In the budget for the 2016-17, the central government had announced imposition of Krishi Kalyan Cess (herein after referred as KKC) at 0.5% of value of all taxable services. This cess will be collected to finance and promote initiatives to improve agriculture in India. It is estimated that with introduction of this cess, the government set to collect an aggregate of Rs 5,000 Crore in the financial year 2016-17. The number looks very tempting and if the money collected is used for intended purpose i.e. “to finance and promote initiatives to improve agriculture in India”, it will reap long term benefits to the country.
In an unexpected step, the Finance Minister, then in 2015, had removed the Education Cess and Secondary Education cess from all the taxable services. The service provider were happy with this step of removal of cesses not because those were high but because of the transactions costs involved in the complying with the provisions related to it. However, with introduction of Swachh Bharat Cess & KKC, the compliances to service providers is back to square one.
Though the cess is named as “Kalyan Cess” it may not be kalyankari for the service providers because of its inherent requirements of keeping separate records, registers, changes in the system and its monitoring. Now, let move on and understand the implications of imposition of KKC on the service providers as well as ultimate service recipient like you and me.
Chapter VI was introduced in the finance bill of the year 2016-17. After Hon’ble President’s assent, the finance bill was enacted and now it will be called as Finance Act, 2016. With the enactment of the Finance Act, 2016, the imposition of KKC has become reality. The KKC is to be levied from 1st June 2016 on all taxable services. It is important to note that,
- The Krishi Kalyan Cess would be over and above the Swachh Bharat Cess;
- The aggregate Service Tax rate w.e.f. June 01, 2016 would be 15% i.e. (14% +0.5% +0.5%)
- It is clearly mentioned in the chapter that, the provision of the Finance Act, as they apply in relation to the levy and collection of tax, will equally apply to the levy.
- The service provider can avail the credit of KKC paid on eligible input services. However, the KKC can only be utilized for liability of KKC to such service provider. However, KKC will be cost to the manufacturer as they are not entitled for Cenvat Credit of KKC.
With its departure from its promise to move to GST regime, the government has taken decision to impose KKC, which will be an additional cess on taxable services. Though, the move is said to be a step towards bringing service tax rate close the expected rate of tax under GST but separate levy and its attached compliances are road blocks in the idea of GST.
Let’s understand the important implications of the KKC on the service providers.
A. What is the Impact of this new levy on services provided before 1st June 2016?
The service providers have to understand the impact of the KKC on the services received before 1st June 2016 as it may result into unnecessary cash outflow on account of KKC and interest on delayed payment of KKC.
The Point of Taxation Rules, 2011 were made effective from 1st April 2011. In case of new levy i.e. levy of KKC one will have to refer the aforesaid rules. Rule 5 of The Point of Taxation Rules, 2011 i.e. Payment of Tax in case of new services, will be specifically applicable for determining the point of taxation for KKC. Though by reading the header of the rule, one may feel that the Rule 5 is applicable only in case of tax in case of new services, however by virtue of explanation 1 & 2 in the said Rule 5, the new levy i.e. KKC will be covered in the Rule 5. The Rule 5 of Point of Taxation Rules, 2011 reads as under,
Rule 5 Payment of Tax in case of new services.
Where a service is taxed for the first time, then, –
(a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service become taxable;
(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within 14 days of the date when the service is taxed for the first time.
Explanation 1 – This rule shall apply mutatis muntandis in case of new levy on services.
Explanation 2 – New levy or tax shall be payable on all the cases other than specified above.
To put it in simple terms,
Ø The service providers will have to pay KKC on all the service invoices from the period April 2011 which are not realized by 1st June 2016.
Ø In cases where the service providers has received payment towards the services rendered but not issued the invoices, then if it issues invoices within 14 days of imposing to new levy i.e. by 14th June 2016 the no KKC will be payable. Otherwise KKC will be applicable.
Ø The service provider will have to charge KKC on the all the invoices which are raised from 1st June 2016.
B. What is the impact on KKC liability under Reverse Charge?
It is also important to note that Rule 7 is applicable in case of reverse charge. As per third proviso to Rule 7 which reads as under,
Provided also that where there is change in the liability or extent of liability of a person required to pay tax as recipient of service notified under sub-section (2) of section 68 of the Act, in case service has been provided and the invoice issued before the date of such change, but payment has not been made as on such date, the point of taxation shall be the date of issuance of invoice.
