Tax Planning in Krishi Kalyan Cess

Cess - Meaning

A cess is a tax that is levied by the government to raise funds for a specific purpose. Collections from the Education Cess and the Secondary and Higher Education Cess, for instance, are supposed to be used for funding primary and higher and secondary education respectively. As per Article 270 of the Constitution, cesses imposed by the Parliament for earmarked purposes need not be shared with state governments. If there is an unspent amount, it is simply carried forward for use in the following year. While the Centre has to mandatorily share the revenue from other taxes with the States, it gets to retain the entire kitty with a cess. Cesses are not supposed to be relied upon as a regular source of revenue. They are resorted to only for a particular purpose and are to be discontinued after the objective is met, though this often doesn’t happen in practise. The Sarkaria Commission remarked way back in 1988 that the application of cess must be for limited duration. In practice though, cesses are in the form of non-lapsable funds with little or no transparency on use of proceeds. CAG reports have brought to light the consistent short transfer of cess funds in many instances including Road Cess.

Krishi kalyan Cess – Imposition

In the Budget laid before the Parliament, the finance Minister has burdened the masses with a new cess (Tax) called Krishi Kalyan Cess, (hereinafter referred to as “KKC”)  at 0.5 per cent on all taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. It is astonishing to witness the new found Love for cess. It started six months back with the introduction of Swachh Bharat Cess levied to raise money for promoting the vision of cleanliness drive initiated by the Prime Minister.

In last budget of 2015-16, the rate of Service Tax was increased from 12% plus Cess (3%) to 14%. The 3% Levy of cess included 'Education Cess' and 'Secondary and Higher Education Cess'. This was subsumed in the revised rate of Service Tax via Notification No.14/2015-Service Tax, dated 19th May, 2015.The rationale given was to simplify the procedure. This new rate of Service Tax @ 14% was applicable from 1st June 2015. Moreover from 15th Nov 2015, Swachh Bharat Cess @ 0.5% also got applicable. Therefore the effective rate of Service Tax is currently at 14.5% with effect from 15th Nov 2015. Of this, 14.5% shall be cenvatable but 0.50% of Swachh Bharat Cess (SBC) shall not be cenvatable. It seems, the rate is slowly being increased to bring service tax closer to the expected goods and services tax (GST) rate of 17-18%. However within a year, thereof we witnessed introduction of two new cess. These levies of additional cess can scare away prudent investors and business from investing in this country.

Introduction of new Cess has raised eyebrows amongst experts. Levy of Cess seems to be contradictory to the overall vision of GST. With the applicability of GST, all indirect taxes shall be subsumed with an attempt to establish uniformity in structure and reduce cascading effect of taxes. As has been seen till now, they are economically inefficient or they are not being used for their earmarked purpose. That being so, is it appropriate for governments to continue with a rampant imposition of cesses? This move is a step backward and it shows lack of vision on the part of government of the day. After this cess, the service tax will increase to 15 per cent. People will have to pay more for mobile phone calls, eating out at restaurants, air tickets, cable and DTH services, among others. It will make host of services costlier, like visits to the beauty parlours, courier service, credit- and debit card-related services, chartered accountants, architects, insurance and demands raised by real estate builder for housing projects, among others. 

The entire change of heart of Government can be seen from the Finance Minister’s Budget Speech 2016-17

“Madam Speaker, my direct tax proposals would result in revenue loss of ` 1,060 crore and my indirect proposals are expected to yield `20,670 crores. Thus the net impact of all tax proposals would be revenue gain of `19,610 crores”

The increase in projected service tax collections are shown in the table given herein below.

Krishi Kalyan Cess: Statutory Provision

Clause 158 of the Finance Bill 2016 seeks to insert a new Chapter-VI leving Krishi Kalyan Cess. It reads as follows

158. (1) This Chapter shall come into force on the 1st day of June, 2016. Krishi Kalyan Cess.

(2) There shall be levied and collected in accordance with the provisions of Chapter VI , a cess to be called the Krishi Kalyan Cess, as service tax on all or any of the taxable services at the rate of 0.5 % on the value of such services for the purposes of financing and promoting initiatives to improve agriculture or for any other purpose relating thereto.

(3) The Krishi Kalyan Cess leviable shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994, or under any other law for the time being in force.

(4) The proceeds of the Krishi Kalyan 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 Krishi Kalyan Cess for such purposes specified in sub-section (2), as it may consider necessary.

(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 Krishi Kalyan Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under the said Chapter or the rules made thereunder.​

Point of Taxation: KKC

Point of taxation means the point when a service shall be deemed to have been provided. KKC Shall be covered under Rule 5 of Point of taxation Rules 2011(Hereinafter referred to as “POTR 2011”). It reads as follows

Payment of tax in case of new services- Where a service is taxed for the first time, then,-

(a) no tax shall be levied to the extent the invoice has been issued and the payment received against such invoice before the service became taxable.

