SKP Tax Alert
Volume 9 Issue 6 |
FAQs on the Krishi Kalyan Cess

The Union Budget 2016 proposed to levy to a new cess called the Krishi Kalyan Cess (KKC) for financing/promoting initiatives to improve agriculture and related activities on the value of taxable services provided.
In this regard, there are many aspects that require clarification. In this alert, we have discussed these aspects through a set of Frequently Asked Questions (FAQs).

 
FAQs
From what date is KKC applicable?
KKC is proposed to be levied with effect from 1 June 2016 on all taxable services at the rate of 0.50% on the value of such taxable services (vide section 158 of the Finance Act, 2016).

 
What is the value on which KKC will be imposed?
KKC will be levied on the gross value of taxable services provided, computed in accordance with section 67 and the prescribed rules under the service tax legislation.
 
What will be the effective rate of service tax from 1 June 2016?
Given that KKC will be levied on the value of taxable services, the effective rate of service tax shall be 15% (with effect from 1 June 2016) i.e. 14% service tax, 0.50% Swachh Bharat Cess (SBC) and 0.50% KKC.
 
Is CENVAT credit of KKC available?
Paragraph 3.1 of circular D.O.F. No.334/8/2016-TRU dated 29 February 2016 states that the “Credit of Krishi Kalyan Cess paid on input services shall be allowed to be used for payment of the proposed Cess on the service provided by a service provider.’’ Thus, it appears that KKC paid on input services will be available as CENVAT credit for discharging the KKC liability payable on taxable output services provided[1]. However, it appears that the credit of KKC may not be available to a manufacturer.
 
Will KKC need to be mentioned separately on the invoice?
It will be advisable to charge KKC separately on the invoice as well as account
 for the same separately in the books of account. This will also help the customer determine the availability or otherwise of CENVAT credit of KKC.
 

Is KKC applicable on services taxable under the Reverse Charge Mechanism(RCM)?
The liability to pay service tax in the case of notified services has been shifted to the service recipient under section 68(2) of the Finance Act, 1994 which is known as the RCM. With regard to KKC, section 158 of the Finance Act, 2016 states that the provisions of the Finance Act, 1994 and the rules made thereunder (i.e. the service tax legislation) will mutatis mutandis apply for the levy of KKC.
 
On a joint reading of this, it can be said that KKC is also applicable on services taxable under the RCM, notified under section 68(2) of the Finance Act, 1994.

 
What will be the point of taxation for determination of KKC for a service provider?
The point of taxation in the case of a new levy will be determined in accordance with Rule 5 of the Point of Taxation Rules, 2011 (POTR). Accordingly, the point of taxation in the case of KKC, which is a new levy, will be determined in accordance with Rule 5 of the POTR. As per Rule 5, KKC will not be applicable with respect to taxable services
  • where the payment is received and the invoice is raised before the levy of KKC i.e. prior to 1 June 2016; or
  • where the payment is received prior to the levy of KKC (i.e. prior to 1 June 2016) and the invoice is raised within 14 days from the date of such levy.
However, KKC will be applicable with effect from 1 June 2016 for all cases other than the aforesaid two specified cases.
 
Is service tax payable with respect to services provided before the applicability of KKC?
Rule 5 of the POTR provides that KKC is applicable with respect to all taxable services other than services for which the payment is received before 1 June 2016 and the invoice is issued before 1 June 2016 or within 14 days from 1 June 2016. One emerging view is that in all cases, other than the two cases specified in Rule 5, will attract KKC even if the service is provided before 1 June 2016. At the same time, there is an equal and alternate school of thought having the opinion that if the levy was not applicable at the time of provision of the service, then because the mere payment is made/received afterwards, the same cannot become applicable. 
 
With this in mind, it would be of paramount importance to evaluate the debtor cycle due after 1 June 2016, the applicability of Rule 5 or Rule 3 with respect to such debtors and the possibility of applicability of KKC.

 
What will be the point of taxation for determination of KKC in the case of services taxable under the RCM?
Rule 7 of the POTR is a specific rule applicable for determining the point of taxation for notified services taxable under the RCM. At the same time, Rule 5 is relevant for KKC. Thus, the question that needs to be answered is whether Rule 5 or Rule 7 is relevant in the case of a service recipient paying service tax on notified reverse charge services.
 

Here, a view could be adopted that Rule 5 is a more specific rule of POTR applicable in the case of a new levy and also, Rule 7 contains a non-obstante clause stating “Notwithstanding anything contained in rule 3,4 and 8...”, i.e. which does not include Rule 5. However, under question 19 of the FAQs released by the Central Board of Excise and Customs (CBEC) with respect to SBC, it is clarified by the CBEC that in the case of RCM, POTR will be determined in accordance with Rule 7.
 
Given the aforesaid ambiguity for determining the KKC liability with respect to RCM (i.e. whether Rule 5 or Rule 7 is applicable), it is critical to evaluate the applicability of KKC with respect to services being paid under RCM after 1 June 2016.

 
Is there a separate accounting code for depositing KKC with the government?
A separate accounting code for depositing KKC with the government treasury has not yet been notified by the CBEC. A notification/clarification in this regard is expected shortly.

 

[1] The provisions enabling such availment and utilisation of CENVAT credit of KKC are yet to be notified under CENVAT Credit Rules, 2004.
 
Way forward
The FAQs mentioned above is an attempt to highlight the key aspects of the proposed levy of KKC. However, given that the levy is effective from 1 June 2016 and in the absence of notifications/clarifications of various aspects, it is critical for businesses to carefully undertake an in-depth study regarding the applicability of KKC with respect to services provided as well as services received.
SKP
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This alert contains general information which is provided on an “as is” basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This alert should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this alert is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship.

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