CA Madhukar N. Hiregange
CA Ashish Chaudhary
This festive season, service sector has witnessed imposition of Swachh Bharat Cess (SBC) in very hasty move by government. It was promised at the time of the budget that it would only be imposed on some services. Govt has gone back on its word. Further they have been left with very little time to prepare for this new tax. This owed to lack of clarity over various issues, holiday period and limited time between issuance of notification for levy and actual levy. Trade and industry had insisted for deferring the levy, but the government has ignored to such demands as is its past practice ( ease of doing business, having certainty has been given a go bye) and consequently the SBC has become effective from 15.11.2015.
On issuance of Notification No. 21/2015-ST and 22-2015-ST both dated 6th November, 2015, we had come out with FAQ on very next day i.e. 7th November, 2015 covering large number of questions which could be relevant in the context of SBC. There were many grey areas required clarification by government and were addressed by us in the FAQs. Since then, the government has issued following notification/clarification addressing the questions covered in our write up.
These all clarifications have cleared many doubts, which were there in the minds of taxpayers. However, there are still some questions/scenarios, which need to be addressed to ensure smooth transition to the levy. We have attempted to analyse some of these issues in the foregoing discussion. We are not repeating the FAQs issued by CBEC which one could have access from CBEC website. This article supersedes our earlier article, this has been after some more clarification and notification from the department.
1. What is the rationale behind not including SBC in the CENVAT Chain?
The SBC has been levied to fund Swachh Bharat Program of GOI. By not allowing credit of SBC, the government would be able to raise multiplier funds. It is just a revenue augmentation exercise to whip the running horse.
This is certainly against the basic philosophy of Value Added System of taxation which allows for levy of tax only on value addition. Where the industry has been looking at government to support them in the environment of economic sluggishness and anticipating herald of near perfect GST, this move has really added to the woes of industry and has raised doubt as to intent of tax reforms by government in present tax regime as well as upcoming GST.
The impact of imposition of SBC could be visible in the cost of goods and services which may increase in the range of 0.5-2% (could be even more) due to non admissibility of credit. This requires making representation to government by trade and industry for amending Cenvat Credit Rules to allow credit of SBC.
2. What would be impact of imposition of SBC on cash flow of service provider?
Imposition of SBC would have negative impact on cash flow of service provider both on procurement and supply side. There would be additional cash outflow upto 0.5% on procurement of services. Moreover, one may not be able to utilize the credit of service tax/excise otherwise available with them for payment of SBC resulting in additional cash outflow on supply side. There could be situations where service providers may have huge credit balance with them yet they will have to pay the SBC in cash.
3. Whether service provider could contemplate availing credit based on some judicial precedence?
There has been judgment of Karnataka High Court in case of Shree Renuka Sugars Ltd (2014-TIOL-98-HC-KAR-CX)where question had come before HC as to whether credit of sugar cesslevied under Sugar Cess Act be allowed considering it in the nature of duty of excise. It has been held by High Court that sugar cess paid is credited to Consolidated Fund of India. Hence, it ceases to be in the nature of cess or fee and partakes the character of duty or a tax. Once it is considered as duty, Cenvat Credit would be eligible even if there is no specific provision in the Cenvat Credit Rules to allow credit for the same.
The rationale may be applied to SBC also as the proceeds of SBC would be first credited to Consolidated Fund of India and appropriation shall be made therefrom. One could evaluate taking credit relying on above judgment. The same may be availed and reversed under protest each month till judicial clarity emerges.
4. Is there any conflict between section 67A and Rule 5 of the Point of Taxation Rules, 2011 (PoTR)?
Section 67A provides that rate of service tax shall be the rate which is in force or applicable at a time when taxable services have been provided or agreed to be provided. If one follows this provision, then SBC shall not be applicable in respect of services provided before 15.11.2015. The timing of raising of invoice or receipt of consideration become inconsequential.
Clause (a) and (b) of Rule 5 of Point of Taxation Rules, 2011 (applicable for SBC as clarified by Board) begins with phrase “no tax shall be payable”. This rule does not determine point of taxation in case of new levy but provides relaxation from levy on fulfillment of specified conditions.
The rule provides that no tax shall be payable to the extent invoice issued and payment received before service is taxed for the first time. Also the rule relaxes the requirement to issue invoice and provides that no tax shall be levied where payment received before service become taxable and invoice issued within 14 days of levy.
This could be understood with following illustration:
Services completed on 10th November. Advances were received on 1st November but the invoice is issued on 2nd December (after 14 days of imposition of SBC). There would be no liability both as per section 67A and Rule 5 as the services have been rendered prior to levy
In another case where services have been rendered on 16.11.2015 but advance received on 1st November and invoice issued on 20th November. As per 67A, service tax shall be applicable as services have been rendered after levy but no tax shall be leviable as advance received prior to the date of levy and invoice issued within 14 days of levy. Thus, the rule provide relaxation from leviability of SBC.
In our earlier article we had given a conservative view to adopt Rule 4 of the PoTR, however since the FAQ of CBEC has clarified Rule 5 to be applied, benefit of the same can be taken.
5. What is relevance of Rule 2A of PoTR?
Rule 2A of PoTR defines date of payment. As per the rule, date of payment shall be the date of entry in the books of account or date of credit to the bank account of the person liable to pay tax, whichever is earlier.
