Krishi Kalyan Cess of 0.5% from 1 June
What's the story
Finance Ministry announced that Krishi Kalyan Cess (KKC) of 0.5% would be applicable to all taxable services including restaurant bills, telephone bills, airline tickets, etc. from 1 Jun'16.
The Ministry said that CENVAT (central value-added tax) credit would be available on the cess paid on input services to service providers.
Input credit on KKC can be utilized for the discharge of KKC liability.
Introduction
What is Krishi Kalyan Cess?
In colonial India, 'cess' was applied to any taxation as a suffix, such as educational-cess, irrigation-cess, property-cess, etc.
In modern India, cess refers to tax designated for a particular purpose like Swachh Bharat cess.
By provision of Chapter VI of the Finance Act, 2016, Krishi Kalyan Cess, for the welfare of farmers shall be levied on all taxable services at the rate of 0.5%.
Budget 2016
Jaitley announces new cess for agriculture
During his budget speech, Finance Minister Arun Jaitley proposed to levy a new cess–'Krishi Kalyan Cess', which would be applicable to all taxable services.
He added that the new cess would be effective from 1 June 2016.
However, on 4 March 2016, Arun Jaitley stated that the effective rate of Krishi Kalyan Cess could be made lower than 0.5%.
Quote
Improvement of agriculture and welfare of farmers
Arun Jaitley said: "I propose to impose a cess called Krishi Kalyan Cess at 0.5% on all taxable services, the proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers."
Current Fiscal
Government intends to collect Rs.5,000 crore through KKC
Through Krishi Kalyan Cess of 0.5% on services, the government proposes to garner Rs.5,000 crore in the current fiscal's remaining ten months.
In the current fiscal, the total collection target of service tax is fixed at Rs.216,000 crore.
The Finance Ministry said that though KKC is as small as 50 paise per Rs.100 transacted, on a larger scale Rs.5000 crore could be fetched.
Non-leviable
KKC not leviable on component of service tax
Krishi Kalyan Cess isn't applicable to the component of service tax but the value of the service.
KKC would apply to the services rendered and invoices issued before 1 June, but payment is made after 1 June.
Finance Ministry has clarified that the cess wouldn't be levied on those services in the negative list and also 47 exempted services specified by the Centre.
Service Tax
Total service tax reaches 15%
As a result of the Krishi Kalyan Cess of 0.5% being levied, the total service tax would go up to 15%.
Finance Minister Jaitley had increased the service tax from 12.36% to 14% in Budget 2015, which was effective from 1 Jun'15.
From 15 Nov'15, Swachh Bharat Cess of 0.5% was also implemented; hence, the current total service tax added up to 14.5%.
Information
Tax break up from 1 June 2016
From 1 June 2016, the effective rate of service tax would be 15%, and the tax break up would be: Service Tax– 14%; Swachh Bharat Cess– 0.5%; Krishi Kalyan Cess– 0.5%; Total– 15%.
Industries
KKC would impact industries and manufacturing units
R Muralidharan, Senior Director–Deloitte (India), said that manufacturing units would be affected as they wouldn't be able to embark the cess paid on input services used by them.
Amit Singhania, Partner–Shardul Amarchand Mangaldas, stated that extension of Rule 5 of Point of Taxation Rules to KKC led to an "inequitable" situation.
Singhania said that all industries including banking and telecommunications would be impacted.