Service Tax - Exemption from KKC - Impossible?
Point of Taxation - Point of Litigation?

By Vijay Kumar

GOVERNMENT has exempted taxable services with respect to which the invoice for the service has been issued on or before the 31st May, 2016, from the whole of Krishi Kalyan Cess leviable thereon, but nothing comes from the Board without a condition or confusion. Now, the condition for this exemption is that the provision of service has been completed on or before the 31st May, 2016.

This is easier said than done. How do you really find out when the service was actually provided? How does an assessee prove that he has completed providing the service? Without this largesse from the Government most of the assessees had decided to pay the 0.5% KKC. Now they will be confused on how to avail this exemption.

I asked an expert in the field to comment. This is what he told me:

Exemption of KKC for amounts received on or after 01/06/2016 - An impossible condition?

The explanation inserted in Rule 5 of POT rules during the Budget has made the outstanding amounts received by the service providers (the services for which the service provider has already issued invoice and discharged service tax @14.5) on or after 1.06.2016 attract service tax and different opinions are circulating among the trade on how to treat such amounts in view of amended Rule 5 of POT. With the issuance of Notification No. 35/2016-ST dt. 23.06.2016, there has been a sigh of relief in the trade circles. However, it appears that the euphoria is short lived as the notification contains a condition - that the provision of service has been completed on or before the 31st May, 2016- which is near impossible to fulfill.

Unlike goods, since services are intangible, it is difficult to specify exactly when a Service has been delivered or completed for the purpose of assessment and payment of Service Tax. To address this problem, the Government came up with POT Rules in 2011 to specify when the service is deemed to have been completed. Irrespective of time of providing Service, the Rules provide "point of assessment and payment” for different situations(though the word assessment was not specifically used in the Rules). Rule 3 of POT rules is a general rule which specifies that service tax is payable when the invoice is issued or payment received whichever is earlier.

KKC has been levied on all taxable services with effect from 01/06/2016 and Rule 5 of POT Rules has also amended during the Budget, by inserting an explanation under Rule 5 to make this Rule to apply on "new levy". Since KKC is new levy, all transitional cases are made to be covered by amended Rule 5.

Now after the of amendment of Rule 5, KKC is not payable if:

a) The invoice is issued and payment is also received before 01/06/2016

b) Payment has been received before 01/06/2016, but invoice has been issued within 14 days (i.e., on or before 14/06/2016)

(Please note that in the above situations, though the service may actually be rendered after 01/06/2016, yet no KKC is applicable as per this sub-rule)

In effect, all the outstanding amounts (lying as debtors as on 31/05/2016) received on or after 1.06.2016, will be subjected to levy of KKC as and when they are received by the service providers, notwithstanding the fact that the assessees might have already discharged Service Tax on these outstanding amounts at 14.5% at the time of issue of invoices by following general rule 3 of POT.

The Government has issued Notification No 35/2016 ST dt. 23.06.16, exempting KKC on all taxable services where invoice has been issued on or before 31/05/2016. Thus, with the issuance of this notification the amounts received from debtors on or after 01/06/2016 should not be attracting service tax, as in such cases the invoices would have been issued on or before 31/05/2016. However, this Notification comes with a condition that the provision of Service should be completed on or before 31/05/2016, which has taken away the relief given in the notification and perhaps created a point of litigation. How can an assessee establish that the provision of Service has been completed in respect of outstanding amount? If it was that simple to establish when the service was completed, then there was no need to bring in the POT Rules.

Let us take an example. An assessee provided different services to XYZ Ltd and issued four bills as indicated below:

Now, in respect of balance amount of Rs 1,10,000/-, how should one establish provision of service has been completed when the outstanding amount cannot be linked to any particular invoice in the books?

Instead of inserting such condition in the Notification, what will happen if KKC is totally exempted on all the outstanding amounts as on 01/06/2016 on which assessee has already paid ST @ 14.5? How much revenue the Government will lose if the Notification is unconditional? Can any assessee satisfy the officers that the provision of Service has been completed in respect of amounts realized on or after 01/06/2016? Why can't the Government be a little more generous and say in respect of all assessments where the Service Tax has been discharged at 14.5% before KKC is effective, there is no need to pay additional 0.5% towards KKC?

For the cases covered under Rule 5(a), where the invoice issued and payment received, the Government is not collecting KKC even though Service has been rendered on or after 01/06/2016. Why can't the same ratio be applied for the cases where invoice has been issued, but payment is received on or after 01/06/2016, without adding the condition that the Service should also be completed on or before 31/05/2016?

Notification No. 35/2016-ST., Dated:. June 23, 2016