CA Madhukar N. Hiregange
CA Ashish Chaudhary
Finance Act 2015 had provided provision for levy and collection of Swachh Bharat Cess (SBC) under section 119 of the Finance Act, 2015 at a rate not exceeding two percent on the value of services. The levy was to become effective from the date to be notified by the Government. The objective of behind introducing SBC was to fund for Government’s flagship program of Swachh Bharat. Incidentally, it was also seen as precursor to introduction of GST where rate of tax is expected to be substantially higher than current rate of service tax.
Also Read- Article by CA Bimal Jain- Swachh Bharat Cess @ 0.5% on value of all taxable services levied from November 15, 2015
Now the government has come up with introduction of SBC immediate post festive season. Notification no. 21/2015 has been issued appointing 15th November, 2015 as the date from which the provision of section 119 would become effective. This means, the cess has been introduced on all taxable services w.e.f. 15.11.2015.
Simultaneous to this, another notification no. 22/2015-ST has been issued whereby exemption has been granted in excess of SBC calculated at the rate of 0.5 percent of the value of taxable services. Effectively, rate of cess would be 0.5% and new rate of service tax would be 14.5%.
There would be consequential impact on many other aspects under services tax law which the author has attempted to discuss in FAQ form.
1. What would be effective rate of service tax post introduction of SBC?
Effective rate of service tax post introduction of SBC would be 14.5%.
2. In case of services covered by abatement, what would be effective rate of tax? Say GTA service where presently tax is payable at 4.2% (14%*30%)?
Section 119 provides that SBC would be levied and collected as service tax. Further, sub section 5 provides that provision of chapter V of the Finance Act would apply to SBC as they apply to service tax. The abatement notification is issued under section 93 (chapter V) of the Act. So, this notification would apply for SBC also in the same manner as apply for service tax. Hence, the effective rate of tax on all abatement services would be 14.5% * effective rate under Notification 26/2012-ST. For GTA, it would be 14.5%*30%= 4.35% (not 4.70%)
3. In case of works contract, how would the tax be calculated?
The value of services would be calculated as per Rule 2A of Service Tax (Determination of Value) Rules, 2006. Tax needs to be applied on the value so arrived at the rate of 14.5%. Effective rate of tax in case of original works and other than original works would be 5.8% (14.5%*40%) and 10.15% (14.5%*70%) respectively. Similar, would be for restaurant and outdoor catering services.
4. Whether SBC would be applicable on services covered by Rule 6 of Service Tax Rules (i.e. air travel agent, insurance premium, purchase and sale of foreign currency)
There is no specific exemption for such services. Therefore technically speaking one has to compute taxable value for the purpose of computing SBC though for computing service tax the special rates are applied. However paper writer feels that there may be consequential amendment to deal with it.
5. I am paying service tax on few services under reverse charge mechanism. How would SBC have impact on my tax liability?
SBC would be applicable on all taxable services. Hence, you need to pay SBC along with service tax on the services availed by you.
6. Whether SBC needs to be collected and paid separately from service tax or subsumed in existing service tax rate?
SBC would be levied, charged, collected and paid to government independent of service tax. This needs to be charged separately on the invoice, needs to be accounted separately in the books of account and needs to be paid separately under separate accounting code which should be notified separately.
7. Services presently provided by me are covered by mega exemption notification i.e. 25/2012-ST. Do I need to charge SBC on services provided by me?
No, it has been specifically provided in the NotificationNo. 22/2015 that SBC would not be applicable on services exempted from levy of service tax. Hence, you need not to charge SBC on the services covered by mega exemption notification. Similar would be treatment of negative list services.
8. If services have been provided prior to 15th November but invoiced on or after 15th November, whether SBC would be applicable? (no advance received)
There is anomaly between section 67A of the Finance Act, 1994 and Rule 4 of Point of Taxation Rules, 2011. As per section 67A, the rate of tax would be applicable as on the date on which service is provided. On the other hand, Rule 4 of Point of Taxation Rules provides that rate of tax would be applicable based on 2 out of 3 events.
If one follows section 67A, SBC would not be applicable in the given example. On the other hand, if one follows Point of Taxation Rules, 2011SBC would be applicable as two (raising of invoice and receipt of consideration) out of three events are occurring post 15.11.2015.
9. What would be rate of tax where services are provided before and after imposition of SBC?
The impact of introduction of SBC on different situations is summarized below. (assuming that applicable rate is determined as per Rule 4 of Point of Taxation Rules, 2011)
|Service provided||Invoice issued||Payment received||Rate to be considered|
|Before imposition of SBC||After imposition of SBC||After imposition of SBC||14.5%|
|Before imposition of SBC||Before imposition of SBC||After imposition of SBC||14%|
|Before imposition of SBC||After imposition of SBC||Before imposition of SBC||14%|
|After imposition of SBC||Before imposition of SBC||After imposition of SBC||14.5%|
|After imposition of SBC||Before imposition of SBC||Before imposition of SBC||14%|
|After imposition of SBC||After imposition of SBC||Before imposition of SBC||14.5%|
10. How would liability be determined in case of reverse charge services where services have been received prior to 15.11.2015 but consideration paid post 15.11.2015?
In case of reverse charge services, point of taxation as per Rule 7 of Point of Taxation Rules, would be the date on which consideration is paid to service provider. Hence, SBC would also be required to be paid in such cases.
11. Whether SBC paid on input service would be eligible as credit?
There is no amendment in the Cenvat Credit Rules, 2004 regarding availment and utilisation of SBC. In the absence of the same, credit would not be admissible. (Are we really moving toward GST regime where it is claimed that there would be no cascading effect of taxes and full credit would be allowed) One can expect suitable amendment is brought in Cenvat Credit Rules, 2004 to provide for availment and utilisation of SBC. If not brought, this would be very trade regressive measure.
12. What would be impact of imposition of SBC on cost of goods and services?
In the absence of any notification providing for availment of credit of SBC, it would directly add to the cost of product and services. If you are manufacturing excisable goods, you will have to factor in additional cost of 0.5% on all services received by you in the course of manufacturing. Similarly, if you are providing taxable service, SBC paid on all your input service become cost. If you are exporter of goods or service, you will not be entitled for refund of SBC.
13. I am providing both exempted and taxable service and reversing credit @ 7% of value of exempted service under Rule 6 of Cenvat Credit Rules? Do I need to reverse the SBC also?
SBC would be levied and collected as service tax. Reversal under Rule 6 is not payment of “service tax” but it is payment of “amount”. Hence, reversal of SBC is not required under Rule 6 of Cenvat Credit Rules, 2004.
14. I am manufacturing excisable goods. Do I also need to charge SBC in addition to excise duty?
No, SBC is levied under chapter VI of the Finance Act, 1994 and is applicable only on provision of service. There is no imposition of SBC on the goods manufactured hence, you are not liable to pay SBC on manufacturing of excisable goods.
Though the objective of the collection of specific cess for a Swachh Bharat Mission is appreciable, the psychological impact on common man would be high with increased burden of taxes. This is especially with the fact that there is no provision for credit (unless it is provided for) and also additional burden on the business man to keep track of the one more tax, as to invoicing, record keeping, payment and returns filing. You can reach authors at firstname.lastname@example.org or email@example.com.