Krishi Kalyan Cess

During the Union Budget 2016, the Finance Minister of India, Mr. Arun Jaitley, introduced a Krishi Kalyan Cess at 0.5% that will be applicable on all taxed services. This additional cess is charged based on the taxed value of the service received.

Finance Minister, Mr. Arun Jaitley had recommended the introduction of a Cess, termed as the Krishi Kalyan Cess (KKC), at 0.5 percent on each and every taxed service during the 2016 Union Budget. It has come into effect on 1st June 2016. Like any new government implementation, KKC too will take time to sink in. As of now, the masses have more doubts and queries than answers. As you are aware, Service Tax (ST) is imposed by the government on contractors, outworkers, service providers on some service transactions. But do you know that this is in fact borne by the consumers and end users? It is classified under Indirect Tax and was effected under the Finance Act, 1994. In previous year’s Union Budget (2015), the Minister had escalated the Service Tax Rate from 12.36 percent to 14 percent. And what is more, from 15th Nov 2015 onwards, they also introduced the Swachh Bharat Cess at 0.5 percent. Hence post KKC, the net rate of Service Tax will be 15 percent from June 2016. It seems that ST is being increased little by little so that it eventually gets closer to that of Goods & Services Tax (GST), which is 17 to 18 percent.

It is high time we find out more about this newly drafted tax:

What is Cess?

A Cess is a type of tax that is imposed by the central government to gather resources towards any particular goal. Example, amount accrued from irrigation cess shall be utilized only for funding government undertaking related to that. According to Article 270 of the Constitution, central government is not obliged to share the cesses levied by the Parliament for reserved projects with state governments; but it is compulsory for the Centre distribute a chunk of revenue amasses from other taxes with the States. And in case of surplus unspent money in the account, it will merely be taken forward for prospective projects in the next year.

Explaining Krishi Kalyan Cess (KKC):

It is a Cess that will be imposed and amassed in compliance with the provision specified in Chapter VI of the Finance Act 2015; a Service Tax on every taxed service at the rate of 0.5 percent of the on-paper price of such services.

Estimating Krishi Kalyan Cess:

Krishi Kalyan Cess can be toted up just as Service tax and will be charged on the same taxed value of ST. KKC shall not be determined on Service Tax but only on the taxed value of the service rendered. For instance, for a service that cost INR 200, the ST will be INR 28 (at 14 percent) and Swachh Bharat Cess (SBC) will be INR 1 at 0.5 percent. In the same way, Krishi Kalyan Cess will be INR 1 at 0.5 percent. And the total amount levied will be INR 230.

Here are few examples to know how it is calculated:

SL No When is the invoice issued and for what amount How much payment received and when Taxability Status
1 28th May 2016 for INR 5 lacs 29th May 2016 for INR 5 lacs Not taxed as issue of invoice and receipt of amount paid before 1st June 2016.
2 28th May 2016 for INR 5 lacs 29th May 2016 for INR 4 lacs Not taxed for up to INR 4 lacs as the amount is paid only partially for the same before the due date of service taxability or new levy. The Balance INR 1 lakh, if disbursed post 31st May 2016 will be levied KKC.
3 4th June 2016 for INR 5 lacs 29th May 2016 for INR 5 lacs Not Taxed as payment receipt before 1st June 2016 while invoice issued within two weeks from taxability of service.
4 20th June 2016 for INR 5 lacs 24th May 2016 for INR 2.5 lacs Taxed as requirement of issuance of invoice within two weeks from the day of service is not met.
5 Overall consideration was INR 6 lacs. On 28th May 2016, invoice was delivered for INR 250,000 and outstanding invoice is scheduled for 19th June 2016. 29th May 2016 for INR 6 lacs Not taxed for up to INR 250,000 as partial payment invoice was sent after two weeks from the day invoice is issued.

Mentioning Krishi Kalyan Cess in Invoice:

KKC will be imposed, charged, accrued and disbursed to Government free of Service Tax. This must be charged individually on the invoice, represent distinctly in the accounts books and also paid separately under different accounting code. S BC shall be levied individually after Service tax as a separate line item in the Invoice. Krishi kalyan Cess became applicable from 1st June, 2016. But it cannot be applied on Services specified in the ‘Mega Exemption List’ and ‘Negative List’. According to the Notification Number 22/2015, KKC cannot be applied on services let off from ST. Also, Rule Number 5 of Point of Taxation Rules 2011 shall to be checked for its practicality in the event of current contracts or deals on 1st June 2016. Hence if payment is made before this date, then cess is exempted.

Effective tax rate if services are covered by Abatement:

Taxed Services, on which service tax is chargeable on a specific share of value of such services, will lure KKC on the exact proportion of value as promised in the Notification Number 26/2012, ST dated 20th June 2012. Similarly, this notice would apply for KKC as well. Example, for GTA service, it shall be 4.5 percent (15 percent multiplies by 30 percent).

KKC and Krishi Kalyan Surcharge Comparison:

Krishi Kalyan Cess (KKC), despite the similarity in their names, is as different from Krishi Kalyan Surcharge (KKS) as can be other than the fact that both were declared by the Union Government Budget of 2016-2017. KKS offer a steady and foreseeable tax system and bring down black money. It was declared in the budget that local tax payers can declare private income or such income saved in the form of any property by shelling out tax at the rate of 30 percent, and surcharge (meaning an addition to the present tax) at 7.5 percent and fine at 7.5 percent, which comes up to 45 percent of such ‘nameless’ income. These declarants will have protection from suit. Arun Jaitley, while reading out the above provision clarified that Surcharge imposed at 7.5 percent of those income will be known as Krishi Kalyan Surcharge, to be utilized for farming and rural economy.

Summing Up:

The underlying principle behind obligation of Krishi Kalyan Cess is noble with an aim to develop inclusive agricultural economy, which makes up about 16 percent to our GDP. But it does not help much to the numerous government undertakings intended to simplify the business and commercial processes. Government should afford adequate motivation to worthy schemes like Startup India, Make in India etc. and help to bring in transparency and ease for business aspirants. KKC is expected to impede these enterprises while adding to the overall production costs and subsequently price hikes. While government do take effort to initiate Goods and Services Tax (GST) in India soon, the rationale of presenting new taxes yearly under the banner of new and diverse Cesses, appears to be needless at this juncture.

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