February 29th 2016, the Hon’ble Finance Minister announced “I propose to impose a Cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services, proceeds of which would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The Cess will come into force with effect from 1st June 2016. Input Tax credit of this cess will be available for payment of this cess.” Para 152 of the Budget Speech with the introduction of Krishi Kalyan Cess (KKC) the effective rate of tax on services has increased to 15%.

KKC is a levy on all taxable services. The relevant provision made in S.161 of the Finance Act, 2016 (which received the President’s assent on 14th May 2016) is as follows:

“There shall be levied and collected in accordance with the provisions of this Chapter, a cess to be called the Krishi Kalyan Cess, as service tax on all or any of the taxable services at the rate of 0.5 percent. on the value of such services…”

Subsequently the notifications making the necessary amendments to the CENVAT Credit Rules, 2004 issued on 26th May 2016 were issued. The highlights of the same are as below:

  1. Rule 3(1a) – The cenvat credit of Krishi Kalyan Cess can be availed.

  2. New proviso (tenth) to Rule 3(4) – The cenvat credit of any other levy cannot be utilized for payment of KKC. The cenvat credit of KKC can be utilized only for the payment of KKC.

  3. New Clause 3(7) (d) – The cenvat credit of KKC can be utilized only for the payment of KKC.

CENVAT credit of KKC can be availed by output service provider only

On combined reading the aforementioned provisions, it appears that an output service provider shall be entitled to take credit of KKC on any of the services received and the same can be utilized for payment of the output liability of KKC on provision of output service without the added burden of maintaining a co-relation between the input service and output service.

Whether KKC is a cost to the manufacturers?

Firstly, the promise that the CENVAT credit of KKC would be available is not really consistent with the existing value addition based taxation system. This is because the CENVAT credit of KKC can be utilized only for payment of KKC on output services, thereby restricting the availability of CENVAT credit of the same only to service providers. The manufacturers who bear the charge of such KKC are at a loss since the credit of the same cannot be utilized for payment of Excise duty or any other levy. Further there is a specific restriction that the credit of any other levy cannot be utilized towards payment of KKC. It is interesting to note that such a restriction was absent in case of Education Cess (EC) or Secondary and Higher Education Cess (SHEC) which in fact enabled the use of credit of basic excise duty towards payment such EC and SHEC by many assesses. Such lack of fungibility makes KKC a cost for the manufacturers. This does not seem to be in sync with the promises of the Govt. to make India a manufacturing hub.

A probable solution to this issue could be to create a refund mechanism akin to the one in existence under Rule 5A (refund of CENVAT credit to units in specified areas) or Rule 5B (refund of CENVAT credit to service providers providing services taxed under reverse charge mechanism) of the CENVAT Credit Rules, 2004, unless it is a clear intention of the Government not to extend the benefit to manufacturers.

Point of taxation – Whether KKC can be levied for service prior to 1-6-2016 ?

There appears to be some confusion due to amendment to R.5 of Point of Taxation Rules, 2011. The amendment by way of insertion of Explanation 1 (from 1.3.2016) suggests that the new levy of services shall also be governed by this rule. The new levy of service in this context would be KKC. R.5 applies to where a service is taxed for the first time or there is a new levy on services, then, no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date (or to the extent the invoice has been issued and the payment received) when the service is taxed for the first time.

A possible interpretation of negative worded provision could be that it exempts services which are provided or to be provided after the new levy, if payment is received and the invoice is issued prior to the levy comes into existence. To that extent it can be said to be an exception of general R.3 of POTR. The harmonious reading of S.67A also suggest this interpretation. In any case, the rule framed under any provision of the law should sub-serve the provisions and cannot be sustained if it goes against the provision of the law.

Point of Taxation Rules, 2011 are accorded power u/s.67A as amended from 14.5.2016 which provides that rate of service tax in force or as applicable at the time when the taxable service has been provided or agreed to be provided. Thus, the FA, 1994 provides for levy of service tax only at the time when services are provided or agreed to be provided.

It is therefore clear that applicability of tax depends on the time when services are provided. In the present case, in respect of services provided on or before 31st May 2016, tax applicable on the date of provision of service will only have to be paid. Since KKC is applicable from 1st June 2016, it cannot be made applicable on services provided on or before 31st May 2016 by means of rule 5 of POTR since it is a settled legal principle that rule cannot override Section.

In case of payment under reverse charge mechanism KKC is payable in all taxable services. The point of taxation would be the date of issue of invoice though the payment is not made to the service provider. Thus, in respect of service provided up to 31st May 2016 and invoice is issued, KKC would not be levied even if payment is made on or after 1st June 2016 (R.7 of POTR refers).

Points to be noted in nutshell

  • KKC needs to be collected on the invoice separately, to be accounted separately in the books of account and paid separately under the accounting codes:

Accounting Code






  • KKC will also apply for the purpose of abatements and composition rates.

  • Eligibility of Refund on KKC :- Refund of this K KC shall also be allowed as the cenvat credit is there. Further, refund of this cess shall be allowed to Exporter of Service as well as Exporter of Goods as there is no restriction of its availment.

