JUNE 29, 2016

By Sanjay Dwivedi, Advocate

SECTION 161 of the Finance Act, 2016 levying KKC "as service tax on all or any of the taxable services" came into force with effect from 01 st June, 2016. On 23 rd June 2016 the government issued a notification (35/2016-ST) exempting services from Krishi Kalyan Cess (KKC) if:

a. Provision of service has been completed; and

b. The invoice for the service has been issued

on or before the 31st May, 2016.

There is an underlying presumption that the KKC was payable even on the services rendered prior to 01 st June 2016. Was it? And will, in future, any newly levied tax become payable in similar circumstances?

Common sense says that tax cannot be collected without there being a levy. Collection is a stage subsequent to levy. The collection is merely a method for fructification of the levy. When the levy itself came into force on 01 st June, how can the services rendered prior to that date be subjected to the tax? But a sleight of legal hand createda situation where tax authorities became entitled to demand KKC even on the services that had already been provided before the levy came into force.

How did it happen? To understand, let's briefly refer to rules 4 and 5 of the Point of Taxation Rules, 2011.

Rule 4 applies to the cases where there is a change in effective rate of tax in respect of a service. It's a rule of majority. Three events are identified and the tax is collected at the rate in force either before the cut-off date or after that, depending upon – on which side do two out of the three events occur. The three events are:

- The date of provision of service

- The date of issue of invoice; and

- The date of receipt of payment for the service

Thus, if any two of the above three had occurred before the change in effective rate, the tax would be payable at the older rate. Similarly, if the majority events (2 out of 3) occurs after the change, then the new rate applies.

There was a section of people holding opinion that imposition of KKC merely amounted to change in effective rate of service tax. After all, the Section 161 itself says that KKC is ‘service tax'. Also the taxable event remains ‘provision of service'. Therefore, it was argued, that the point of taxation should be determined as per rule 4 noted above.

Rule 5, on the other hand, applies

a. Where a service is taxed for the first time; and

b. In case of new levy on services

Rule 5 derives the point of taxation without any reference to the date of provision of the service. If we consider KKC to be a new levy, then it was not payable only if both of the following conditions are fulfilled:

i. The payment is received before 01 st June, 2016; and

ii. The invoice is issued either before 01 st June or at the most within 14 days i.e. by 15th June, 2016.

It needs to be stressed that only if both of the above conditions are fulfilled, then the newly levied tax won't be payable. Where any one of the conditions is not met, the tax would become payable. To emphasise the point, the government has added an explanation to the rule 5 which says that “New levy or tax shall be payable on all the cases other than specified above.”

We will look into the argument as to whether KKC is a new levy or is mere change in effective rate of tax; but supposing it is a new levy then what would be the consequence? Suppose, a company had provided service in December 2015, raised bill in January 2016 and had also paid tax by 06th February 2016. Let's say that the service receiver pays the bill in July 2016. Is KKC also required to be paid? Though manifestly illogical, unfair & unjust, the answer is a big ‘yes' if rule 5 is to be applied. The facts clearly fit into the legal provisions. The payment is received after the new levy came into force. Thus, the first condition is not met and the explanation 2 clearly says that tax would be payable in all cases where the two conditions are not fulfilled.

That leads to examination of the question - whether KKC is a new levy or is a mere change in effective rate of tax? It needs to be appreciated that KKC is not a tax levied under section 66B of Finance Act, 1994. The charge for KKC has been created vide section 161 of the Finance Act, 2016. The said section merely borrows various provisions of the chapter V of the 1994 Act and various rules framed thereunder. For the purpose of KKC, one would read the entire body of the 1994 Act along with the said section 161. These are two different taxes. Neither KKC is the service tax under section 66B, nor is the service tax, KKC under section 161. KKC does not change effective rate of the sec 66B tax; and service tax does not change the effective rate of sec 161 tax. Section 66B levies tax on all services except those under negative list. Levy of KKC is not even a ‘new levy' under Sec 66B. A new levy under section 66B can refer only to the following:

a. If a service is removed out of the negative list;

b. Any activity which is currently excluded from definition of ‘service' is removed from such exclusion; or

c. Something is artificially defined to be service (by a deeming clause or by addition to the list of ‘declared service')

KKC, is thus a new levy and the levy is under sec 161 of the Finance Act, 2016. Readers may recall the landmark judgment in CCE, Hyderabad vs. Vazir Sultan Tobacco Co. Ltd. [ 2002-TIOL-215-SC-CX-LB ]. In that case, a ‘special duty of excise' (SED) was levied in the case of goods chargeable with duty of excise under the Central Excise Act. The tax was levied @5% of the Basic Excise Duty. The levy came into force from 1 st March, 1978. The question before Supreme Court was whether SED was payable on the goods that had been manufactured prior to the date of levy but removed on or after that date. Revenue had argued that -

"…… the levy and collection is at the stage of clearance of the goods from the factory or warehouse as the case may be. Both for the purpose of rate and valuation, one has to look to the date of removal and it is the said date which determines the levy, the rate and the valuation."

