Roll out of Swachh Bharat Cess before GST. Is it a bad omen for India Inc.?

Narendra Modi, Prime Minister of India, kicked-off the Swachh Bharat Abhiyan with a key objective of uplifting hygiene and sanitation in both urban as well as rural areas in a bid to improve the overall quality of life. Since its rollout, the government has poured in a considerable amount of funds on this noble initiative.

For the fiscal year 2015-2016, the Modi government has allotted a whopping Rs 3625 crores towards the Swachh Bharat Abhiyan, which is a straightaway 27% increase from the previous fiscal year. The surge in allotted budget is a clear indicative of the government’s intentions i.e. Swachh Bharat Mission is here to stay! To add up, the government also has released around 94% of the allotted funds allocated for the same the previous year.

Thus, with the aim to promote and fund the Swachh Bharat initiative further, Central Government of India has decided to levy additional cess tax known as Swachh Bharat Cess aka SBC that will be levied on all taxable services.

The new levy is a straight 0.5% increase in the previous 14% making it 14.5% to be applicable from November 15. Swachh Bharat Cess will be calculated similarly we compute Service tax. However, SBC is not applicable on services that are totally excluded from service tax or the ones that come under the negative list of services.

Swachh Bharat Cess would be levied separately on your invoice. For instance, you dine at a restaurant and the bill comes as Rs 1000. As usual, the service tax calculated would be 40% on the total bill meaning the service tax rate would be Rs 56 (14%*40%*1000). But things would be a bit different from November 15, since you will have to shell out additional cess on service tax in the form of Swachh Bharat cess. So now after the inclusion of 0.5% SBC, service tax rate comes to Rs 58 (14%+0.5%)*40%*1000. Now, the total bill that you ought to pay comes to Rs 1058, wherein SBC would reflect as a separate item.

Here comes the gloomiest part of Swachh Bharat cess i.e. it is exempted from the CENVAT credit input. Thus, taxpayer won’t be liable to avail the perks of CENVAT credit by paying the newly levied cess. This will increase the service cost for both services providers as well as manufacturers across the nation. The new tax levy would also trigger a cascading effect in the form of increased tax burdens on end consumers.

For a few service providers such as lottery selling agents, FOREX distributor or seller, life insurers and air travel agents, service tax would be calculated by using alternate tax rates. Here, the Swachh Bharat cess will be calculated using the following formula:

Amount to be paid as service tax (using the alternate rates)* 0.5%/14%

With the rollout of GST (Goods and Services Tax) approaching quick, one might argue that the government is attempting to sweep up the revenue neutral rate by increasing the existing tax rates. However, the main aim of GST is to merge different State as well as Central taxes into one single tax system to curb the cascading effects. But unfortunately, Swachh Bharat cess nullifies input credit thus, paving way for the onset of cascading effects. This is why the introduction of Swachh Bharat cess before the rollout of GST may not sound a good omen for India Inc. Moreover, increased tax rates minus the provision for input credit may trigger inflation in the long run. Nevertheless, it is the end consumers, who would have to endure the most from Swachh Bharat cess.