Union Budget – 2015 Clarifications regarding
increase in Service Tax Rate
Amid huge expectations and challenges facing the
economy, the Hon’ble Finance Minister Shri Arun Jaitley has presented his 1st
Full-year Union Budget for the year 2015-16 on 28th February, 2015. In his
Budget Speech, he has proposed to increase the effective rate of service tax
from 12.36% to 14%. This proposal has created doubts in the minds of some
assessee’s and professionals as well. The objective of this article is to
identify various issues/queries relating to proposed rate of service tax and
try to clarify the same in simple language. To begin with, I quote the relevant
Clause 121 of the Budget Speech as below:-
“121. Introduction of GST is eagerly awaited by
Trade and Industry. To facilitate a smooth transition to levy of tax on
services by both the Centre and the States, it is proposed to increase the
present rate of service tax plus education cesses from 12.36% to a consolidated
rate of 14%.”
1. Do I have to charge new
rate of service tax from 01-03-2015 onwards like we do in case of changes in rates
of central excise?
No, you don’t have to
charge new rate of service tax from 01-03-2015 onwards as the new rate has not
yet come into effect. Till then, the existing rate of 12% (service tax) + 2%
(Education Cess on tax) + 1% (SHE Cess on tax) i.e. effective rate of 12.36%
shall continue.
2. Whether the new enhanced
rate of service tax going to be effective from 1st April, 2015?
No, the proposed service tax rate will not become
effective from 01-04-2015. Many service providers and receivers are having the
misconception that any change in rate of service tax takes effect from 1st
April of the year. It shall come into effect from a date to be appointed by the
Central Government, by way of notification in the Official Gazette, AFTER the enactment of the Finance Bill, 2015. The proposed amendments vide
Clause 106 of the Finance Bill, 2015 is quoted as below:-
“106. In section 66B of the 1994 Act, with effect
from such date as the Central Government may, by notification in the Official
Gazette, appoint, for the words “twelve per cent.”, the words “fourteen per
cent.” shall be substituted.”
Further, the Tax Research Unit of CBEC has issued
instructions vide F. No. 334/5/2015TRU dated 28-02-2015 and
clarified at para 3.3 as quoted below:-
“3.3 The new Service Tax rate shall come into
effect from a date to be notified by the Central Government after the enactment
of the Finance Bill, 2015.”
It means, that the new service tax rate cannot come
into force before the Finance Bill, 2015 get assent
from the President of India, after which the
government will notify the effective date.
3. The Finance Minister’s
Budget Speech clearly state that it is proposed to increase the present rate of
service tax plus education cesses from 12.36% to a consolidated rate of 14% (as
quoted above). Does it mean that once enacted, there won’t be any requirement
of charging additional Education Cess of 2% and Secondary Higher Education Cess
of 1% over service tax of 14%?
Yes, once the new rate is effective, there won't be
any requirement of charging 3% education cesses on the service tax.
4. Does it mean that the
consolidated rate of 14% is inclusive of education cesses? In other words, the
tax break-up is 13.59% (service tax) + 0.27% (Education Cess @2%) + 0.14% (SHE
Cess @1%) aggregating to 14%.
No, there is no break-up of 14% tax rate which
entirely constitute of service tax. The 14% rate has been proposed by
substituting 12% in the charging section 66B of the Finance Act, 1994 and being
statutory rate, it can’t include any other tax/cess within.
As mentioned in para 3 above, there won’t be any
requirement of charging Primary Education Cess of 2% and Secondary Higher
Education Cess of 1% on the service tax of 14% because it has been provided
vide clauses 179 and 187 respectively of the Finance Bill, 2015 that sections 95 of the
Finance Act, 2004 and 140 of the Finance Act, 2007, levying Education Cess and
Secondary and Higher Education Cess on taxable services shall cease to have
effect from a date to be notified by the Government.
5. Ok, now it’s clear that 14%
is the FINAL effective rate of service tax from the date to be notified by
the Central Government?
Yes, subject to Swachh Bharat Cess (SBC) of 2%!!
6. What is Swachh Bharat Cess
(SBC) and how is that related to service tax?
An enabling provision is being incorporated in the
Finance Bill, 2015 (Chapter VI/clause 117) to empower the Central Government to
impose a Swachh Bharat Cess on ALL or ANY of the taxable services at a rate of
2% on the value of such taxable services. This cess shall be levied from such
date as may be notified by the Central Government after the enactment of the
Finance Bill, 2015. The details of coverage of this Cess would be notified in
due course.
7. OMG!!! It means that the
levy of education cesses has been removed and replaced by 2% cess on service
tax to be named as Swachh Bharat Cess making the effective rate of service tax
at 14.28%?
No, it is wrong to say that the levy of education
cesses has been removed and replaced by SBC @ 2% on service tax. I quote below
the proposed levy of SBC vide Clause 117(2) of Bill:-
“(2) There shall be levied and collected in
accordance with the provisions of this Chapter, a cess to be called the Swachh
Bharat Cess, as service tax on all or any of the taxable services at the rate
of two per cent on the value of such services for
the purposes of financing and promoting Swachh Bharat initiatives or for any
other purpose relating thereto.”
The new provision clearly says that the new levy of
SBC shall be as service tax @ 2% on the VALUE of such
services. So, unlike education cesses, which were levied not on value of
services but on service tax thereon, SBC is not a tax on service tax. A cess
should not be confused with surcharge which is always a tax on tax.
In the Indian context, the Hon’ble Supreme Court,
in a ruling in Shinde Brothers Vs. Commissioner, Raichur reported in 1967, said
that ‘‘the word cess means a tax and is generally used when the levy is for
some special administrative expense’’ citing various examples suggesting the
name of the cess explains the object. Thus, cess is a tax which can be
collected in any manner but to be utilized only for purposes specified at the
time of levy.
Therefore, if the proposed Swachh Bharat Cess is
implemented, the Final effective rate of service tax shall be 16% on notified
taxable services.
8. Whether SBC will be made
applicable on all the services?
The Central Government is empowered to issue a
notification after the enactment of the Finance Bill, 2015 to impose the new
levy on either all the taxable services or on specified services. If selected
services are subjected to the new levy of SBC, the issue of classification of
service arise which is expected to generate more disputes, litigations and
controversies, as has been seen in the past. The effective date of
applicability of SBC shall be notified by the government.
Author : Manoj Agarwal
Address : Ganpati Campus, Lal Building Road,
Rourkela – 769012, ODISHA
Contact : +91-9937041788
E:mail : ServiceTaxExpert@yahoo.com
Kindly contact for further clarifications.
