BIRTH OF NEW CESS

[Dr. Sanjiv Agarwal]

We as Indians are habitual of living with levies, taxes and cesses. As if taxes are not enough, the Governments (to whichever political party it may belong) have been levying cesses and surcharge on taxes as additional tax revenue-may be it has a psychological effect on tax payers that tax is low but for the exchequer, it is the effective yield that counts. Presently we have education cess and secondary and higher education cess on all Union taxes, besides clean energy cess.

While both the education cesses have been proposed to be subsumed in Excise Duty and Service Tax (not abolished but subsumed in tax rates by hiking the duty / tax rates), it would continue or direct taxes and customs duty.

The Government of the day at the centre believes that cleaning India is a top most priority (and why it should be not) and as such, there is a drive to collect more and more money in the name of clean India or 'Swachh Bharat' drive.

Clean India in Budget, 2015

With focus on clean India, the Union Budget-2015 proposes to have a special cess called 'Swachh Bharat Cess" (SBC) over and above Service Tax. This SBC shall be used to finance and promote swachh bharat initiatives. Further, contributions to Swachh Bharat Kosh (SBK) shall be eligible for 100 percent deduction u/s 80G of the Income Tax Act, 1961. Contribution to SBK shall be utilized to improve sanitation facilities in rural and urban areas and school premises. Similarly, contributions to Clean Ganga Fund (CGF) will also be eligible for 100 percent deduction u/s 80G of the Income Tax Act, 1961. Contributions to CGF shall be used to rejuvenate ganga river. Clean Energy cess is levied on coal, lignite and peat.

According to the Budget speech, 'swachh bharat' has been transformed into a movement to regenerate India. It is proposed to build six crore toilets out of which 50 lakh have already been attained. Swachh Bharat is not only a programme of hygiene and cleanliness but, at a deeper level, a programme for preventive health care and building awareness.

Budget speech in para 123 states as follows -

"In indirect taxes, I propose to increase the Clean Energy Cess from ₹ 100 to ₹ 200 per metric tonne of coal, etc. to finance clean environment initiatives. Excise duty on sacks and bags of polymers of ethylene other than for industrial use is being increased from 12% to 15%. It is also proposed to have an enabling provision to levy Swachh Bharat Cess at a rate of 2% or less on all or certain services if need arises. This Cess will be effective from a date to be notified. Resources generated from this cess will be utilised for financing and promoting initiatives towards Swachh Bharat".

Swachh Bharat Cess (SBC)

Objective

Finance Bill, 2015 proposes to levy a cess called Swachh Bharat Cess (SBC) vide Chapter VI of the Bill in Clause 117.

According to notes on clauses to the Finance Bill, 2015, it has been stated that -

"Clause 117 of the Bill seeks to insert a new Chapter VI so as to levy a cess to be called the Swachh Bharat Cess, as service tax on all or any of the taxable services for the purposes of the Union for financing and promoting Swachh Bharat initiatives and any other purpose relating thereto."

Statutory provision (Clause 117 of Finance Bill, 2015)

(1) This Chapter shall come into force on such date as the Central Government may, by

notification in the Official Gazette, appoint.

(2) There shall be levied and collected in accordance with the provisions of this Chapter, a cess to be called the Swachh Bharat Cess, as service tax on all or any of the taxable services at the rate of two per cent. on the value of such services for the purposes of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto.

(3) The Swachh Bharat Cess leviable under sub-section (2) 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 Swachh Bharat 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 Swachh Bharat 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 Swachh Bharat Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under Chapter V of the Finance Act, 1994 or the rules made thereunder, as the case may be.

