ALL ABOUT KRISHI KALYAN CESS APPLICABLE WEF 01.06.2016

Pursuing with an objective to finance and promote initiatives to improve agriculture and farmer welfare, the Government announced a new cess namely ‘Krishi Kalyan Cess’ (“KKC”), to be levied at 0.5% on the value of all taxable services w.e.f June 1, 2016. In this regard, a new Chapter VI was inserted in the Finance Bill, 2016, containing relevant provisions, which are applicable with enactment of the Finance Act, 2016 on May 14, 2016.
Hence, after levy of KKC, Service tax rate will increase from 14.5% to 15%, effective from June 1, 2016.An illustration showing levy of Service tax and Swachh Bharat Cess (“SB Cess”)& KKC is given below assuming Rs. 1,000/- as value of a taxable service:

The Central Government vide Circular No. 194/4/2016-ST dated May 26,2016 has notified accounting codes for payment of KKC in the following manner:

Now, the Central Government has issued following Notifications to clarify on calculation of value of taxable services under Reverse Charge Notification/ Abatement Notification/ Valuation Rules,Rebate of KKC on input services used for provision of export of services, Refund of KKC paid on specified services used in SEZ,calculation of Alternate rate of Service tax in specified cases,availability of Cenvat credit of KKC etc.:

1. Clarifications on various aspects of KKC

KKC along with Service tax & SB Cess shall be paid on Services under Reverse Charge Mechanism– Notification No. 27/ 2016-ST dated May 26, 2016 : 

The Reverse Charge Notification No. 30/2012-ST dated June 20, 2012 (“Reverse Charge Notification”) prescribes the specified services under full reverse charge wherein 100% Service tax to be paid by the Service Recipient and under partial reverse charge wherein both the Service Provider and Service Recipient has to pay specified percentage of Service tax.

Now, the Central Government vide Notification No. 27/2016-ST dated May 26, 2016, has amended/clarified that the Reverse Charge Notification shall be applicable mutatis mutandis for the purposes of KKC also. In other words, KKC along with Service tax shall be paid on taxable services under Reverse Charge and Partial Reverse Charge Mechanism as well.

No KKC on services specified under the Negative List of services or otherwise exempted by a Notification/ Special Order issued under Section 93(1)/ Section 93(2)respectively of the Finance Act, 1994 Notification No. 28/2016-ST dated May 26, 2016 (“Notification No. 28”):

The Central Government vide Notification No. 28 has provided that KKC shall not be leviable on services which are exempt from Service tax by a Notification issued under Section 93(1) or Special Order issued under Section 93(2) of the Finance Act, 1994 (“the Finance Act”) or otherwise not leviable to Service tax under Section 66B thereof.

Therefore, KKC @ 0.5% will be levied on value of all taxable services except the following:

• Activity excluded from the definition of Service under Section 65B(44) of the Finance Act;
• Negative List of Services under Section 66D of the Finance Act;
• Services exempted by a notification issued under Section 93(1) of the Finance Act i.e.

–          Services exempted under Mega Exemption Notification vide Notification No. 25/2012-ST dated June 20, 2012.

–          Services exempted, as specified to specified percentage under the Abatement Notification No. 26/2012-ST dated June 20, 2012;

• Services exempted by Special Order issued under Section 93(2) of the Finance Act.

KKC@ 0.5% will be levied on value of all taxable services after availing abatement:

Notification No. 28 further clarifies that KKC will be levied on value of taxable services after availing the benefit of abatements by way of an exemption provided vide Abatement Notification No. 26/2012-ST dated June 20, 2012 i.e. KKC would be computed on abated value of taxable services.

For example, in case of GTA services (other than used household goods), presently, abatement of 70% is available and accordingly, Service tax is required to be paid on 30% of value of taxable service after exemption (abatement) of 70% as provided under the said Abatement Notification. The effective rate of Service tax including SB Cess and KKC would be 4.50% (i.e. 30% of 15%).

Value of taxable services for the purposes of KKC shall be the value as determined in accordance with the Service Tax (Determination of Value) Rules, 2006 (“the Service Tax Valuation Rules”):

Notification No. 28 furthermore clarifies that value of taxable services for the purposes of KKC shall be the value as determined in accordance with the Service Tax Valuation Rules. Thus, KKC would be levied in the following manner:

1. Computation of tax under Works contract: In terms of Rule 2A of the Service Tax Valuation Rules, Service tax along with SB Cess and KKC needs to be applied on taxable value. Accordingly, effective rate of Service tax would be as under:

ü   In case of original works: 6% (15%*40%); and

ü   Other than original works: 10.50% (15%*70%)

2.  Computation of tax on Restaurant and Outdoor catering services:In terms of Rule 2C of the Service Tax Valuation Rules, Service tax along with SB Cess and KKC needs to be applied on taxable value.Accordingly, effective rate of Service tax would be as under:

ü   In case of AC Restaurant services: 6% (15%*40%); and

ü   In case of Outdoor catering services: 9% (15%*60%)

Rebate of KKC paid on input services used for provision of export of services -Notification No. 29/ 2016-ST dated May 26, 2016:

The Central Government vide Notification No. 29/2016-ST dated May 26, 2016, has amended Notification No. 39/2012-ST dated June 20, 2012 (Rebate of the duty paid on excisable inputs or Service tax and cess paid on all input services used in providing service exported) to insert KKC under the definition of “service tax and cess”, to enable the provider of services to claim rebate of KKC paid on all the input services used in providing services exported in terms of Rule 6A of the Service Tax Rules, 1994.

