MARCH 03, 2015

By Rohit Jain, Harsh Shah & Ruchita Shah

ONE of the key objectives of the Government has always been to promote education and accordingly, with a view to provide universalized education to all, the Central Government had introduced Education Cess @ 2% interalia onCustoms duty, Excise duty and Service tax vide Finance Act, 2004. With the advancement and progression in its objective, the Government, vide Finance Act 2007 introduced a Secondary and Higher Education Cess ('SHE Cess') @ 1% for promoting higher education for the masses. Thus, over the last few years, Education Cess of 2% and SHE Cess of 1% (hereinafter collectively known as 'Cess') is charged on Customs duty, Excise duty and Service tax.

Budget 2015-16 has proposed to do away with the Cess, which is a welcome step considering the introduction of Goods and Services Tax ('GST'), from April 2016. While the Cess on Central Excise duty has been done away effective 1 st March 2015, Cess on Service tax will continue till such date the rate of Service tax increases to 14% i.e. from a date to be notified after enactment of Finance Bill. It is important to note that there is no proposal to do away with the Cess on Customs duty and hence Cess on Customs duty will continue to be levied.

The manner in which the Cess is proposed to be done away leaves a lot of questions on the aspects of accumulated credits, transitional provisions and the possibility of it being re-introduced.

Under the CENVAT Credit Rules, 2004 ('CENVAT Rules'), a manufacturer is interalia , permitted to avail credit of Service tax paid on input services. Since Cess on Service tax will continue, albeit for some time, a service provider shall charge Cess to the manufacturer. In terms of the CENVAT Rules, while the manufacturer shall be entitled to avail such credit, the question is as to how the manufacturer will utilize the credit. The provisions of Rule 3 of the CENVAT Rules permit utilisation of CENVAT credit of Excise duty/Service tax for payment of Cess but not vice versa . With no Cess on Excise duty, the manufacturer will merely accumulate such credit without any utilization option. A similar issue would arise when the Input Service Distributor ('ISD') transfers credit to the factory or the plant. The ISD would need to even transfer credit of the Cess charged on the services received by it, which will only accumulate at the plant. There will also be an element of Cess in the goods in transit as on 1 st March 2015. The supplier of raw material would have charged Cess which will result in accumulation of credit at the hands of the manufacturer. While, theoretically, the Cess can be utilized in certain cases such as removal of Inputs or Capital goods on which these Cesses were paid, future demand of these Cesses due to litigation, etc. the burden will continue to remain on the industry as in case of Cess paid on removal, the Cess will merely pass to buyer of such goods and the question of utilization will still remain at the buyers end.

The issue of accumulation of CENVAT credit on Cess is already live in the context of manufacturer and similar issue can arise even when Cess is removed on Service tax. Resorting to an immediate amendment in CENVAT Rules to permit utilization of Cess for Service tax/Excise duty liability is perhaps a quick solution to this issue. Another alternative, which may be difficult and daunting for the industry, will be to permit refund of the accumulated Cess. We are all aware of the various issues around refunds of duties and taxes. Lastly, one can only hope that if none of the measures to ensure utilization of Cess credit are introduced, atleast the transitional provisions under GST will provide a mechanism permitting transfer of accumulated Cess credit into the GST regime.

We are hopeful and for once, do not wish to witness a Bollywood trend where we see sequel or Part II of every other movie. One only hopes that there is no U turn on the removal of Cess. Well, the Government has kept this window open, atleast in Central Excise by removing the Cess by way of a notification. All that the Government requires is withdrawal of the Notification under Central Excise for the Cess to be reintroduced again. This is vastly distinct with the manner in which Cess under Service tax is proposed to be rescinded. For Cess under Service tax, the Government has proposed to rescind the relevant Section of the Finance Act (2004 and 2007 respectively) which provided for the levy of Cess and hence, once rescinded, it would be an for the end of Cess under Service tax. Looking at the introduction of the biggest tax reform in the country in the near future, and the Government's emphasis on no surprises, we can perhaps be assured that there will be no U turn on this aspect.

Considering the above, it appears that a lot is still to be answered before there is a peaceful departure from the Cess. While for the industry this may be a short term pain, it is clearly a long term gain.

Contradictory as it may appear, the proposed abolition of these Cesses for Service tax law in order to make a smooth GST transition is only followed by introduction of one more Cess! Clause 117 of the Finance Bill, 2015 seeks to create an enabling provision for levy of Swachh Bharat Cess at the rate of 2% on value(and not tax amount) of all or any of the taxable services to finance Swachh Bharat initiative! So the elephant is still in the room!! This Cess is proposed only under Service tax and, therefore, one only hopes that we are not again going into the era of differential tax treatment for goods and services.

(This article has been authored by Rohit Jain, who is a Partner, Harsh Shah, who is an Associate Partner and Ruchita Shah, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors and the views expressed are strictly personal.)