Based on the proposed provisions, it can be inferred that -

1. Though the levy is called cess, it shall be in the nature of tax (service tax) and collected as such
2. SBC shall be levied on all on any of the taxable services
3. SBC shall be levied on all services or some of the services as may be notified. It is expected that to start with, it may be imposed on few services which yield more tax, are in organised sector and collection / monitoring is easier. Later, it may be extended to other services
4. Rate of SBC shall be 2 percent (not 2 percent or less) as mentioned in the speech in view of the clear mention of rate @ 2 percent in Bill)
5. It shall be collected for the purposes of Union and no component thereof may devolve on the states
6. The proceeds of SBC collected will be credited to Consolidated Fund of India and will be subject to due appropriation by Parliament as per law. After such appropriation, Central Government shall utilize the same for specified purposes of swachh bharat initiatives.
7. The purpose of SBC shall be for financing and promoting swachh bharat initiatives and any other purpose in relation thereto
8. The rate of SBC shall be 2 percent levied on the value of taxable service, not on tax
9. For service providers and service receivers, effective burden of Service Tax where SBC is also levied, shall therefore, be 16 percent (i.e., 14 percent Service Tax and 2 percent SBC).
10. SBC shall be in addition to Service Tax or any other cess on taxable services under Finance Act, 1994 or any other law implying that SBC will not be a substitute or alternate to any other cess
11. SBC is a cess but will be levied and collected as Service Tax and all provisions of Service Tax shall apply
12. An accounting code will be notified for SBC to effect payment of SBC and shall be payable on a monthly / quarterly basis as is with Service Tax.
13. The provisions of chapter V of Finance Act, 1994 and rules made thereunder shall apply to SBC also. Thus, provisions and rules for exemptions, refunds, interest, penalty etc shall apply to SBC also. For example, if a service is exempt from levy of Service Tax, SBC shall also be exempt.

Impact of SBC

The effective levy of Service Tax alongwith SBC, wherever applicable, shall be 16 percent as also explained in the following table:

Tax / duty	Present Position			As per Finance Bill, 2015 (Without SBC)				As per Finance Bill, 2015 (With SBC)
	Tax	EC & SHE Cess	Total	Tax	EC & SHE Cess	Total	Net increase	SBC	Total	Net increase
Service Tax	12%	0.36%	12.36%	14%	-	14%	1.64 %*	2%	16%	3.64%**
Excise Duty (General Rate)	12%	0.36%	12.36%	12.50%	-	12.50%	0.14%	-	12.50%	0.14%

*14 minus 12.36                                              ** 16 minus 12.36

On Service Tax front, Government has been too harsh and aggressive as it appears from the target of Service Tax collection itself. From a revised tax target of ₹ 168000 crore in current fiscal, it is aimed to collect Service Tax of ₹ 210000 crore in financial year 2015-16. To achieve this, the budget proposes to mercilessly increase the rate of Service Tax by 2 percent from 12% to 14% a hike of about 17 percent from earlier rate. As if this was not enough, a new cess in the name of Swachh Bharat Cess is proposed @ 2 percent and that too on value of service, not on tax. So, the effective Service Tax rate may be 16 percent which is equivalent to 133 percent of earlier tax rate of 12%. While this is not expected from a Government that claims to be concerned about its people, this will surely lead to inflationary trend. However, it is said that the Government may levy this cess on only select services as may be notified. The value of services will also go up as all reimbursements shall be part of value which will be subjected to tax. Indirect tax proposals and levy of surcharge and new cess in the name of Swachh Bharat Cess would fuel inflation.

Effective Date

SBC shall be levied after the enactment of the Finance Bill, 2015 from a notified date. There will be issuance of notification for the effective date, rate and services on which SBC shall be levied. If budget speech is any indication, there may also be a situation that SBC may not be levied at all as it states '……..enabling provision to levy …….if need arises'. It is expected that Government must have made up its mind to levy SBC on few services and also factored such SBC in its budget targets of service tax. However, there does not seem to be a separate target for SBC.

Discussions to this article

[Manoj Agarwal]

Respected Sir,

Thanks for sharing such a nice article, covering almost everything with respect to SBC. As mentioned by you at para iv, I quote:

"(iv) Rate of SBC shall be 2 percent (not 2 percent or less) as mentioned in the speech in view of the clear mention of rate @ 2 percent in Bill)"

In my view, the rate of SBC may be less than 2% because the govt. can exempt a portion. As in service tax, the charging section 66B levy a tax @ 12% (14% after enactment of Finance Bill, 2015) but after abatement (i.e. exemption u/s 93), the effective rate is only 3.09% on GTA service. And as you rightly pointed out, all the provision of Chapter V are applicable to SBC, including section 93.

Regards,

Manoj Agarwal, Service Tax Consultant, Rourkela

+91-9937041788

[Dr. Sanjiv Agarwal]

THere is no abatement in cess. Yes, it may be levied on select services initially. The language of the provision suggest that the rate will be 2 percent only .