19/03/2015

RATE AND CESS ON SERVICE TAX-BUDGET IMPACT

The charge of Service Tax under the Finance Act, 1994 as amended so far is at the rate of 12 percent on the value of taxable services. This rate of Service Tax is specified in section 66B of the Finance Act.

Presently the rate of 12 percent Service Tax is further subject to levy of education cesses as follows:
Education Cess (EC) 2%
Secondary and Higher Education Cess (SHEC) 1%

These education cesses of 2% and 1% are in addition to Service Tax of 12% and are charged on Service Tax i.e, 2% and 1% on amount of Service Tax and not on the value of services on which service tax is levied. Thus, effective levy of Service Tax for the service provider or service receiver becomes 12.36 percent (12% Service Tax, 2% on Service Tax as education cess and 1% on Service Tax as SHE cess).
  
These cesses are special purpose cesses which are appropriated by the Union for the purpose of promoting education and secondary and higher education and related purposes.

BUDGET 2015-16
The Union Budget speech in para 121 states as follows -
"Introduction of GST is eagerly awaited by Trade and Industry. To facilitate a smooth transition to levy of tax on services by both the Centre and the States, it is proposed to increase the present rate of service tax plus education cesses from 12.36% to a consolidated rate of 14%".

Not only this, in case of excise duty also, it has been said in para 118 as follows -
"As part of the movement towards GST, I propose to subsume the Education Cess and the Secondary and Higher Education Cess in Central Excise duty. In effect, the general rate of Central Excise Duty of 12.36% including the cesses is being rounded off to 12.5%".
It is therefore, proposed that both the education cesses i.e., EC and SHE cess will get subsumed into the duty or tax and that the new rate shall be deemed to have factored education cesses in terms of rate or amount but education cesses will no longer be levied separately. The Government will get the amount, in fact even higher amounts as tax or duty itself and not in the form of cesses. Thus, cesses will no longer be levied but assessees will end up paying a higher rate and amount of duty or tax. This is evident from following table.

Tax / Duty
Present Position
As per Finance Bill, 2015
Net increase
Tax
EC and SHE Cess
Total
Tax
EC and SHE Cess
Total
Service Tax
12%
0.36%
12.36%
14%
-
14%
2.68%
Excise Duty (General Rate)
12%
0.36%
12.36%
12.50%
-
12.50%
0.14%

Specific rates of central excise duty in other items and commodities have also been revised. However, in case of petrol and diesel, such specific rates are revised only to the extent of subsuming the quantum of education cess presently levied on them, keeping the total incidence of excise duties unchanged.

FINANCE BILL, 2015
Clause 106 of the Finance Bill, 2015 seeks to amend section 66B so as to increase the Service Tax from 12 to 14 percent. Further, Clauses 179 and 187 respectively of the Finance Bill, 2015 provide that -

i). Section 95 of the Finance Act, 2004 levying education cess, and

ii). Section 140 of the Finance Act, 2007 levying SHE cess

Shall cease to have effect from a notified date after enactment of Finance Act, 2015.
  
EFFECTIVE DATE
New Rate of Service Tax and cessation of both education cesses shall be applicable only after enactment of Finance Act, 2015 (i.e. on President's assent) and upon notification of an effective date. Till the time the revised rate comes into effect, the 'education cess' and 'secondary and higher education cess' will continue to be levied in Service Tax.

EDUCATION CESS ON OTHER TAXES
Levy of both education cesses will continue to be levied on income tax and customs as these have not been subsumed in tax rates.

NEW CESS
It is also proposed to levy a new cess in the name of Swachh Bharat Cess (SBC) at a rate of 2% on all or any taxable services. The resources generated from this cess will be utilized for financing and promoting initiatives towards clean India (Swachh Bharat). For this purpose, provisions are contained in Chapter VI (Clause 117) of the Finance Bill, 2015. It shall be levied as Service Tax for the purpose of the Union for financing and promoting "Swachh Bharat" initiatives and any other purpose relating thereto.


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