Krishi Kalyan Cess on services from tomorrow

Telephone and restaurant bills, airline tickets and visits to beauty parlours will turn dearer from June 1, when the 0.5 per cent Krishi Kalyan Cess (KKC) kicks in.

It will apply to all taxable services, and CENVAT (central value added tax) credit will be available to service providers on the cess paid on input services, the Finance Ministry has said. However, the input credit on the Krishi Kalyan Cess can only be used for discharge of the KKC liability.

Manufacturing units will be affected as they will not be able to set off the cess paid on input services utilised by them, R Muralidharan, Senior Director, Deloitte in India, told BusinessLine , adding that these units will have to absorb the added cost or pass it on to their customers. He also said the KKC levy could be inflationary for all business-to-consumer transactions.

“For all practical purposes, the service tax rate will now be 15 per cent from June 1,” Muralidharan said. Currently, service tax is pegged at 14 per cent and there is a Swachh Bharat cess of 0.5 per cent.

The Krishi Kalyan Cess is not leviable on the component of service tax but the value of service, as in the case of the Swachh Bharat Cess. However, there is still uncertainty over the applicability of the Krishi Kalyan Cess in respect of services availed before June 1, and for which payment will be received after this date.

Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said extension of Rule 5 of Point of Taxation Rules to KKC has led to an “unequitable” situation.

The Krishi Kalyan Cess would be payable even in cases where a service has been rendered and invoice has been issued prior to June 1, but the payment is made after this date, he said.

In other words, invoices for a service that has not yet been paid for would now retrospectively attract the Krishi Kalyan Cess. This would typically impact all industries, especially banking, credit card and telecommunications companies where the invoices are typically paid later, Singhania said.

Since the service provider in all cases would want to recover this additional burden from customers, this would lead to the retrospective taxation of customers, he added.

Meanwhile, the Finance Ministry has made it clear that the Krishi Kalyan Cess will not be levied on services in the negative list. India follows a negative list system of service taxation where around 17 categories are listed. Besides the negative list, the Centre has also specified 47 exempted services.

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