The above proviso clearly states that “where there is change in the liability”, & the invoice is issued before change in the liability but payment is not made to the service provider, the point of taxation will be date of invoice.
Therefore, in case of reverse charge, in case of transaction of which the invoice is booked before 1st June 2016 but the payment is made after 1st June 2016, no KKC will be required to be discharged.
One can dispute the applicability of Rule 7 for the new levy considering the wording used in Rule 5 which clearly states that Rule 5 is applicable for new levy. Being KKC is new levy, rule 5 will only be applicable instead of Rule 7 and any payment made after 1st June 2016 will attract KKC even though the invoices are booked prior to 1st June 2016. Further, there is no provision in entire rules which states that Rule 5 is not applicable to reverse charge. Therefore for levy of KKC (which is a new levy), Rule 5 will override all other rules of Point of Taxation Rules, 2011.
It is settled principle that in case of conflicting provisions under the Act or Rules, the provision which is beneficial to the assessee can be opted by the assessee. By virtue of this principle, the assessee can opt for Rule 7 and not pay KKC on the invoice is issued before change in the liability but payment is not made to the service provider by 1st June 2016. However, the department may litigate the option chosen by the assessee. One would welcome necessary clarification from the department on the above matter so as avoid future litigation which consumes time and energy of the assessee, department and adjudicating authorities.
C. What is the impact of KKC on the Service providers paying service tax liability on receipt basis?
The Rule 5 is also applicable on the cases wherein the small service providers, having taxable turnover less than 50 lacs. Such service provider pays the service tax on receipt basis. In such cases, even though the services are rendered before and invoice is raised, as the payment is received after the new levy, KKC will have to be discharged.
D. Whether there will be any Changes in the Invoice formats?
With effect from from 1st June 2016, the service providers will have to charge 0.5% KKC on the taxable value of the services which they are rendering. The Cess will be required to be shown separately on the invoices. It is to be noted that charging consolidate services tax @ 15% will not be in compliances with the Service Tax Rules, 1994. Further, if the service recipient entitled for the Cenvat Credit of KKC then service recipients will also insist for separate reporting of KKC on invoice so that they can easily avail the cenvat credit.
E. What important change will be required in the systems?
The service providers will have to change their ERP / accounting system so as to accommodate the levy of cess the invoices. Further, the service provider will have to create separate ledger for recording of KKC paid on the input services so as avail the credit and it’s reporting in the service tax returns.
F. Can we raise supplementary invoices for recover of KKC on earlier period invoices?
One should note that KKC is a levy which is in nature of indirect tax. The service provider are entitled to collect the same for service receiver. As mentioned earlier, the KKC is cenvatable (only to the service provider). Therefore, the service provider can raise the supplementary invoice for recovering KKC towards the earlier period invoices which are not paid service recipient by 1st June 2016. Based on the supplementary invoices, the service receiver can avail the credit of KKC. For better control, it is advisable that the services provider mentions that earlier period invoice numbers on the supplementary invoice.
G. Whether refund of KKC will be available for service exporters?
The service exporter are entitled for refund of service tax. Necessary provisions have been incorporated in the input rebate notification (Notification No. 39/2012-ST dated June 20, 2012) and Cenvat Credit Rules, 2004 so as to allow refund of KKC to the service exporters. However for goods exporters, KKC will be cost even though they are exporting the goods.
H. Whether SEZ Units can claim the exemption of KKC on specified services?
The SEZ Developer / unit will be entitled for ab-initio exemption or refund of the KKC paid on the specified services on which ab-initio exemption is admissible but not claimed. Necessary amendment has been carried out in notification No. 12/2013-ST dated July 1, 2013.
It can be noted from the above that there are many issues which the service provider will have to take care w.e.f. 1st June 2016. It is advisable to the service providers as well as service recipient to get their liability validated from the experts so as to avoid any future outgo on account of tax payment, interest and penalty due to non-compliances. Also a detailed circular or FAQ by CBEC clarifying the applicability of KKC can resolve lot of confusion in the mind of the assessee.