Finance Act 2016 - Service Tax - Krishi Kalyan Cess - Equalisation Levy

Finance Act 2016 - Service Tax - Krishi Kalyan Cess - Equalisation Levy

Tax Quest

by K. VAITHEESWARAN 

Advocates & Tax Consultants

Chennai, India.

SERVICE TAX

Finance Act, 2016 has effected a number of changes that are effective from 01.06.2016 and this alert seeks to provide a brief view on such changes.

1. Service Tax on Ocean Freight – Import Segment

1.1 Section 66D(p)(ii) which referred to services by way of transportation of goods by an aircraft or a vessel from a place outside India upto the customs station of clearance in  India has been deleted w.e.f. 01.06.2016.

1.2 Service received from foreign shipping line by a business entity located in India will be taxable under Reverse Charge Mechanism.

1.3 TRU Circular dated 29.02.2016 states that domestic shipping line registered in India shall pay service tax and if the services are availed from foreign shipping line by a business entity located in India, reverse charge would apply.

1.4 The tax position in the context of ocean freight – inbound segment is given in the following table:-

Transaction	Service Tax
Indian shipping company receives ocean freight from a person located in India – Import segment	Taxable – From 01.06.2016
Indian shipping company receives ocean freight from a person located outside India – Import segment	Taxable – From 01.06.2016
Foreign shipping company receives ocean freight from a business entity located in India – Import segment	Taxable – From 01.06.2016 – Service tax payable by the business entity under reverse charge mechanism.
Foreign shipping company receives ocean freight from a person located outside India	Not Taxable - Exempted vide entry 34(c) of exemption Notification No. 25/2012 dated 20.06.2012 – services provided by a person located outside India to a person located outside India – Exempt

1.6 When an Indian carrier receives air freight from a person located in India in the import segment, services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India is exempted through Notification No.9/2016.

1.7 In terms of Notification No. 26/2012, transport of goods in a vessel qualifies for abatement of 70% and hence 30% would be liable to service tax and no Cenvat credit on inputs and capital goods would be available. However, Cenvat credit of input services can be availed.

1.8 In the case of Commissioner Vs. United Shippers Ltd. (2015) 39 STR J369, USL was registered under the category ‘cargo handling services’ and entered into contracts to provide services in relation to stevedoring / barging / loading / unloading / transportation of cargo by barges from mother vessels to jetty. 

Mr. K. VAITHEESWARAN 

Advocates & Tax Consultants

Chennai, India.

The Department was of the view that the shipping charges and shipping freight realized by the Appellant were includable in the value under

Section 67. The Tribunal held that when goods are being transported by the barges from another vessel to the jetty, that activity is part of the import transaction of bringing the goods into India from a place outside India. 

The question of rendering any service in respect of such goods by way of cargo handling or otherwise can take place only after the customs transaction is completed. There is no question of levying service tax on the transportation

by barges since the activity is part of the import transaction leviable to import duty. This is also evident from Section 14 of the Customs Act and the Customs Valuation Rules which specifically includes barge charges and handling charges in the transaction value of imported goods. The Civil Appeal filed by the Department against the decision of the Tribunal has been dismissed by the Supreme Court.

1.9 In the light of the decision of the Supreme Court referred to above; provisions of Section 14 of the Customs Act and the WTO Valuation Rules, ocean freight is considered as part and parcel of the value of goods for the purpose of levy of customs duty. 

Hence the new levy imposing service tax on ocean freight amounts to double taxation of the same transaction.

Generally, the conflict between goods and services would be a conflict between State tax and Central tax and it is ironical that the Centre has chosen to impose service tax on an element which is considered as part of value of goods for customs duty.

2. Section 66D(O)(i) of the Finance Act, 1994 has been deleted w.e.f. 01.06.2016 resulting in a levy of service tax on the service of transportation of passengers with or without accompanied belongings by a stage carriage. Abatement to the extent of 60% is available in terms of Notification No.26/2012 subject to non-availment of cenvat credit on inputs, input services and capital goods.

