC : The Fine Print

The following assertions can be made in respect of KKC-

(a) The nature of KKC is that of a Service Tax.

(b) Rate of KKC is fixed @ 0.50 percent of value of service.

(c) The effective date for KKC is 01.06.2016 i.e., based on point of taxation, KKC shall be charged on all services provided on or after 1st June, 2016

(d) KKC shall be levied on services only which could be on all services or some of the services (as the provision provides for ‘….on any on any or all the taxable services…..’)

(e) There may be a notification issued prior to 01.06.2016 making KKC applicable to some services or class of services (rather than on all services). It is expected that some basic services may be spared from levy of KKC.

(f) KKC shall be chargeable on invoices separately as KKC like Swachh Bharat Cess. Charging Service Tax @ 15 percent (14% Service Tax, 0.50% SBC and 0.50% KKC) is not legally correct.

(g) KKC shall be charged and accounted for as a separate cess and also deposited under a new accounting code to be notified in due course.

(h) It is announced that KKC shall be cevnatable. Since KKC will be levied only on services, cenvat credit would be allowed only for services provided by service provider.

(i) Necessary amendments are expected to be brought in Cenvat Credit Rules. It is imperative that Cenvat Credit should also be allowed to manufacturers on KKC paid on input services against the duty payable on goods manufactured.

Effectively, w.e.f. 01.06.2016, the date from which KKC shall be made applicable, Service Tax structure shall be as follows:

Tax / Cess Rate (%)Cenvat
Service Tax14.00Yes
Swachh Bharat Cess0.50No
Krishi Kalyan Cess0.50Yes
Total15.00

Thus, out of total imposition of fifteen percent, 14.5 percent shall be cenvatable and 0.50 percent shall not be cenvatable. This would require extra care while accounting, invoicing and book keeping by the assessees.

Impact of KKC

So far has Service Tax is concerned, effective tax cost shall be 15 percent of value of services w.e.f. 01.06.2016, i.e. 14% Service Tax, 0.50% Swacch Bharat Cess and 0.5 percent of Krishi Kalyan Cess. Of this, 14.5% shall be cenvatable but 0.50% of Swachh Bharat Cess (SBC) shall not be cenvatable.

Since KKC is leviable on all or any taxable services (there may be exemptions to be announced later), it will have an adverse effect on make in India programme and starts ups, besides adding to inflation. It also goes against the philosophy of having an environment of ease of doing business in India. Further, cenvat credit is allowed to service provider only and not to manufacturer, adding to cost of production. It would have been better if tax rate was kept at 15 percent merging the two cesses into tax.

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