Swachh Bharat Cess (“SBC”) proposed at the “rate of 2% on all or any services” in Budget Speech on 28th February 2015, was notified vide Notification No. 21/2015-ST and Notification No. 22/2015-ST both dated 6th November 2015 for imposition from 15th November 2015 onwards “just like Service Tax” at the rate of 0.5% on the assessable value of taxable service.
While one is to be grateful for the 1.5% exemption, the short notice on the face of festivity and unpreparedness had stirred up a lot more chaos and confusion among the entire gamut of taxpayers and advisors. The basic issue, inter alia, at that time was the ambiguity in Notification No. 22/2015-ST dated 6-11-2015, for it notified the rate of charge for the taxable services and those fully exempted alone, overlooking the fact that there exist a plethora of services between the two. It also made a blunder of exempting the services in the negative list as a taxable service, implying that the non–taxable negative list was earlier taxable.
A lot of legal issues were put to rest on 12th November 2015 vide Notification No. 23/2015-ST dated 12-11-2015 which amended Notification No. 22/2015-ST, providing for SBC on abated value, vide Notification No. 24/2015-ST dated 12-11-2015 which made applicable the full and partial Reverse Charge Mechanism and vide Notification No. 25/2015-ST dated 12-11-2015 which amended the Service Tax Rules, 1994 by inserting sub-rule 7D in Rule 6, to provide for alternate rate in respect of SBC on money changing, life insurance, air travel and lottery services. However there was no notification or clarification regarding the Cenvat credit applicability and mode of payment of SBC. While the FAQs on SBC published by CBEC on its website posed as respite over inter alia the issue of Cenvatability, as it clarified that the Cenvat Credit Rules, 2004 (“Credit Rules”) would not extend to SBC, the mode of clarification was condemned since FAQs do not hold legal binding of any sort, which gives way to frivolous litigation and otherwise an obvious cascading effect.
On observing SBC, it is not impetuous to remark that the burden of Service Tax exclusive of the benefits extends to SBC, making the tax system way more complex and regressive. SBC though in the nomenclature of cess, since it is earmarked for the purpose of ‘Swachh Bharat Abhiyan’, is disparate with the earlier cesses levied on Service Tax like Education Cess and Secondary and Higher Education Cess. Unlike the earlier ones it is not tax on tax but tax on the taxable value and Credit Rules do not extend to it. The subject matter of SBC is public health and sanitation which falls under the State List, but the Centre has under the garb of residuary power and power to legislate over service tax, introduced additional tax in the name of SBC, which the Centre is not bound to share with the respective States.
The discrepancies of SBC on the basis of which it can be constitutionally / legally challenged are briefly touched upon in the following paragraphs.
The wordings of the charging Section 119(2) “on all or any services” creates certain ambiguity, vagueness and uncertainty as to the subject of tax, which lays open the imposition of SBC to the whims and fancies of the executive. “A taxing statute must be couched in express and unambiguous language” since by well-settled principles of law, it has to be read and construed strictly.
The Centre has achieved the devolution of revenue to States at rate of 42% as recommended by the 14th Finance Commission, to uphold the essence of federalism in the nation, however it is an eyewash, since devolution is only of tax and not of cess and surcharge, thus the revenue benefit by imposition of any sort of cess or surcharge shall remain with the Centre and keep the pocket of Centre alone jingling, completely inimical to the quasi-federal structure of India.
SBC does not hold strong ground in the face of challenge on taxation principles of equality, convenience, certainty and economy. These are the basic canons of a good tax system, inspired by the economic theory and policy of Adam Smith. Equality refers to vertical equity of taxation, Convenience refers to the manner and time of tax payment, Certainty refers to the certain nature of the tax which is not arbitrary and is simple and provides stability, and lastly Economy propagates that taxes should be minimized. However SBC does not seem to be based on these cornerstones of good taxation regime.
To sum up, while expenditure of the government for improving the sanitation level in the country having a direct effect on health is appreciated, the collection of cess is condemned since the usage of nomenclature of cess deprives State of funds and increases tax burden on taxpayers and why should there be an additional tax when tax collected can be internally earmarked for this purpose and spent accordingly. Looking towards tax overhaul with GST, the question that is to be vetted is about the treatment of SBC then since GST conventionally and by practice is one consolidated tax with no additional taxes.
[The first author was an intern and the second author is a Principal Associate in Lakshmikumaran & Sridharan, New Delhi]