Supreme Court held:

"Admittedly, the special excise duty is an independent duty of excise separate and distinct from the duties of excise levied by the Central Excises and Salt Act, 1944. This levy came into effect only on and from March 1, 1978 which means that the goods produced prior to that date were not subject to such levy. If that is so, the levy cannot attach nor can it be realised because such goods are removed on or after March 1, 1978. The provisions of the Central Excise Act and the Rules, in our opinion, do not say otherwise."

Further analysis by the court showed that the rules really did not say otherwise. The rule 9 required payment of duty on “excisable goods” - and not “goods” - upon their removal. The goods removed must be excisable goods first - which means that the goods were already subject to the levy of duty before their removal.

But, the Point of Taxation Rules do say otherwise. The rule 5 clearly overreaches to the services already rendered before the levy comes into force merely by deeming that the service has been rendered after the levy came into force. We have already noted above that the rule 5 of POT rules does not pay any regard to the actual date of rendering the service. In contrast rule 3 has different consequences when the invoice is issued within specified time period and when it is delayed. Through this, it relates to the date of rendering of the service.

Point of Taxation is the point in time when a service is deemed to have been provided . So long as this deeming provision operates within the domain of collection machinery, it is fine. But, can this fiction create levy? Where a service was factually rendered before the levy came into force, can a rule deem that it was rendered after it? It is submitted that the Finance Acts have not conferred any such power on the government. Let's examine whether in framing the rule 5 of POT Rules, the government has confined itself within the limits set by the Parliament.

In framing the Point of Taxation Rules, 2011, the government has derived powers from the aforesaid section 67A (2), and 94 (hhh). Ostensibly, in exercise of this power the government says in rule 5, that in case of a new levy no tax would be payable if the payment has been received before the levy comes into force and the invoice is raised maximum within 14 days thereafter; but the ‘new levy' shall be payable in all other cases. Thus, if the payment is received after the levy comes into force, tax becomes payable and no regard is to be paid to the fact that the service had been rendered before the levy came into force. Thus, the rule creates levy where the Parliament had not.

In fact neither the section 67 (2) nor the section 94 (hhh) confer any such power on the government. Both the provisions merely empower the government to determine the applicable rate of tax.

Section 94 (hhh) empowers the government to make rules providing for

- the date for determination of rate of service tax and

- the place of provision of taxable service un der section 66C"

Section 67A reads as under:

(1) The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

(2) The time or the point in time with respect to the rate of service tax shall be such as may be prescribed.

(The sub-section (2) above, was inserted w.e.f. 14th May 2016)

Sub-section (2) of section 67 does not empower government to disregard the sub-section (1). Power granted under sub-section (2) is for the purpose of effectuating the sub-section (1) and not for destroying it.

Most importantly, the charging sections viz. Sec 66B and 161 of the two Finance Acts cannot be overlooked. Section 66B imposes service tax @14% on value of all services other than those in the negative list, provide or agreed to be provided in the taxable territory. It empowers the government to prescribe the manner of collection . Similarly the section 161 too levies tax and empowers government to prescribe the manner of its collection. Power of the government is confined to prescribe manner of collection – obviously it is for collection of the tax levied by the charging sections. While prescribing the manner of collection, the government cannot levy a tax.

In some quarters it is also being argued that the tax would be payable if the service had been rendered on or after 14th May 2016 but not before that. Probably this argument is based on the fact that the sub-section (2) of section 67 came into force on that date. It is submitted that this argument is fallacious. It concedes that section 67 (2) empowers government to levy tax through rules, before the charging section levies the tax.

Way Forward…

Presently, the government has come to rescue of the tax payers and has also doused the controversy by issuing the notification 35/2016-ST. However, the notification is also an assertion by the government that tax was otherwise payable. It is submitted that the government should re-draft the rule 5, ibid, to avoid recurrence of a similar situation in future.