KRISHI KALYAN CESS

¡ Section 161(2) of the Finance Act, 1994 has imposed Krishi Kalyan Cess on all or any taxable services at the rate of 0.5% on the value of such services for initiatives relating to improvement of agriculture and welfare of farmers and shall come into force with effect from 01.06.2016.

¡ KKC shall be in addition to any cess or service tax leviable on such taxable services and the proceeds shall be first credited to the Consolidated Fund of India and the Central Government may after due appropriation by law of the Parliament utilize such sums for the purposes specified.

¡ All the provisions of Chapter V of the Finance Act, 1994, Rules made thereunder including those relating to exemptions / refund / interest / penalty shall apply.

¡ Accounting codes have also been allotted by the Office of the Controller General of Accounts for the new Minor Head which is “507-Krishi Kalyan Cess”.

¡ Krishi Kalyan Cess is not leviable on services which are exempt from service tax by a notification or special order issued under sub-section (1) of Section 93 of the Finance Act, 1994 or otherwise not leviable to service tax under Section 66B of the Finance Act, 1994.

¡ Krishi Kalyan Cess shall be leviable only on that percentage of taxable value after abatement, in case abatement is available under Notification No. 26/2012.

¡ The value of taxable services for the purposes of the Krishi Kalyan Cess shall be the value as determined in accordance with the Service Tax (Determination of Value) Rules, 2006. ¡ Notification No. 30/2012 shall apply mutatis mutandis to KKC and hence wherever service tax is payable by another person under reverse charge mechanism, KKC is also payable.

¡ Notification No. 31/2016 has introduced Rule 6(7E) of the Service Tax Rules in order to enable various categories of persons availing optional service tax payment mechanism under Rule 6(7) or (7A) or (7B) or (7C) to discharge KKC.

 Accordingly, all these service providers shall all have the option to pay such amount as determined by multiplying total  service tax liability calculated under these rules by effective rate of KKC and dividing the product by rate of service tax specified in section 66B of the Finance Act, 1994 during any calendar month or quarter, towards the discharge of his liability for KKC instead of

paying KKC at the rate of 0.5% and the option under this sub-rule once exercised, shall apply uniformly in respect of such services and shall not be changed during a financial year under any circumstances.

¡ Notification No. 12/2013 dealing with SEZ has been amended in order to provide for refund of KKC paid on specified services on which ab initio exemption is admissible but not claimed. Refund is also available in respect of the amount determined by multiplying total service tax distributed in terms of Para 3(III)(a) of the Notification by the effective rate of the sums of SBC and KKC and dividing the product by the rate of service tax.

¡ Notification No. 39/2012 is amended to grant rebate of KKC paid on input services where service is exported in terms of Rule 6A of the Service Tax Rules.

¡ Cenvat Credit Rules, 2004 have been amended whereby

(i) A provider of output service shall be allowed to take cenvat credit of KKC on

taxable services leviable under Section 161 of the Finance Act, 1994.

(ii) Cenvat credit of any duty under Rule 3(1) cannot be utilised for the payment of KKC.

(iii) Cenvat credit in respect of KKC on taxable services shall be utilised only towards payment of KKC on taxable services.

¡ Non availability of cenvat credit to manufacturers will only increase the cost.

¡ Section 67A(2) inserted to provide that the time or the point in time with respect to the rate of service tax shall be such as may be prescribed. 

Explanation-1 to Rule 5 of PoT Rules, 2011 provides that the Rule shall apply mutatis mutandis in case of new levy on services.

¡If one were to treat KKC as a new levy and apply Rule 5 of the PoT Rules, 2011, then no tax is payable if (a) invoice is issued and payment received before the service became taxable; (b) payment is received before the service became taxable and invoice is issued within 14 days from the date the service became taxable. When SBC was introduced the same dispute arose and many assesses adopted a position that Section 67A would prevail over the PoT Rules, 2011 based on a number of decisions. 

