Treatment of KKC on on-going services/ transactions already rendered prior to June 1, 2016– Still warranting clarification
Though, the Central Government has tried to address the concerns of the assessees/industry at large to certain extent well in advance which were dragged till February, 2016 for SB Cess levied last year w.e.f. November 15, 2015. But, at the same time, the Notifications fails to amend/ clarify certain open issues on applicability of KKC on on-going transactions/ services already rendered prior to June 1, 2016, which has raised daunting concerns amongst the Trade.
With the Service tax rate (including SB Cess and KKC) of 15% becoming effective from June 1, 2016,a turmoil is being faced by the service provider in respect of on-going transactions for which completion of services have taken place before June 1, 2016 with or without raising of corresponding invoices, but payment for the same is not received till June 1, 2016.
Point of Taxation for New Levy of 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:
- Invoice issued and payment received against such invoice before such service becomes taxable;
- 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.
An illustrative table to above explanations is given as under:
| S. No. |
Date of applicability of KKC |
Date of Invoice |
Date of Payment Received |
Applicability of KKC |
| 1. |
1st June, 2016 |
14thJune, 2016 |
30th May, 2016 |
No |
| 2. |
1st June, 2016 |
18thJune, 2016 |
30th May, 2016 |
Yes |
| 3. |
1st June, 2016 |
30th May, 2016 |
30th May, 2016 |
No |
| 4. |
1st June, 2016 |
3rdJune, 2016 |
3rdJune, 2016 |
Yes |
| 5. |
1st June, 2016 |
30th May, 2016 |
3rd June, 2016 |
Yes |
Vide this explanation, the Government is seeking to impose KKC in cases, where the invoice and provision of service has taken place prior to June 1, 2016, however payment is not received till June 1, 2016. This would imply that on all debtors as on May 31, 2016, assesses will be liable to pay KKC.
Applicability of KKC when liability to pay Service tax is on Service Receiver under reverse charge
POT in case of reverse charge is governed by Rule 7 of the POTR, which starts with non-obstante clause: “Notwithstanding anything contained in rules 3, 4, or 8”.
In terms of Rule 7 of the POTR, point of taxation under reverse charge (except associated enterprises located outside India), shall be as under:
- Payment made within 3 months – Date of payment;
- Payment not made within 3 months – Date immediately following the end of 3 months
In case of associated enterprises, where the person providing the service is located outside India, POT shall be earlier of the following:
- Date of debit in the books of account of service receiver;
- Date of Payment
It would not be out of place here to mention that a proviso has been inserted in Rule 7 of the POTR vide Notification No. 21/2016-ST dated March 30, 2016, to provide that where there is change in the liability or extent of liability of Service tax to be paid under Reverse Charge:
Service has been provided and the invoice issued before the date of such change, but payment has not been made as on such date, the POT shall be :- the date of issuance of invoice.
Analyses of Erstwhile Rule 7 Vs. Amended Rule 7:
|
Date of service |
Date of invoice (DOI) |
Date of payment (DOP) |
Applicability of KKC |
| As per erstwhile Rule 7 |
20.05.2016 |
25.05.2016 |
04.06.2016 |
POT shall be DOP: KKC applicable |
| As per amended Rule 7 |
20.05.2016 |
25.05.2016 |
04.06.2016 |
POT shall be DOI: KKC not applicable |
Service Provider Vs. Service Receiver: Anomaly
|
Date of service |
Date of invoice (DOI) |
Date of payment (DOP) |
Applicable Rule |
Applicability of KKC |
| Liability of SP under forward charge |
20.05.2016 |
25.05.2016 |
04.06.2016 |
Rule 5(a) of the POTR |
KKC applicable |
| Liability of SR under reverse charge |
20.05.2016 |
25.05.2016 |
04.06.2016 |
Rule 7 of the POTR |
POT shall be DOI: KKC not applicable |
Thus, under similar situation, on one hand KKC would be payable in case liability to pay Service tax is on service provider but KKC would not be payable when liability to pay Service tax is on the service recipient under reverse charge.
Our Comments:
Under the Finance Act, Section 66B of the Finance Act is the charging Section for levy of Service tax on taxable services. We are reproducing herewith Section 66B of the Finance Act for the ease of convenience:
“66B. Charge of service tax on and after Finance Act, 2012.
There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. 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.”
The literal interpretation of the charging Section 66B of the Finance Act means that the levy of Service tax is on the value of all taxable services ‘provided or agreed to be provided’. However, the collection of Service tax may be shifted to any point/ stage/event, in any manner, as prescribed by the Rules made in this behalf.
The Hon’ble Supreme Court in the case of All India Federation of Tax Practitioners Vs. Union of India [2007-TIOL-149-SC-ST] held that “a tax on a thing or goods can only be with reference to a taxable event” and the same contention was upheld again in the case of Association of Leasing & Financial Service Companies Vs. Union of India [2010 (20) STR 417 (SC)], wherein the Hon’ble Supreme Court observed that the taxable event under the Service tax law is the rendition of service.
In view of the above discussed provisions, the matter is subjected to debate as to whether KKC would be leviable on a service rendered prior to June 1, 2016 when KKC was not applicable at the time of its rendition, merely because its payment is received on or after the date of levy or the invoice is not issued within 14 days of the date of levy.
Here, it would not be out of place to mention that the POTR were framed by the Central Government in exercise of the powers conferred under Section 94 of the Finance Act and such delegated legislation cannot be extended to go beyond the vires of the Finance Act.
As KKC awaits its introduction, in few days to come, still an immediate detailed clarification on the stated issue would surely be welcomed by the industry at large.
Tax Planning for KKC in terms of Rule 5 of the POTR
The explanations added to Rule 5 of the POTR raise a fundamental question as to whether a service which has already been provided prior to introduction of levy could be taxed on raising of invoice or receiving payment subsequently. However, the chargeable event being rendering of services will always be the prime factor for determining leviability of any tax or cesses. Nonetheless, the following is advised to our esteemed readers to plan their tax liability under KKC:
Service Provider
Any payment/advance received against services provided or to be provided before June 1, 2016
- Raise Invoice within 14 days from the date of service is taxed first time i.e. June 1, 2016
Services rendered & Invoice raised before June 1, 2016
- Collect Payment towards the invoice raised
Service Receiver
Services rendered and No payment made before June 1, 2016
- Ask for Invoice to be raised before June 1, 2016.
To understand applicability of KKC in detail with multiple practical example(s) as to what will be the scenario when new levy ‘KKC’ becomes applicable from June 1, 2016 @ 0.5% on value of all taxable service.