However, in caseof imposition of new levy, date of payment shall be the date of credit in the bank account provided such credit is AFTER 4 working days of new levy. This could be very crucial in managing the tax on transactions executed during transition period.
6. How would tax be levied during transition period?
For the services rendered prior to 15.11.2015, there would be no liability of SBC in terms of section 67A irrespective of timing of receipt of advances or issuance of invoice. For services rendered on or after 15.11.2015, following could be taxability under different scenarios.
|Date of credit in books of account||Date of credit in bank account||Date of raising of invoice||PoT||SBC applicable|
|10.11.2015||12.11.2015||17.11.2015||10.11.2015 (date of credit in books of account)||No|
|12.11.2015||10.11.2015||17.11.2015||10.11.2015 (date of credit in bank account)||No|
|12.11.2015||10.11.2915||30.11.2015||30.11.2015 (invoice raised after 14 days)||Yes|
|14.11.2015||17.11.2015||17.11.2015||14.11.2015 (payment received within four days of new levy)||No|
|14.11.2015||20.11.2015||17.11.2015||20.11.2015 (as payment received after 4 working days from of levy)||Yes|
|10.11.2015||17.11.2015||14.11.2015||10.11.2015 (payment within four days of levy)||No|
One could follow above indicative table to manage tax liability by ensuring that date of payment on or before 19.11.2015 and invoice issued on or before 29.11.2015.
7. A Residential Welfare Association (RWA) has received maintenance charges for the month of November in advance. Do they need to raise supplementary invoice to collect SBC for the maintenance charges pertaining to period post 15.11.2015.
No, if advance has been received before levy of SBC and invoice issued on or before 29.11.2015, there is no need to collect SBC by raising supplementary invoice. Hence, RWA need to ensure that invoice is issued on or before 29.11.2015.
8. I had purchased a flat in respect of which demand letter has been received from builder on 1stNovember, 2015 for milestone payment based on terms of agreement. I have not paid the installment yet. Now the builder is demanding SBC also. Whether it is correct?
Issuance of demand letter by builder indicates that the services had been completed to the extent demand made based on the agreement between parties. As the services were completed prior to levy of SBC, there is no liability of SBC even if installment is paid now. The action of builder to demand SBC is not correct.
9. How would liability be determined in case of reverse charge cases/joint charge cases (RC/JC)?
Rule 7 of PoTR is applicable in case of RC/JC cases where liability arises on the date of payment to service provider. However, in respect of services received before 15.11.2015, there may not be any liability under RC/JC even if payment is made post 15.11.2015 as there was no levy in terms of section 67A when the services were rendered. But department could contend that liability arises on the date of payment hence, SBC needs to be paid.
10. Whether SBC would be levied on the services provided to SEZ unit/developer?
Services provided to SEZ unit/developer is exempted from service tax leviable under section 66B vide notification no. 12/2013-ST. There is no consequential amendment in the said notification. Hence, technically, service provider engaged in providing services to SEZ units would be liable to charge SBC on the invoice issued to SEZ unit even though not liable to service tax if covered by exemption notification 12/2013-ST. Similar would be treatment where services received by SEZ unit is covered by RC/JC.
However, this may not be intention of government to levy SBC on services provided to SEZ in view of the exemption granted from SBC on services covered by mega exemption notification/negative list. Representation should be made to government for issuance of suitable notification granting exemption from levy of SBC.
11. I am a service exporter. How can I claim back SBC paid on my input service.
A service exporter may get back the taxes paid on expenditure incurred by him by claiming refund of Cenvat Credit under Rule 5 of Cenvat Credit Rules or rebate under Notification No. 39/2012-ST. Claiming benefit of SBC under these provision could be as follows:
Refund under Rule 5 of CCR: SBC may not be granted as refund by department as it has not been entered into cenvat chain.
Rebate under Notification No. 39/2012-ST: Rebate could be claimed as rebate of cess has been specifically mentioned in the notification without mentioning the nature of cess and hence a possibility may be explored for claiming the rebate.
12. I am an exporter exporting goods outside India. Can I claim benefit of SBC?
An exporter may claim benefit of service tax paid on input services/specified services as follows:
Refund under Rule 5 of CCR: SBC may not be claimed as SBC has not been entered into cenvat chain.
Rebate under Notification No. 41/2012-ST: There is no specific mention in the notification that the rebate would be granted only of service tax levied under section 66B. Hence, the possibility of claiming rebate may be explored under this notification
13. Whether SBC is applicable on services rendered in J&K/non taxable territory?
Preamble to Chapter V of the Finance Act provides that provision of this chapter (i.e. chapter V) does not extend to J&K. SBC is levied under chapter VI of the Finance Act, 1994 where there is no specific mention about territorial application. However, section 119(5) provides that provision of chapter V of the Finance Act in relation to levy and collection of service tax shall equally be applicable to SBC also. Based on this, it can be said that SBC shall not have applicability in J&K/Non taxable territory.
Levy of SBC without entering the same in cenvat chain is very disappointing. This requires representation to be made to government for allowing the credit. Also, there could be multiple challenges during transition period. The paper writers have tried to cover few of such issues in above FAQs. If you have any other doubt query, you may contact us at [email protected] or [email protected]