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Swachh Bharat Cess (SBC) - Everything You Need To Know

  • Starting 15th November 2015, Hotel, Mobile Phone bills, airline tickets will get more expensive with the finance ministry of India deciding to impose a Swachh Bharat cess on all services.
  • As a consumer, you will have higher input cost for your business and as a business owner, you need to be sure how to deal with this new tax levy Swachh Bharat Cess.
  • "The proceeds from this cess will be used for financing and promoting Swachh Bharat initiatives," the ministry said in a statement.
  • Lets look at some of the questions you might have about this new tax:

1. What is Swachh Bharat Cess (SBC)?

  • SBC is tax in addition to Service Tax which shall be levied and collected in accordance with the provisions of Chapter VI of the Finance Act, 2015,called Swachh Bharat Cess, as service tax on all the taxable services at the rate of 0.5% of the value of taxable service.
  • SBC has been imposed for the purposes of financing and promoting Swachh Bharat initiatives by government. (Refer official Swachh Bharat Cess Notification No.21/2015-Service Tax, dated 6th November, 2015)

2. How Swachh Bharat Cess will be calculated?

  • SBC would be calculated in the same way as Service tax is calculated.
  • Therefore, SBC would be levied on the same taxable value as service tax.
  • SBC is not to be calculated on Service Tax but on the taxable value of the service provided.
  • Example of Swachh Bharat Cess calculation –
    • For a service worth Rs. 100, Service Tax will be Rs. 14 at 14% rate and SBC will be Rs. 0.05 at 0.5%. So the total chargeable amount will be Rs. 114.5.

3. Whether SBC would be required to be mentioned separately in invoice?

  • SBC would be levied, charged, collected and paid to Government independent of service tax.
  • This needs to be charged separately on the invoice, accounted for separately in the books of account and paid separately under separate accounting code which would be notified shortly.
  • SBC may be charged separately after service tax as a different line item in invoice.
  • It can be accounted and treated similarly to Education cesses.

4. What would be effective rate of service tax and SBC post introduction of SBC?

  • Effective rate of service tax plus SBC, post introduction of SBC, would be [14% + 0.5%].
  • Both the taxes needs to be mentioned on invoice separately.

5. Whether Cenvat Credit of the SBC is available?

  • SBC is not integrated in the Cenvat Credit Chain.
  • Therefore, credit of SBC cannot be availed.
  • Further, SBC cannot be paid by utilizing credit of any other duty or tax.

6. What would be the point of taxation for Swachh Bharat Cess?

  • Following are possible scenarios for point of taxation of SBC:
    • 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.

Some case specific FAQs related to Swachh Bharat Tax

7. How will the SBC be calculated for services under reverse charge mechanism?

  • In case of reverse charge under section 68(2) of the Finance Act, 1994, the liability has been shifted from service provider to the service recipient.
  • As per section 119 (5) of the Finance Act, 2015, the provisions of Chapter V of the Finance Act, 1994, and the rules made thereunder are applicable to SBC also.
  • Thus, the reverse charge under section 68(2) of the Finance Act, 1994, is made applicable to SBC.
  • In this context, to clarify, Government has issued notification No. 24/2015-Service Tax dated 12th November, 2015 to provide that reverse charge under notification No.30/2012-Service Tax dated 20th June, 2012 shall be applicable for the purpose of levy of Swachh Bharat Cess mutatis mutandis.

8. How will SBC be calculated for services where abatement is allowed?

  • Taxable services, on which service tax is leviable on a certain percentage of value of taxable service, will attract SBC on the same percentage of value as provided in the notification No. 26/2012-Service Tax, dated 20th June, 2012. So, this notification would apply for SBC also in the same manner as it applies for service tax.
  • For example, in the case of GTA, [Service Tax + SBC]% would be (14% Service Tax + 0.5% SBC) X 30% = 4.35% (4.20%+0.15%)

9. Whether SBC would be applicable on services covered by Rule 6 of Service Tax Rules (i.e. air travel agent, life insurance premium, purchase and sale of foreign currency and services by lottery distributors/selling agents)

  • Sub-rule (7D) to rule 6 has been inserted vide notification 25/2015-Service Tax, dated 12th November, 2015 so as to provide that the person liable for paying the service tax under sub- 6 rule (7), (7A), (7B) or (7C) of rule 6 of Service Tax Rules, shall have the option to pay SBC as determined as per the following formula -
    • Service Tax liability [calculated as per sub-rule (7), (7A), (7B) or (7C)] X 0.5%/14% The option under this sub-rule once exercised, shall apply uniformly in respect of such services and shall not be changed during a financial year under any circumstances.

10. 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?

  • 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.

11. Does a person providing both exempted and taxable service and reversing credit @ 7% of value of exempted service under Rule 6 of Cenvat Credit Rules, does he need to reverse the SBC also?

  • As SBC is not integrated in the Cenvat Credit chain and reversal under Rule 6 is payment of amount equal to 7% of the value of exempted services, hence, reversal of SBC is not required under Rule 6 of Cenvat Credit Rules, 2004.

12. How would the tax (Service Tax and SBC) be calculated on services covered under Rule 2A, 2B or 2C of Service Tax (Determination of Value) Rules, 2006?

  • The tax (Service Tax and SBC) on services covered by Rule 2A, 2B or 2C of Service Tax (Determination of Value) Rules, 2006, would be computed by multiplying the value determined in accordance with these respective rules with [14% + 0.5%].
  • Therefore, effective rate of Service Tax plus SBC in case of original works and other than original works under the works contract service would be 5.8% [(14% + 0.5%)*40%] and 10.15% [(14% + 0.5%)*70%] respectively.
  • Similar, would be the tax treatment for restaurant and outdoor catering services.

13. How would the tax be calculated on restaurant services covered under Service Tax (Determination of Value) Rules, 2006?

  • Swachh Bharat Cess would be calculated on the value arrived at in accordance with the Service Tax (Determination of Value) Rules, 2006.
  • For example, the effective Swachh Bharat Cess in respect of services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, having the facility of air–conditioning or central air-heating in any part of the establishment, would be 0.5% of 40% of the total amount, i.e, 0.2% of the total amount.
  • The cumulative service tax and Swachh Bharat Cess liability would be [14% ST + 0.5% SBC] of 40% of the total amount, i.e., 5.8% of the total amount charged.

14. Why has SBC been imposed and Where will the money collected under SBC go?

  • SBC has been imposed for the purposes of financing and promoting Swachh Bharat Abhiyan initiatives.
  • Proceeds of the SBC will be credited to the Consolidated Fund of India, and the Central Government.

15. Why the government isn’t funding the Swachh Bharat initiative out of its own money?

  • The Indian government made a substantial allocation of Rs 3,625 crores for the Swacch Bharat Mission for the financial year ending March 2016 which is a healthy 27% increase over last year’s allocation.
  • Not just this, almost 94% of funds earmarked for the initiative were released by the government in the financial year 2013-14.
  • If you are already using a good accounting software for your business, you should be able to setup this new Swachh Bharat Cess tax easily and apply it on the invoices.

 

Financial Management