The Finance Act, 2016 under Chapter VI has introduced a new cess named ‘Krishi Kalyan Cess’ (KKC) on all taxable services at the rate of 0.5% of the value of such services for the purposes of financing and promoting initiatives to improve agriculture or any other purpose. This cess would come into force from 01.06.2016 and would be levied and collected ‘as service tax’ on the value of all taxable services. This cess would be in addition to any cess or service tax leviable on such taxable services. It is in the nature of a tax and not a fee since there is no quid pro quo between the payer (assesses) and the recipient (Government).
The immediate question which generally arises in case of a new levy is its impact to cases where any of the following events such as services completion, invoicing or receipt of payment occur after the effective date of levy. In order to address this question, it is important that the nature of levy and the statutory provisions under section 67A of the Finance Act, 1994 (Act) read with the Point of Taxation Rules, 2011 (POT) be understood.
To understand this crucial point, it may be worthwhile to first examine the difference in Rule 4 and Rule 5 of the POT rules i.e. – whether the levy of KKC results in increase of the effective rate of service tax from 14.5% to 15% (coming within the foray of Rule 4 of POT Rules) or is it a separate and new levy and hence covered by Rule 5 of the POT Rules.
Change in effective rate of tax (Rule 4)
The POT Rules explain the term change in effective rate of tax as follows – “change in effective rate of tax shall include a change in the portion of value on which tax is payable in terms or a notification.” Rule 4 of the said rules that in case of a change in effective rate of tax, the new rate would be applicable only when atleast two of the three events occur after the introduction of the new rate: a) provision of service; b) invoicing; and c) receipt of payment. Where two events occur before the effective date, then the old rate would be applicable.
In the context of KKC w.e.f. 01.06.2016, in a case where Rule 4 becomes applicable, the levy would apply only if atleast two events occur after 01.06.2016, else it would not apply. Therefore, KKC may not be applicable to cases where the sundry debtors are present on 31.05.2016 or also to cases where invoicing and advance payment have been completed before 01.06.2016
Service Taxed for the first time (Rule 5)
Rule 5 provides that where a service is ‘taxed for the first time’ to all cases where payments are received after 01.06.20016 even though the invoice has been issued before 01.06.2016. Unlike Rule 4, all sundry debtors as on 31.05.2016 would be subject to KKC if the payments are received after 01.06.2016. Date of receipt of payment is generally the date of credit in the bank account except for certain limited cases provided in Rule 2A.
What is the character of KKC
The Hon’ble Supreme Court in Barnagore Jute Factory Company’s case & Telco’s case held that levy and collection of Cess (Jute Cess and automobile cess respectively) should be considered as a duty of excise and all the provisions of the Central Excise Act and rules made thereunder apply to the levy of the respective cess. Similarly, in a case involving Jute Cess, the Karnataka High Court in Shree Renuka Sugars Ltd held that the Jute Cess is in the nature of duty of excise and hence eligible for Cenvat Credit even though the Cess is not specifically mentioned in the Cenvat Rules. In another case involving automobile cess, the Karnataka High Court in TVS Motor Co Ltd also held that rebate on automobile cess cannot be denied as it is in the nature of duties of excise and is part of the duties paid by manufacturer.
However, in a different context, the Gujarat High Court while examining whether education cess would apply on sugar cess held that the Cess Act have only adopted the machinery provisions of the Central Excise Act and cannot be treated as part and parcel of the duty of central excise and hence sugar cess cannot subjected to education cess. The Larger bench of the Tribunal in Kumar Arch Tech Pvt Ltd held that education cess cannot be treated as mere addition to the excise duty or customs duty. The said cess has to be treated as different and distinct levies from the excise duties and customs duties on which the same are charged.
The above decision may seem contrary to each other but can be reconciled on the ground that cess is levied under a separate and independent enactment but is given the nature of the duty of excise in view of the specific mention in charging provisions of the enactment. But, the new enactment merely borrows the machinery provisions of the Central Excise law and only such provisions which are borrowed would be applicable to the Cess in question. In other words the cess is still an independent levy and cannot be treated as part and parcel of the central excise duty.
Conclusion – Rule 4 v/s Rule 5
On an application of the well settled principles, it is can be more or less be concluded that KKC is an independent levy but has been conferred the character of service tax. Yet, it cannot be treated as part or change in the effective rate of service tax as this levy in an independent levy with an independent existence from service tax. Consequently, the introduction of KKC cannot be treated as change in the effective rate of tax rather a new levy and covered by Rule 5. In effect, all sundry debtors as on 31.05.2016 whose payments are received after such date would be subject to KKC, albeit, the provision of service has taken place before 01.06.2016. Whether landmark excise principles as stated in Vazir Sultan Tobacco and Wallace Four Mills case could be applied is a tricky proposition in view of the amendment to section 67A of the Act. I am in the process of studying this aspect & would provide my view in due course.
(The author is a Chartered Accountant and Lawyer by qualification. The author can be reached at firstname.lastname@example.org. As law is a complex subject, I request the readers to alternate views which could be adopted.)