Krishi Kalyan Cess on all taxable services w.e.f. June 1, 2016 – Impact on “Make in India” and “Start-up India” drive

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Amidst huge expectations, the Hon’ble Finance Minister Shri. Arun Jaitley presented the third full-year Budget of the Hon’ble Prime Minister Shri. Narendra Modi’s Government on February 29, 2016, Monday. The Budget 2016, a big test for Shri. Jaitley, is a tough balancing act between the fiscal consolidation and much-needed spending to revive growth in the economy.

Pursuing with an objective to finance and promote initiatives to improve agriculture and farmer welfare, the Government on Monday announced a new cess namely ‘Krishi Kalyan Cess’, to be levied at 0.5% on the value of any or all the taxable services w.e.f June 1, 2016.In this regard, a new Chapter VI has been inserted in the Finance Bill, 2016 that contains the corresponding provisions.

Krishi Kalyan Cess’ though said to be Cenvatable, but appropriate amendments also required in the Cenvat Credit Rules, 2004

Unlike Swachh BharatCess imposed w.e.f. June 15, 2015, which is not Cenvatable neither in the hands of service providers nor manufacturers, in terms of TRU F. No. 334/8/2016-TRU dated February 29, 2016 [Para 3.1], it is provided that Cenvat credit of Krishi Kalyan Cesspaid on input services shall be allowed to be used for payment of the proposed Cess on the service provided by a service provider.

However, corresponding to such entitlement of Cenvat credit of Krishi Kalyan Cess as stated in the TRU letter, changes are yet to be incorporated in Rule 3 of the Cenvat Credit Rules, 2004 to provide requisite legal backing for availment of Cenvat credit.

Krishi Kalyan Cess viz-a-viz Ease of doing business

With introduction of Krishi Kalyan Cess at 0.5% w.e.f June 1, 2016, effective rate of Service tax would eventually go up to 15%, which was earlier increased to 14% (with subsumation of Education Cess and Secondary and Higher Education Cess) from 12.36% w.e.f June 1, 2015 and Swachh Bharat Cess at 0.5% on value of all taxable services imposed w.e.f November 15, 2015.

Whereas these steps are said to be taken for improvement of agriculture and welfare of farmers, it seems to hit ‘Start up India’ initiative of our Hon’ble Prime Minister, as:

  • An entrepreneur craves for simplicity of taxes. However, it is likely that a separate accounting code will be prescribed for Krishi Kalyan Cess and the service providers will be required to display the same separately on invoices;
  • Paying Service tax at 15% may not be a problem but maintaining separate accounts for Service tax and various Cesses, their records & computation, followed by corresponding Cenvat provisions which allows Cenvat credit of Krishi Kalyan Cess to service providers and no Cenvat credit of Swachh Bharat Cess, is somewhat a cumbersome task.

Krishi Kalyan Cess viz-a-viz Make in India

Though on one hand, Krishi Kalyan Cess has been made Cenvatable (as stated in TRU Letter). But on perusal of the same, it can be inferred that such entitlement is limited only to the service providers for payment of the proposed Cess on the services provided.

  • Manifestly, the manufacturers paying Krishi Kalyan Cess on 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;
  • Further, it also appears that the Cenvat credit of Service tax or Excise duty can be neither utilized for payment of Krishi Kalyan Cess nor vice versa.

In the nutshell:

Though, the Union Budget 2016 has endeavoured to give impetus to the “Make in India” and “Start-up India” campaign of the Modi Government, but imposition of Krishi Kalyan Cess, which is Cenvatable for service providers to a limited extent &not even Cenvatable for manufacturers, it is likely to hamper these initiatives with adding to the cost of goods and resultantly increase in prices.

Further, with the aim of Mr. Narendra Modi’s Government to introduce Goods and Services Tax (“GST”)in the Country sooner or later, the logic of introducing new levies every year under the banner of new and different Cesses, seams unwarranted at this stage when India Trade Inc is pinning hopes on the on-going Budget Session for the 122nd Constitutional Amendment Bill to finally see the light of the day.

Even, in an exclusive seminar with PHD Chamber of Commerce at New Delhi, the Revenue Secretary, Shri. Hasmukh Adhia, said that a reprieve from Cesses will come through one GST kicks in.

“First, cesses are for specific purposes. Second, under the new regime of GST, there will not be any cesses”

Shri. Hasmukh Adhia

Thanks & Best Regards

Bimal Jain

FCA, FCS, LLB, B.Com (Hons)

Author of a book on Goods and Services Tax, titled, “GOODS AND SERVICES TAX – INTRODUCTION AND WAY FORWARD” (1st Edition)

A2Z TAXCORP LLP

Tax and Law Practitioners

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