Three new & major notifications issued for Swachh Bharat cess

We carried the article on our website titled “Swachh Bharat Cess – Not so Swachh” containing the issues that needs to be settled by the board relating to Swachh Bharat Cess (SBC).

The Board acted proactively and responded even when we all our busy with our diwali celebrations.

THREE NEW NOTIFICATIONS ISSUED:-

1. Notification 23/2015 –ST Dated 12th Nov’ 2015 = (SBC on services covered under Abatement Scheme and Service Tax Valuation Rules)

2. Notification 24/2015 –ST Dated 12th Nov’ 2015 = (SBC on services covered under Reverse Charge Mechanism)

3. Notification 25/2015 –ST Dated 12th Nov’ 2015 = (SBC on services covered under Special Manner of Payment)

ISSUES CLARIFIED

ISSUE - 1

What would be the effective rate of tax in case of Partially exempted services i.e. abatement scheme under notification 26/2012?

In this respect it is mentioned that the abatement scheme does not alter the value of taxable service but only alters the rate of service tax. Thus, in case of GTA services, wherein the abatement is 70%, for a service of Rs. 100, the service tax is to be payable at 4.2%.

Now the issues arise with respect to the applicability of SBC.

View-1

The SBC is applicable on the value of taxable service and not on the service tax. Thus, the effective rate will be 4.7% (i.e. 4.2% + 0.5%)

View-2

Any exemption (Whether Full or Partial) given in service tax laws shall be applicable for SBC. Thus, the effective tax rate under this viewpoint would be 4.35% (i.e. 14.5% x 30%).

As per the latest Notification 23/2015 –ST Dated 12th Nov’ 2015, Swachh Bharat Cess shall be leviable only on the specified percentage of taxable value. Thus, view-2 stands accepted in favour of assessees and if we take the example of GTA service then the effective tax rate would be 4.35% (i.e. 14.5% x 30%).

It is further clarified that the SBC on the services covered under Service Tax Valuation Rules’ 2006 shall be only on the taxable value. The effective rate would be as follows:-

ISSUE - 2

Whether the Swachh Bharat Cess shall be applicable on the services covered under Reverse Charge Mechanism?

Latest Notification 24/2015 –ST Dated 12th Nov’ 2015 clarifies that the SBC shall be applicable on services covered under Reverse Charge Mechanism and shall be collected in the same manner as that of service tax.

ISSUE - 3

What would be the effective rate of tax in case of services covered under Special Manner of Payment?

Rule 6 of Service Tax Rules’ 1994, covers four services under special manner namely

• Services of Air travel agent,
• Services of Life Insurer,
• Services of Money Changer &
• Services of Lottery Agent.

In these services, value of taxable service is not determined but the service tax is paid in a special manner. For ex:- Air travel Agent is required to service tax pay at 0.7% on Basic Fare value.

Now after the introduction of SBC, whether the effective rate would be 0.7% + 0.5% = 1.2% or it is 0.7% only (i.e. the consolidated rate)

As per the latest Notification 25/2015 –ST Dated 12th Nov’ 2015, new sub rule (7D) has been inserted and alternate rate of Swachh Bharat Cess under all the above four services has been prescribed.

The alternative rate shall be calculated as follows:-

Total service tax liability at the alternative rate to be multiplied by 0.5 (i.e. the rate of SBC) and dividing the product by 14 (i.e. the present rate of service tax), during any calendar month or quarter.

For example

An Air ticket cost Rs. 1,00,000. Determined the liability of service tax under Rule 6(7) of STR’ 1994.

Ans:

Service Tax = 700 (1,00,000 X 0.7%)
SBC = 25 (700 X 0.5/14)
Thus total tax payable = 725

ISSUES REMAINING TO BE CLARIFIED

1. Whether the cenvat credit of this SBC can be claimed?

Rule 3(1) of Cenvat Credit Rules’ 2004, specifies the duties and taxes eligible for cenvat credit. At present SBC is not covered there.

Suggestive course of action

a. Proper Notification must be issued if the cenvat credit of SBC is to be given.

b. If Government does not want to allow, then proper clarification must be issued.

2. Whether this cess is to be paid in cash or can be paid by using cenvat credit?

Rule 3(4) of CCR’ 2004, speaks for the utilization of cenvat credit and states that the cenvat credit can be utilized for payment of service tax on any output services. Further Rule 3(7b) of CCR’ 2004 pose restrictions on utilization of cenvat credit.

Suggestive course of action

If cenvat credit of SBC is allowed, proper notification must be issued to pose restriction on its utilization towards this cess only.

If cenvat credit of SBC is not allowed, proper clarification must be issued in this respect.

3. Whether SBC is to be shown and discharged separately?

Cess has particular objective. Thus, SBC must have separate accounting codes for its payment.

Suggestive course of action
Separate accounting codes must be released via new Notification.

4. What would be the relevant date for taking the effective rate of tax? Whether it is the provision of service or the issuance of invoice or the receipt of payment? OR

Applicability of Swachh Bharat Cess on Ongoing Contracts?

Rule 5B was inserted in Service Tax Rules, 1994 which dealt with “Date for Determination of Rate of Service Tax”. Rule 5B is extracted below:

“5B. Date for determination of rate -----

The rate of tax in case of services provided, or to be provided, shall be the rate prevailing at the time when the services are deemed to have been provided under this rules made in this regard.”

Thus, Rule 5B gives the reference to POT Rules’ 2011 for determining the date for taking rate of service tax. Any date prescribed by the POT Rules’ 2011 is taken for the rate of service tax.

However, Rule 5B was omitted with effect from 01.07.2012. With effect from 28.05.2012 a new Section 67A was introduced in Finance Act, 1994. The title of section 67A stated as “Date of determination of rate of tax, value of taxable service and rate of exchange”. Section 67A is reproduced below:

“The rate of service tax, value of a taxable service and rate of exchange, if any,

a. Shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be,
b. In force or as applicable at the time when the taxable service has been provided or agreed to be provided.”

The present section specifies the date of actual provision of service as the relevant date for rate of service tax. It does not make any reference to the deemed provision of service.

Thus, for SBC whether Section 67A of FA’ 1994 needs to be followed or Rule 5 or Rule 4 of POT needs to be followed.

Suggestive course of action
Proper clarification must be issued.

5. Proper changes in Service Tax Return format.

Stay Tuned. We’ll keep you updated.

Warm Regards
CA Raman Singla
Partner - Indirect Tax Professionals
Devalya Advisory LLP
30A, 1X, ILD Trade Centre, 
Sector 47, Sohna Road, Gurgaon
Web: www.indirecttaxprofessionals.com