(b) No tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time.

You may be amazed that KKC is new levy and not new service. But the government has extended the scope of this rule by inserting two explanation provisions resulting which new levy is covered under the ambit of Rule 5.

Rule 5 of the Point of Taxation Rules, 2011 has been amended with effect from 1st March 2016 by Notification No 10/2016-ST dated 1stMarch, 2016 and two Explanations (Explanation 1 & 2) have been inserted in said Rule. After the amendment, Rule 5 reads:

• Explanation 1: This rule shall apply mutatis mutandis in case of new levy on services.
• Explanation 2: New levy or tax shall be payable on all cases other than specified above.

Analysis

Rule 5(a) provides that when the issuance of invoice and receipt of payment is made before the date of taxability then the service shall be non-taxable.

Rule 5(b) stipulates that if the payment received before date of taxability and invoice is issued within 14 days from the service becoming taxable for the first time even then no service tax to be charged.

Further, new insertion by way of explanation has resulted in expanding the scope of rule 5 to new levy erstwhile limited to new services only.

Let us examine the provision with regard to KKC

Date of applicability of KKC- 1st June 2016

It is pertinent to mention that invoice has to be issued within 14 days from the date service became taxable for the first time in order to avail the benefit of such clause. However time limit for issuance of invoice as per Rule 4A of Service tax Rules 1994 is 30 days from the completion of service or receipt of payment towards the value of such taxable service whichever is earlier.

The table herein below reflects the burden of KKC on the clients of top listed companies in India.

It is also worth mentioning that it does not cover the situation when both completion of service and date of issue of invoice are prior to the date from service becoming taxable. Only Date of Invoice and receipt of payment are to be considered for the purpose of Rule 5.

KKC Planning

• Assessee must ensure that all debtors have received the invoice and payment from the customer by 31st May 2016 to keep KKC at bay.
• In case service provided and payment is received before 31stMay, 2016 but invoice has not been issued by said date, ensure that invoice to be issued by 15 th June, 2016 to save the levy of KKC.
• In case a taxable service is to be provided in the near future, if possible take advance from the customer on or before 31st May 2016 and issue invoice by 15th June, 2016 and this may lead to non-levy of KKC.
• Ensure credit of the cheques that are received and accounted end of May 2016 in the Bank Account within four working days of the date of levy of KKC, i.e. by 6th June, 2016. As in case of breach of this condition, the date of payment as per rule 2A of POT Rules would be the date of credit in Bank Account and thus would make the transaction exigible to KKC.

Key Takeaways:

• Incremental 0.5% can make significant difference to the financials of a company .Accordingly it should raise the Invoice and make attempt to receive the payments before 31st May 2016. Company should improve Debt collection period by expediting the entire machinery.

• Company should also prefer to clear the current liability (creditor Balance) in order to reduce the burden of additional cess. Company should settle the liability before 1st June so that KKC doesn’t result in additional cash outlflow.

Impact of KKC

(I) Ease of doing business

With Government’s vision to promote ranking in the ease of doing business in India, one envisage a structure which promotes simplicity of taxes exist. Proposed structure is not congruent to the overall vision.

It is likely that a separate accounting code will be prescribed for Krishi Kalyan Cess and the service providers will be required to display the same separately on invoices. Paying Service tax at 15% may not be only problem but maintaining separate accounts for Service tax and various Cesses, their records & computation, followed by corresponding Cenvat provisions may be an issue.

II)  Make in India

KKC doesn’t augurs well for Make in India vision. In order to be manufacturing hub (like China, Vietnam), one needs low tax rates. Contrary approach is being displayed by levying this additional cess

• Manifestly, the manufacturers paying Krishi Kalyan Cess on their input services would not be in a position to avail Cenvat credit of the same and thus would form part of their cost, leading to increase in prices to that extent;
• It appears that the Cenvat credit of Service tax or Excise duty can be neither utilized for payment of Krishi Kalyan Cess nor vice versa.​

III) Overall Economy

Amidst the global slowdown, Indian economy appears to be few bright spots. Measures like KKC are inflationary in nature. It will lead to spike in the cost of services. Consumption of various services would be badly affected. Thereby resulting in downward spirals, which in turn will affect the job market and GDP of the country. Creating a distinction between the manufacturer of goods and provider of output services seems detrimental and regressive move towards implementation of GST in India.

Conclusion

As a whole, rationale of KKC is very noble with an intent to improve overall agrarian economy, which contributes around 16% of our GDP. Government needs to play a balancing act. The need of hour is simplification of business process.

Government needs to provide enough impetus to projects like Make in India, Startup India and ease of doing Business. Otherwise it shall appear to be marketing gimmick thereby exposing us before the world.