Exemption to E Cess & SHE Cess- Really Lucrative?

[Pradeep Jain]

Right from the common man to the corporates and foreign investors, where everyone was expecting the government to deliver a reform-oriented Budget, but the changes proposed in the Budget announced by the Hon’ble Finance Minister took all the hopes in vain. Even before the cheer over the raising of tax exemption limit could have died down, Budget 2015 delivered a staggering blow by hiking the rate of service tax from 12.36% (including Education Cess and SHE Cess) to 14%. Likewise, the rate of excise duty was increased from 12.36% (including Education Cess and SHE Cess) to a consolidated rate of 12.5%. Not only this, Swatch Bharat Cess of 2% on the value of taxable services has been proposed thereby leading to service tax rate to be 16%. In order to calm down the temper of the declared hike in the excise and service tax rates, the government gave “so called relief” by exempting the levy of Education Cess and SHE cess. The Education Cess levied under section 91 read with section 93 of the Finance Act, 2004 on excise duty is being fully exempted vide notification no. 14/2015-CE dated 01.03.2015. Similarly, SHE Cess leviable under section 136 read with section 138 of the Finance Act, 2007 on excise duty is also being fully exempted vide notification no. 15/2015-CE dated 01.03.2015. However, with respect to Education Cess and SHE Cess levied on service tax under section 95 of the Finance Act, 2004 and section 140 of the Finance Act, 2007, the same will cease to have effect from a date to be notified by the Government. Not only this, the TRU Letter dated 28.02.2015 also clarifies that till the time the revised rates comes into effect, the ‘Education Cess’ and ‘SHE Cess’ will continue to be levied in service tax. It is worth noting that the Education Cess and SHE Cess in Customs is not being exempted. Consequently, there is no final “Bye Bye” to Education Cess and SHE Cess. It is submitted that providing exemption to levy of Education Cess and SHE Cess all of a sudden, that too, with respect to Excise and Service Tax only leaves many questions that remain unanswered and will only lead to litigation in days to come.

Whether credit balance available as on 01.03.2015 to lapse? First and foremost question that arises in the minds of the assessees is that what will be the fate of the credit balance of Education Cess and SHE Cess pertaining to excise duty lying with them as on 01.03.2015 because the exemption to Education Cess and SHE Cess of excise duty is applicable w.e.f. 01.03.2015. There is no express provision as regards the lapse of balance of credit available with the manufacturers or the provision of its utilisation in future or its refund in the Budget provisions. Moreover, the credit of Education Cess can be utilised only for payment of Education Cess and likewise, the credit of SHE Cess can be utilised only for payment of SHE Cess. Consequently, the balance of cenvat credit of Education Cess and SHE cess available with the manufacturers will become a “sheer cost” unless and until a clarification as regards disposal of the available cenvat credit balance of Education Cess and SHE Cess is issued by the government. One view that may be taken is that the balance of Education Cess and SHE Cess may be retained by the manufacturers and may be used if any demand is fastened against them for the prior period in future. Alternatively, one may also view that the intention of the government is to grant temporary exemption to the levy of Education Cess and SHE Cess because there is no such exemption with respect to Customs duty and also, the government could have abolished it altogether instead of granting exemption from its levy.

Credit eligibility on transit goods as well as on input services:- Supposing the goods are dispatched on February 27 and received in the factory of manufacturer in the month of March. The Education cess and SHE cess will be charged on the same. But the credit will not be available as there is no Education cess and SHE cess leviable on the final product. Similarly the education cess and SHE cess is payable on service tax. It will be discontinued on the date notified after the enactment of budget. But the credit of the same will not be available to manufacturers. This will add to cost of their goods.

