Swachh Bharat Cess – Can it be “collected” without “levy”?

The Swachh Bharat Cess (SBC) has been introduced with effect from 15^th November, 2015 on all the taxable services. The board has also issued Frequently Asked Questions (FAQ) to clarify the various aspects in relation to the applicability, valuation, levy and collection of SBC. The many of the clarifications given in the FAQ are such that one cannot understand whether it is clarifying or it is making it more complicated? The main issue, I would like to highlight in the present article is clarification provided under FAQ reply 15 and 19 with respect to the point of taxation of SBC. The relevant reply provided under FAQ reads as under.

“Q.15 What would be the point of taxation for Swachh Bharat Cess?

Ans. As regards Point of Taxation, since this levy has come for the first time, all services (except those services which are in the Negative List or are wholly exempt from service tax) are being subjected to SBC for the first time. SBC, therefore, is a new levy, which was not in existence earlier. Hence, rule 5 of the Point of Taxation Rules would be applicable in this case. Therefore, in cases where payment has been received and invoice is raised before the service becomes taxable, i.e. prior to 15th November, 2015, there is no lability of Swachh Bharat Cess. In cases where payment has been received before the service became taxable and invoice is raised within 14 days, i.e. upto 29th November, 2015, even then the service tax liability does not arise. Swachh Bharat Cess will be payable on services which are provided on or after 15th Nov, 2015, invoice in respect of which is issued on or after that date and payment is also received on or after that date. Swachh Bharat Cess will also be payable where service is provided on or after 15th Nov, 2015 but payment is received prior to that date and invoice in respect of such service is not issued by 29th Nov, 2015.

Q. 19 How would liability be determined in case of reverse charge services where services have been received prior to 15.11.2015 but consideration paid post 15.11.2015?

Ans. In respect of reverse charge mechanism, SBC liability is determined in accordance with Rule 7 of Point of Taxation Rules, as per which, point of taxation is the date on which consideration is paid to the service provider. Thus, SBC liability in such case will be 0.5% X Value of taxable service.”

In view of the above clarifications given in the FAQ, SBC is payable by the service provider even though payment has been received prior to 15^th November 2015. Further, in case of reverse charge mechanism, SBC is payable even though service has been received prior to 15^th November 2015 as payment has been made subsequently and as per point of taxation, tax is payable when payment is made to the service provider.

The clarification given in the FAQ are without considering the difference between two terms i.e. “levy” and “collection”. The term “levy” means charging of tax or imposition of tax. “Collect” means the physical realisation of tax which is levied or charged. The levy and collection are distinctly different from each other and exigibility to tax is not the same as liability to pay tax; that the former depends on charge created by the statute and later on computation in accordance with the provisions of statute and rules made thereunder. The collection of tax is always at subsequent stage then levy. The point of collection does not affect the leviability. The point of collection is merely for the administrative convenience. Under taxing statute, one must first determine the levy and once there is levy, then only one can apply the provisions for collection of taxes. Till the time there is no levy, you cannot collect the taxes at all. Therefore, first of all one needs to determine, whether tax is chargeable or not?

Under service tax, charge is created by section 66B. As per section 66B, service becomes chargeable for the payment of service tax only when it is “provided” or “agreed to be provided”. The term “agreed to be provided” has also been clarified in the Service Tax Education Guide issued at the time introduction of negative list of services wherein it states that receipt of advances for services agreed to be provided become taxable before the actual provision of service. Therefore, the phrase ‘agreed to be provided’ to be considered as the moment when assessee receives advances. Hence, “rendition of service” or “the receipt of advances for rendering of service” is the trigger to attract the tax liability. Hence, levy of service tax is determined by section 66B.

The Point of Taxation Rules, 2011 (POT) has been introduced for the “collection” of tax. It determines at which point assessee is liable to discharge their tax liability. Therefore, POT merely deals with the collection of taxes. However, till the time service does not get triggered by charging section, there is no need to apply for the POT at all because till the time there is no levy you can not apply the rules for the collection of taxes.

Therefore before determining the SBC liability, one must determine whether at the time of rendering of service or at the time of receipt of advances SBC was leviable or not. If SBC was not leviable at the time of levy, based on the POT it cannot be collected. Hence, in my view the clarification given in the FAQ is not correct (with respect to the underlined clarification) as it applies the rules for the collection of taxes without determining the levy.

The applicability of SBC under various situations has been analysed below.

Hope next time onwards, FAQ will clarify the issue rather than creating more confusions……