The key question is whether the issue is resolved in the context of KKC. With due respect to various views expressed on this issue, there is still some scope for debate for the following reasons:

(i) KKC is a levy on ‘taxable services’. Section 65B(51) defines taxable service as any service on which service tax is leviable under Section 66B. Section 66B

provides for a levy on all services other than items in the negative list provided or agreed to be provided. Therefore, KKC as service tax can apply only to services provided on or after 01.06.2016.

(ii) Any levy of KKC on outstanding balances would tantamount to retrospective taxation when such an intention is not manifest in the Legislation given the fact that Section 161 itself is effective only from 01.06.2016.

(iii) The explanation to Rule 5 of PoT Rules in the context of new levy on services is effective from 01.03.2016 whereas Section 67A(2) which gives the power to specify the time or point of time came into force only from 14.05.2016. In any event, it is a settled position of law that Section would always prevail over a Rule.

(iv) The Supreme Court in the case of CCE Vs. Vazir Sultan Tobacco (1996) 83 ELT 3, in the context of excise duty and Rule 9 of the Central Excise Rules has held that special excise duty is an independent duty of excise separate and distinct from the excise duty levied under Central Excise Act. This levy came into effect on and from 01.03.1978 which means that the goods produced prior to the date were not subject to such levy and the levy cannot attach nor can be realized because such goods were removed on or after 01.03.1978.

(v) The Supreme Court in the case of Association of Leasing and Financial Service Companies Vs. Union of India (2010) 20 STR 417, has held that the taxable event is the rendition of service.

EQUALISATION LEVY

¡ Chapter VIII of the Finance Act, 2016 (Section 163 to Section 180) deals with

Equalization Levy.

¡ ‘Equalisation Levy’ (EL) is a new tax on the consideration received or receivable for any specified service.

¡ Specified service means online advertisement, any provision of digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this

behalf.

¡ CBDT has issued Notification No. 37/2016 dated 27.05.2016 and has notified the effective date as 01.06.2016.

¡ CBDT has issued Notification No. 38/2016 dated 27.05.2016 notifying the Equalisation Levy Rules, 2016 effective 01.06.2016.

¡ In terms of Section 165 of the Finance Act, 2016, EL at the rate of 6% is chargeable on the amount of consideration for any specified service received or receivable by a person being a non-resident from

(i) A person resident in India and carrying on business or profession; or

(ii) A non-resident having a permanent establishment in India.

¡ In terms of Section 165(2), EL shall not be charged where:

(i) The non-resident providing the specified service has a permanent establishment in  India and the specified service is effectively connected with such permanent establishment.

(ii) The aggregate amount of consideration for specified service does not exceed Rs. 1 lakh in the previous year.

(iii) The payment for the specified service by a person resident in India or the

permanent establishment in India is not for the purpose of carrying out business or profession.

¡ In terms of Section 166, the person liable should deduct EL from the amount paid or payable to a non-resident and the amount so deducted during any calendar month shall be paid by every assessee to the credit of the Central Government by the 7th day of the month immediately following the said calendar month.

¡ There are a number of other provisions including provisions of the Income Tax Act being made applicable.

¡ It is pertinent to note that EL is not a levy under the Income Tax Act and is a distinct and separate levy under the Finance Act, 2016. This clearly is a structured first move to tax digital commerce and seeks to surpass the concept of PE; characterization issues as well as DTAA. It is likely that the provisions would also be tested in Courts since the provisions adopt the language which is identical to the language adopted in Section 66B

of the Finance Act, 1994 which imposes service tax.

Disclaimer: - Tax Quest is only for the purpose of information and does not constitute or purport to be an advise or

opinion in any manner. The information provided is not intended to create an attorney-client relationship and is not for advertising or soliciting. K.Vaitheeswaran & Co. do not intend in any manner to solicit work through this

Newsletter. The Newsletter is only to share information based on recent decisions and regulatory changes.

K.Vaitheeswaran & Co. is not responsible for any error or mistake or omission in this Newsletter or for any action taken or not taken based on the contents of the Newsletter.

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