Whether discrimination between excise and service tax assessees proper? It is further submit that with the gap created in the grant of exemption of Education Cess and SHE Cess on excise duty and that on service tax to be applicable on a date to be notified later, the government has put the service providers at a relatively advantageous position than the manufacturer assessees. This is for the reason that the Education Cess and SHE Cess will be continued to be levied until the new service tax rates are effective and so the service providers will continue to utilise their credit balance till notified date. However, if we talk of manufacturer assessees that avail input services, they will have to bear additional cost of Education Cess and SHE Cess levied on input services availed by them because they would be unable to utilise the same. But, the manufacturer who is service provider also will be saved from the absurd situation. This will be termed as step towards GST or step away from GST where the rates of service tax and excise are different and credit provisions will also apply differently for both of them.

Whether reversal under Rule 6(3)(i) of 6% still proper in light of hike in duties? It is submitted that when the issue of availment of credit of inputs/input services commonly used by assessee is considered, it is found that the government seeks to deny the cenvat credit attributable to inputs/input services that are used in the manufacture of exempted goods or provision of exempted services. Moreover, if the present provisions of credit reversal as contained in Rule 6(3)(i) of the Cenvat Credit Rules, 2004 are pursued, they warranted approximately 50% of the credit reversal because the rate of duty of excise and service tax was 12%. Consequently, the credit reversal under Rule 6(3)(i) was 6%. However, when the government has hiked the service tax rate to 14% (effectively 16% as there is 2% Swatch Bharat Cess) and has also hiked excise duty to 12.5%, then whether the rate of credit reversal of 6% will be proper or not is also another question that the government appears to have skipped.

How to apportion duties under Pan Masala Rules for the purpose of claiming abatement? Another question that has arisen in the minds of the assessees working under compound levy scheme is that how the abatement amount will be apportioned under various heads of duties. As it is known that in compound levy scheme, a fixed amount of duty is paid which is apportioned in the specified ratio under different categories of duties. With this budget, the apportionment under Education Cess and SHE Cess has been specified as “0”. However, for claiming the amount of abatement for the prior period, the manner of computation will be highly debatable and will be prone to litigation. In abatement, no cash refund is allowed but the manufacturer is allowed to adjust the duty in ensuing months. If so, the department will allow the abatement of education cess and SHE cess but it cannot be adjusted as there is Education cess and SHE cess on final product now. So, refund of the same in cash should be allowed.

Whether assessees claiming benefit of Notification no. 01/2011 and 2/2011 benefitted? It is also worth observing that although the rate of excise duty has been hiked from 12.36% (Including Cesses) to 12.5% (without cess) but the assessees availing the benefit of concessional rate of duties as contained in Notification no. 1/2011 and 2/2011 will pay 2% and 6% duty instead of 2.06% and 6.18%. Hence, it can be said that they have been benefitted by the exemption from Education Cess and SHE Cess granted by the government.

Manufacturers of stainless steel patta patti :- The manufacturers of Stainless steel patta patti are working under special procedure under notification 17/2007 and paying duty in advance. They have already paid duty, education cess and SHE cess for the month of March 2015. But there is no education cess and SHE cess for the month of March 2015. The only remedy for them is to claim refund of the same. But claiming refund of small amount of ₹ 1200/- per month and to clear the doctrine of unjust enrichment is a big hurdle.

Before parting:- Before concluding, we wish to submit that one of our suggestions in our Article titled:- “BUDGET 2015: STEPPING STONE TO SIMPLIFIATION?” was that there should be a single rate of tax so that the requirement of maintaining separate cenvat credit balances of Education Cess, SHE Cess is dispensed with which appears to have been considered by the government. However, the back door route of providing exemption has made the amendment prone to litigation. Moreover, It is submitted that on one hand, the new government is making earnest efforts to introduce and implement GST, which is a unified tax measure that is aimed at streamlining the different rates of service tax and excise duties to one consolidated rate of tax and has made promises to implement GST by April, 2016. However, on the other hand, the amendments proposed in the Budget seeks to create greater disparity between the rates of excise duties and the service tax. The effective rate of excise duty has been declared as 12.5% while the effective rate of service tax has been made 16%. The assessees expected a budget with changes that facilitate in introducing the unified tax reform GST but on the contrary, it seems that the implementation of GST is a remote possibility in the coming years.