Refund of KKC paid on specified services used in Special Economic Zone (“SEZ”) -Notification No. 30/2016-ST dated May 26, 2016:

The Central Government vide Notification No. 30/2016-ST dated May 26, 2016 has amended Notification No. 12/2013-ST dated July 1, 2013 (Exemption on services received by units located in a SEZ or Developer of SEZ and used for their authorised operation) to enable the SEZ Unit or the Developer for refund of the KKC paid on the specified services on which ab-initio exemption is admissible but not claimed.

Further, the refund of amount will be determined as under:

Service tax distributed to SEZ Unit/ Developer as per Rule 7 of the Credit Rules*(0.5+0.5)/14

Amendment in the Service Tax Rules, 1994 for providing alternate rate for KKC–Notification No. 31/2016-ST dated May 26, 2016:

As per sub-rules 7,7A,7B and 7C to Rule 6 of the Service Tax Rules, 1994 (“the Service Tax Rules”), there is an alternative rate of Service tax for services, namely, air travel agents, insurance premium, purchase & sale of foreign currency and lottery distributor.

The Central Government vide Notification No. 31/2016-ST dated May 26, 2016 has amended the Service Tax Rules to insert sub-rule (7E)after sub-rule (7D),which prescribes that if Service tax is payable at an alternative rate, KKC would also be computed in proportion to such alternative rate, in similar manner as it was prescribed at the time of introduction of SB Cess:

Total Service tax liability calculated under Rule 6(7)(7A), (7B) or (7C) * 0.5/14

For example, in case of air travel agent services, air travel agent opting alternative rate of Service tax is liable to pay Service tax at the rate of 0.7% of the basic fare in case of domestic bookings and at the rate of 1.4% of the basic fare in the case of international bookings. Therefore, KKC would be payable at the following rates:

Domestic bookings: 0.7%* 0.5%/14 = 0.025%

International bookings: 1.4%* 0.5%/14 = 0.05%

Further, in sub-rule (7D), for the figures “0.5” the words “effective rate of Swachh Bharat Cess” and for the words, figures and brackets “14 (fourteen)”, the words and figures “rate of service tax specified in section 66B of the Finance Act, 1994” shall be substituted.

2. Cenvat credit of KKC to service providers only:

Amendment in Rule 3 of the Credit Rules to allow Cenvat credit of KKC to a service provider:Notification No. 28/2016 – CE (N.T.) dated May 28, 2016

The Central Government vide Notification No. 28/2016-CE (N.T.) dated May 28, 2016, has amended Rule 3 of the Credit Rules to provide that:

• A provider of output service shall be allowed to take Cenvat credit of the KKC on taxable services leviable under Section 161 of the Finance Act, 2016 (28 of 2016);
• Cenvat credit of any duty specified in Rule 3(1) of the Credit Rules shall not be utilised for payment of KKC;
• Cenvat credit in respect of KKC shall be utilised only towards payment of KKC.

Thus, unlike SB Cess, which is not Cenvat able neither in the hands of service providers nor manufacturers, Cenvat credit of KKC paid on input services shall be allowed to be used for payment of the KKC on taxable services provided by a service provider.Further, Cenvat credit of Service tax or Excise duty can neither be utilized for payment of KKC nor vice versa.

Manifestly, the manufacturers paying KKC on procurement of their input services would not be in a position to avail Cenvat credit of the same and thus would form part of their cost, leading to increase in prices to that extent.Thus, imposition of KKC is likely to hamper“Make in India” and “Start-up India” campaign of the Modi Government.

Point of Taxation For KKC

It is pertinent here to note that Explanation 1 & 2 to Rule 5 of Point of Taxation Rules, 2011 (“the POTR”) have been inserted w.e.f March 1, 2016.

Explanation 1 provides that point of taxation in case of new levy on services shall be governed by Rule 5 of the POTR and as per Explanation 2, new levy or tax shall be payable on all cases other than specified in Rule 5.

Rule 5 of the POTR covers two specific situations where new levy shall NOT be payable:

1. Invoice issued and payment received against such invoice before such service becomes taxable;
2. Payment 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

Effective June 1, 2016 KKC @ 0.5% on the value of all taxable service is proposed to be levied. Point of taxation in case of new levy on services shall be governed by Rule 5 of POTR.

As per the Rule 5 read with explanations, only in two situations (mentioned above), the KKC shall not be payable and in all others, KKC is to be paid.