Finance Act, 2016 instigated a new cess called “Krishi Kalyan cess” (herein after referred as ‘KKC’) vide Chapter VI of the Act. KKC shall be applicable w.e.f. 01.06.2016. Following provisions regarding KKC has been mentioned in Chapter VI under section 161(5) of the Finance Act, 2016 which provides:
“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, as the case may be.
On the basis of above provisions contained in Finance Act, 2016, it can be concluded that provisions of Section 66B regarding levy of service tax would also apply to KKC.
Where section 66B reads as under:
“There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen percent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”
As provided in section 66B ibid, levy of service tax shall be imposed at the time of provisioning of service. To substantiate this view reliance can be placed in judgment of honorable Apex Court in case of Association of Leasing & Financial Service Companies Vs. Union of India (2010 (20) STR 417 (SC), wherein Apex Court observed that ‘rendering of service is the taxable event for service tax’.
The taxing event for the service tax is providing of service and therefore liability to pay the service tax would arise during the period when the service was provided. Further, to levy service tax at the time of receipt of advance, the phrase ‘agreed to be provided’ has been incorporated in charging section. It is only by virtue of Rule 6(1) of the Service Tax Rules that the payment of Service Tax has been deferred to the 5th day of the month immediately following the calendar month in which the payments are received towards the value of taxable services provided but in a situation where the payment for the service to be provided has been received in advance i.e. prior to rendering the taxable service, liability to pay the service tax would be on 5th day of the month immediately following the calendar month in which the service was provided.
In case of Commissioner of C. Ex., Allahabad Versus Ashok Singh Academy 2010 (17) S.T.R. 363 (Tri. – Del.), honorable tribunal held that:
“The taxing event for the service tax is providing of service and therefore liability to pay the service tax would arise during the period when the service was provided. It is only by virtue of Rule 6(1) of the Service Tax Rules that the payment of Service Tax has been deferred to the 5th day of the month immediately following the calendar month in which the payments are received towards the value of taxable services provided but in a situation where the payment for the service to be provided has been received in advance i.e. prior to rendering the taxable service, liability to pay the service tax would be on 5th day of the month immediately following the calendar month in which the service was provided.”
Similar provisions also exist in excise law(s), where duty is levied at the time of manufacture of goods however payment thereof has been deferred at the stage of removal of goods. In case of Collector of C. Ex., Hyderabad Versus Vazir Sultan Tobacco Co. Ltd. 1996 (83) E.L.T. 3 (S.C.), honorable Apex Court held that “Once the levy is not there at the time when the goods are manufactured or produced in India, it cannot be levied at the stage of removal of the said goods. The idea of collection at the stage of removal is devised for the sake of convenience”. Relevant para 11 of the said judgment is produced below:
“11. We are of the opinion that Section 3 cannot be read as shifting the levy from the stage of manufacture or production of goods to the stage of removal. The levy is and remains upon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal. Once this is so, the fact that the provisions of the Central Excise Act are applied in the matter of levy and collection of special excise duty cannot and does not mean that wherever the Central Excise duty is payable, the special excise duty is also payable automatically. That is so as an ordinary rule. But insofar as the goods manufactured or produced prior to March 1, 1978 are concerned, the said rule cannot apply for the reason that there was no levy of special excise duty on such goods at the stage and at the time of their manufacture/production. The removal of goods is not the taxable event. Taxable event is the manufacture or production of goods.”
Applying the same ratio in service tax, it can be concluded that service tax is applicable at the time of provisioning of services whereas payment thereof is governed by Rule 6 of Service Tax Rules, 1994 read with Point of Taxation Rules, 2011. In addition, service tax cannot be demanded in respect of services, which were outside the ambit of service tax at the time of provisioning thereof.
Situation gets more confusing after introduction of Explanation(s) to Rule 5 Point of Taxation Rules vide Point of Taxation (Amendment) Rules, 2016. After this amendment Rule 5 reads as under:
“Payment of tax in case of new services.
5. 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 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.”
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 the cases other than specified above.”
Literal interpretation of Rule 5 infers that applicability of KKC will be governed by Rule 5 (Explanation 1) and KKC will apply in all cases, where amount was not received up to 31st May, 2016 (Explanation 2). This interpretation will lead to levy of KKC on outstanding amount as on 31st May, 2016. Not only this, this interpretation of Rule 5 will also lead to levy of tax on outstanding amount pertaining to new services e.g. transportation of goods by vessel from a place outside India up to the customs station of clearance. Suppose, one freight forwarder has debtors of Rs. 300 Cr as on 31st May, 2016, he is supposed to pay service tax @ 15% on Rs. 90 Cr (30% of Rs. 300).
In author’s view, Rule 5 should be read with Section 66B of the Finance Act, 1994 i.e. charging section and accordingly Rule 5 should apply only in respect of cases where services are provided on or after 1st June, 2016 meaning thereby no KKC on debtors outstanding as on 31st May, 2016.
To avoid confusion, Central Government has issued Notification No. 35/2016-ST dated 23rd June, 2016 so as to exempt taxable services w.r.t. which the invoice for the service has been issued on or before 31st May, 2016 from levy of KKC subject to the condition that provision of service has been completed before 31st May, 2016. On similar lines, exemption has been issued for transportation of goods by a vessel from outside India up to customs station in India with respect to which the invoice for the service has been issued on or before 31st May, 2016 subject to conditions (Notification No. 36/2016-ST dated 23rd June, 2016).
