From June 1, 2016, our expenses in matters as banal as dining out would have increased. We all have to now pay an additional 0.5% Krishi Kalyan Cess (KKC) for availing services. Is KKC a dampener? May be, for the end-consumer of services. But let us understand what a cess is, why it is levied and what is KKC.
A cess is a tax that is levied by the government to raise funds for a specific purpose. Collections from the education cess and the secondary & higher education cess, for instance, are supposed to be used for funding primary and secondary & higher education, respectively.
As per Article 270 of the Constitution, cesses imposed by the Parliament for earmarked purposes need not be shared with state governments. If there is an unspent amount, it is simply carried forward for use in the following year. While the Centre has to mandatorily share the revenue from other taxes with the states, it gets to retain the entire kitty with a cess.
KKC is a cess levied on all taxable services @0.5%. The proceeds of KKC would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The proceeds shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money derived from the KKC for specified purposes.
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So, the rationale of KKC is good, considering the current economic scenario in the agricultural sector and the situation of farmers. However, to the ultimate consumers, it will be an additional burden on day-to-day expenses on services like paying mobile bills, coaching for students, credit card bills, etc.
Recently, the government issued various notifications and circulars to make amendments in the service-tax law for bringing clarity on provisions governing the levy of KKC.
One of the most important amendments made relates to Cenvat Credit Rules, 2004 (the Credit Rules), wherein, KKC has been integrated with the Cenvat credit chain and credit can be availed by the service-provider. It can be paid either in cash or by using credit of KKC only. This would mean that, ideally, for a service-provider, KKC should not become a cost.
What is not a happy situation is that of the manufacturer. This is because credit of KKC is not available to a pure manufacturer (who pays excise duty on manufacture of goods). As a result, KKC will be an additional burden on the goods manufactured in India leading to a possible increase in price.
From a compliance perspective, there are various aspects which need to be followed, as per the recent amendments. Like levy of KKC on services, for which payment is made under the reverse charge mechanism by the service recipient (i.e., in case of import of services, goods transport agency services etc), levy of KKC on abated value of services (i.e., in case of restaurant services, works contract services etc), refund of KKC paid on services received and used by special economic zone units, rebate of KKC paid on services used by exporter of services and manner of computation of KKC for specified service-providers such as air travel agent, life insurer, etc.
To conclude, it will be fair to say that the rationale behind imposition of KKC is noble, with an intent to improve overall agrarian economy that contributes around 16% to the Indian GDP. However, it does not help the various government initiatives aimed at simplification of the business process.
The government needs to provide enough impetus to projects like Make-in-India, Startup India and ease of doing business. KKC is likely to hamper these initiatives by adding to the cost of goods and, as a result, leading to increase in prices.
While the government is making concerted efforts to introduce Goods and Services Tax (GST) in India soon, the logic of introducing new levies every year under the banner of new and different cesses seems unwarranted at this stage. This is because under GST, it is anticipated that most of the cesses will get subsumed and there will be no place for them.
Co-authored with Prashant Gupta, manager (indirect tax), PwC Rastogi is partner (indirect tax, PwC. Views are personal