Service provided by Government and local authorities

Though the amendment was made by the Finance Act, 2015, any service provided by government or local authority has become taxable by virtue of substitution of word ‘Support Services’ by ‘any service’ in the negative list of service u/s. 66D(a) and deletion of the definition of support service in S.65B(49) made effective from 1.4.2016:

However, the under mentioned service provided by government or local authority remains taxable in the hands of the government or local authorities even if provided to a business entity:

  1.  Specified postal services (speed post, express parcel post, life insurance, and agency services provided).

  2. Service in relation to an aircraft or a vessel, service of transportation of goods or passengers (transportation of passengers by non air-conditioned stage carriage is now been placed under mega exemption notification). Thus, transportation of passengers by air-conditioned buses of State government or local authorities will now become taxable.
    Above services are exempt if provided to a non business entity or a business entity having turnover up to ` 10 Lakhs in the preceding financial year.

  3. Service tax is now liable to be paid on services provided by the government or local authority to a business entity having turnover above ` 10 lakhs in the preceding financial year and the liability of service tax is on the business entity under reverse charge mechanism. In view of the liability of payment of service tax the business entity needs to be very careful about applicability of service tax on government services. The TRU has come out with a detailed circular on 13th April 16 clarifying the leviability of service tax on certain services provided by the government / local authority as guidelines. Some of such services to be kept in mind are as follows:

Services not covered –

  • Passport, visa, travelling license, birth or death certificate;

  • Taxes, Cesses, duties, fines, penalties, composition fees which are not consideration for any particular service;

  • Services provided by government or local authority by way of tolerating non performance of a contract for which consideration in form of fines or liquidated damages is payable to government or local authority under such contract;

  • Registration fees for registration required under any law, testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under the law;

  • Services where the gross amount charged does not exceed ` 5,000/- including continuous supply of such service;

  • Assignment of right to use any natural resource where such right to use was assigned by the government or local authority before 1st April 2016, provided the consideration for such service is payable on one time charge basis in full upfront or installments;

  • Regulation of land use including change of such use, building approvals, utility services etc, as listed in Twelfth Schedule of the Constitution under the provisions of Article 243W (as exempted under Entry No.39 of Notification No. 25/2012 – ST);

  • Services provided by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution (as exempted under Entry No.60 of Notification No. 25/2012 – ST);

  • Services provided by Government by way of deputing officers after office hours or on holidays for inspection or container stuffing or such other duties in relation to import export cargo on payment of Merchant Overtime charges (MOT).”.

Services covered –

  • Activity undertaken by government / local authority for a consideration or performance of any activity for which an amount is charged (any amount, charges or fees charged as quid – pro – quo for any service rendered);

  • Any permission or license granted by the government or local authority on application of a business entity or payment of fees;

  • Assignment of any right for use of any natural resource (for e.g spectrum assignment, coal mine extraction etc) on periodical payment of royalty, other than consideration payable on one time charge payable up front or in installments (as exempted under Entry No.61 of Notification No. 25/2012 – ST);

  • Services provided by Government or a local authority by way of allowing a business entity to operate as a telecom service provider or use radio frequency spectrum from 1st April 2016 on payment of license fee or spectrum user charges;

Point of taxation in case of assignment of right in case of natural resource –

  1. When any payment in respect of such service becomes due as per the invoice or any other document issued by the government or local authority demanding such payment, or b) actual payment, whichever earlier, shall be the point of taxation. [Therefore, if the assignee / allottee opts for upfront payment then service Tax would be payable on the full value upfront. However, if the assignee opts for part upfront and remainder under deferred payment option, then service tax would be payable as and when the payments are due or made, whichever is earlier, however, the bills or invoice etc from the government / local authority should have been issued on such periodical basis].

Services tax on interest on deferred payment for use of natural resources

Where service tax is payable on interest charged by government or local authority where payment of assignment of natural resources is allowed to be made under deferred payment option, such interest will also be included for the purpose of considering taxable value (however, though clarified in the impugned circular, the inclusion of interest in the taxable value can be contested in view of the writer).

CENVAT credit of service tax paid on natural resources

In case service provided on one time charge basis (whether paid upfront or in installment), the credit shall be allowed in equal installments over a period of three years (amendment to cenvat credit rules by Notification No. 24/2012 – CE (NT) dtd. 13.4.2016)

In case service tax is paid on user charges, license fees, transfer fees, royalty etc the credit would be allowable in the year of payment.

Changes in CENVAT Credit Rules w.e.f. 1.4.2016

Amendments have also been made in CENVAT Credit Rules, 2004 so as to allow CENVAT credit to be taken on the basis of the documents specified in sub-rule (1) of rule 9 of CENVAT Credit Rules, 2004 even after the period of one year from the date of issue of such document in case of services provided by the government / local authority or any other person by way of assignment of right to use any natural resource [Fifth Proviso to sub-rule (7) of Rule 4 of CENVAT Credit Rules, 2004].

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