14 Nov 2015 17:37 IST

All you wanted to know about Swachh Bharat Cess

The 0.5 per cent cess for Swachh Bharat has made both, common man and businesses, unhappy

Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes”.

Well, now this connotation can be extended to cess as well!

Last week, the Ministry of Finance issued a circular, stating that the government has decided to impose a Swachh Bharat cess (SBC) at the rate of 0.5 per cent on all services presently liable to service tax, with effect from November 15, 2015. This implies that for every ₹100 worth of taxable services, you will be taxed 50 paise as SBC.

And the proceeds from this cess will be exclusively used for Swachh Bharat initiatives. The statement proclaimed, “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat (sic).”

Swachh Bharat is among the major initiatives undertaken by Prime Minister Narendra Modi’s government, and has sparked a major drive to ensure cleanliness across India. The Government, in Budget 2015-16, estimated to collect over ₹2.09 lakh crore from service tax.

What is service tax?

Service tax is a tax levied by the Central Government, which you pay for certain services. It is the end user of the service who pays this tax. In June, the government had increased the service tax rate to 14 per cent (inclusive of all cess) from 12.36 per cent earlier, making services more expensive for the common man. And now, with the SBC, it will go up from 14 per cent to 14.50 per cent.

Thankfully, the 0.5 per cent cess is much lower than the rate that was mentioned in the Finance Bill this year. In February 2015, the Bill had enabled a provision to empower the Centre to impose SBC on all or any of the taxable services, at a rate of 2 per cent!

What it means for us and the government

Any service that attracts service tax will now become more expensive. The added cess means that for all your restaurant bills, air tickets, mobile bills, essential financial services, insurance and broking services, and for similar other day-to-day essential services that you, a common man depends on, you will have to pay more.

All services that are exempted from service tax presently, will also be exempt from the SBC. The clean India cess shall be calculated on abated value or value arrived at under the service tax rules prescribed. It shall be paid even when service tax is given under reverse charge basis. The additional cess is expected to yield the government an additional revenue of ₹400 crore (approximately) during the remainder of the current fiscal year.

Why SBC is undesirable

Levy of SBC is one of the few issues whose certainty was not questioned, but disliked by people at large. There are quite a few reasons why SBC is deemed unpleasant amongst business communities as well as common men.

From a common man’s perspective, his thoughts will linger over the statement released in this regard: “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat.”

That the Swacch Bharat Abhiyaan is an important initiative for the government is obvious. And since that is indeed the case, then should it not have the first charge on the government’s revenues? Why is it being financed through a cess? If they look at cess as a definitive means of achieving the well being of the state, then we should have cess for every initiative, such as Pollution Control cess, afforestation cess, and the likes.

The alternatives

Economic Survey 2014 termed “cess” as a bad tax and commented that such “bad tax”, if withdrawn, will boost investments and growth in GDP. Cess is regressive by nature, because any cess levied essentially ends up taxing the same set of people. The Government should improve the ratio of income tax paying population to the total population, instead of levying SBC.

Pursuant to the Union Budget, Swach Bharat Kosh was set up to attract funds from various entities, including corporates, for activities related to Swachh Bharat initiative. This treasury of sorts was in addition to the funds already allotted for the initiative. The Government can thus augment funds by increasing the CSR limits of the Corporates, instead of levying SBC.

Any new tax, as a cess, adds to the tax system’s complication; and this keeps people away from paying taxes. Further, in the Indian scenario, a cess tends to be more of a permanent nature than ad-hoc, as it should be. The case in point being education cess on income tax; it has been around for a while now, bamboozling us, as if education is not important enough to be financed out of the primary revenues of the government.

Why the businessmen are unhappy

From the perspective of business communities, it should be noted that significant investment has been made by all institutions, in June 2015 to update their billing systems for accommodating the new rate of Service Tax. Now, another upgradation to the billing system in the middle of the month to ensure compliance will only make them unhappy.

Further, the Centre has not notified Cenvat Credit eligibility of such cess under the Cenvat Credit Rules, 2004. Therefore, as of now, no such credit can be availed for the SBC paid. In fact, there is lack of clarity of Cenvat Credit used for payment of SBC.

All said and done, SBC has been implemented for a wonderful initiative to clean up the nation and build a healthier, more sanitised society. Now it shall be the prerogative of the common man to act responsibly and ensure a cleaner India, in addition to their monetary contribution by way of SBC.