Swachh Bharat Cess – Whether Cenvatable

Dr. Sanjiv Agarwal, FCA, FCS

Backdrop

Budget speech in para 123 stated as follows –

“In indirect taxes, I propose to increase the Clean Energy Cess from ? 100 to ? 200 per metric tonne of coal, etc. to finance clean environment initiatives. Excise duty on sacks and bags of polymers of ethylene other than for industrial use is being increased from 12% to 15%. It is also proposed to have an enabling provision to levy Swachh Bharat Cess at a rate of 2% or less on all or certain services if need arises. This Cess will be effective from a date to be notified. Resources generated from this cess will be utilised for financing and promoting initiatives towards Swachh Bharat”.

The date from which this amendment would come into effect was to be notified in due course. (now notified as 15^th November, 2015)

Objective of SBC

According to notes on clauses to the Finance Bill, 2015, it was stated that –

“Clause 117 of the Bill seeks to insert a new Chapter VI so as to levy a cess to be called the Swachh Bharat Cess, as service tax on all or any of the taxable services for the purposes of the Union for financing and promoting Swachh Bharat initiatives and any other purpose relating thereto.”

Statutory Provisions

According to the statutory provisions for levy of Swachh Bharat Cess (SBC), Chapter VI (Section 119) of the Finance Act 2015 contains provisions for levy and collection of Swachh Bharat Cess (SBC). Now the Government has announced 15th November, 2015 as the date from which the provisions of Section 119 would come into effect (notification No.21/2015-Service Tax, dated 6th November, 2015 refers). Simultaneously, Government has also notified levy of Swachh Bharat Cess at the rate of 0.5% on all taxable services. Effectively, the rate of SBC would be 0.5% and new rate of service tax plus SBC would be 14.5%. As such SBC translates into a tax of 50 paisa only on every one hundred rupees worth of taxable services. The proceeds from this cess will be exclusively used for Swachh Bharat initiatives. (Refer Notification No. 21/2015-ST and 22/2015-ST, both dated 6.11.2015).

Sub section (2) of section 119 is very important and relevant to understand the nature of SBC. Let’s look at it –

“(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.”

A careful reading of the provision will reveal that SBC is not a cess but a levy in the form of Service Tax only, more so because unlike education cess which was levied as a percentage on Service Tax itself, SBC is levied as a percentage on the value of Service Tax only, just like Service Tax is levied on value of taxable services i.e., on gross amount of consideration charged, of course, subject to abatement, if any.

Sub section (2) expressly and in very clear certain terms uses the expression ‘……. as Service Tax’. It states that cess, called SBC, shall be levied and collected as Service Tax.

Thus, there should be no doubt in the mind of legislature, tax collectors and tax administrators that nature of SBC is that of Service Tax only.

Section 119(4) deals with proceeds of SBC Accordingly, 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.

The proceeds of Service Tax are also transferred to Consolidated Fund of India and later appropriated.

As per section 119(5), the provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, 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 thereunder, as the case may be.

Thus, going by entire provisions of section 119, one tends to believe and perhaps rightly so, that SBC is a separate levy but its nature is that of Service Tax.

Cenvat Credit of SBC

However, on whether SBC shall be subject to Cenvat credit provisions or not, there appears to be lot of confusion and doubt in the mind of assessees as well as tax consultants.

CBEC View

CBEC has issued a set of FAQ’s on SBC and according to Question No. 14, CBEC is of the view that Cenvat credit of SBC shall not be available to assessees.

Following is the relevant text:

Q.14 Whether Cenvat Credit of the SBC is available?

Ans. SBC is not integrated in the Cenvat Credit Chain. Therefore, credit of SBC cannot be availed. Further, SBC cannot be paid by utilizing credit of any other duty or tax.

Cenvat Credit Rules

According to Rule 3 (1) of Cenvat Credit Rules 2004, Cenvat Credit can be allowed on various duties and taxes as specified therein. Clause (ix), (ixa) and (ixb) of Rule 3(1) provide that Cenvat credit shall be allowed of the Service Tax leviable under section 66, 66A or 66B of the Finance Act, 1994 (as amended).

A reading of Rule 3(1) of the Cenvat Credit Rules alongwith section 119 (2), (4) and (5) of the Finance Act, 1994 would suggest that Cenvat Credit of SBC should be allowed because–

(a) nature of SBC is that of Service Tax

(b) SBC is in addition to existing Service Tax

(c) Proceeds of SBC are credited to Consolidated Fund of India (like Service Tax)

(d) All the provision of Service Tax (Chapter V of Finance Act, 1994) are applicable to SBC also

What should be done

Government should immediately get the issue of allowability of Cenvat credit on SBC legally examined and issue a clarficatory Circular in the interest of all stakeholders to have clarity on the subject, avoid confusion and disputes, have full compliance and avoid possible litigation.