In the budget of 2015-16, service tax was imposed on all services provided by Government or local authority to business entity. This provision was not notified and was not made effective when other provisions were notified and made effective on 14-5-2015.
However, this provision has now been made effective from 1-4-2016.
The issues arising out of this change are discussed in this article.
All services provided by Government to business entity subject to serviced tax w.e.f. 1-4-2016
The negative list of services was reading as follows upto 1-4-2016 - Services by Government or a
local authority excluding the following services to the extent they are not covered elsewhere— (i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport (iii) transport of goods or passengers; or (iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities are not taxable services - Clause (a) of Negative List of section 66D of Finance Act, 1994 as existing during 1-7-2012 to 1-4-2016.
Presently, only support services provided by Government or local authority to business entity [except those in clauses (i), (ii) and (iii) above] are under reverse charge mechanism, i.e. the business entity is liable to pay service tax under reverse charge.
The words 'support services' have been replaced with 'any service', w.e.f. 1-4-2016. Thus, any service provided by Government to a business entity will be taxable, except those exempted or in negative list– amendment to section 66D(d)(iv) of Finance Act, 1994 w.e.f. 1-4-2016 [negative list of services].
The scope of 'any Government service' is likely to open pandora's box and its coverage is likely to be very wide.
What is 'service'
As per section 65B(44) of Finance Act, 1994, "Service" means any activity carried out by a person for another for consideration.
An activity which constitutes merely a transfer of title in goods or immovable property, by way of sale, gift or in any other manner is excluded from definition of 'service'.
What is 'consideration' ?
One essential requirement is that there should be 'consideration'.
Section 2(d) of Contract Act defines consideration as follows – 'When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise'.
In layman's terms, 'consideration' means quid pro quo i.e. 'something in return'. It is an advantage moving from one to another. The consideration can be a positive act or an abstinence from act (i.e. negative act). It can be in form of cash, goods or services. It can be past, present or future.
Consideration should be at the desire of promisor – The consideration should be at the desire of promisor However, it is not necessary that it must be for benefit of promisor. It can be for benefit of third person also.
Forbearance or abstinence can be consideration – 'Forbear' means abstain or desist from. It means forgoing one's legal right or claim - e.g. agreeing not to file a suit is a consideration.
Compromise or composition is consideration - A bona fide compromise is 'abstinence and return promise' and hence consideration. Similarly, composition with creditors is a 'consideration' as creditors agree to write off certain part of debt, in consideration of promise to pay the balance amount.
Consideration need not be adequate – Explanation 2 to section 25 of Contract Act states that mere inadequacy of consideration does not make a contract void, if consent of promisor was freely given.
Tax is not a 'service'
As per Article 366(28) of Constitution of India, 'taxation' includes the imposition of any tax or impost, whether general or local or special, and 'tax' shall be construed accordingly.
In view of the wide definition, in D.G. Goser and Co. (Agents) (P.) Ltd. v. State of Kerala AIR 1980 SC 271 (SC 5 member bench), it was observed that 'tax' in its widest sense includes all money raised by taxation. It includes taxes levied by Central or State legislatures, and also those known as 'rates', or other charges, levied by local authorities under statutory powers.
A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered - Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt AIR 1954 SC 282 * Har Shankar v. Dy Excise & Taxation Commissioner - AIR 1975 SC 1121 (Constitution bench). In this case, it was observed that essential characteristics of a tax are (i) Imposed under statutory powers without tax payer's consent and payment is enforced by law (ii) It is imposition for public purpose without reference to any special benefit to be conferred on the payer of tax and (iii) it is part of common burden, the quantum of imposition on tax payer generally depends upon his capacity to pay - quoted with approval in Indian Medical Association v. VP Shantha [1995] 6 SCC 651 3 member bench * Dewan Chand Builders & Contractors v. Union of India [2012] 1 SCC 101 (SC) * Delhi Race Club Ltd. v. Union of India [2012] 347 ITR 593/24 taxmann.com 350/209 Taxman 83 (Mag.) (SC).
Tax in its wider sense includes all imposts. Imposts in the context have following characteristics – (i) The power to tax is an incident of sovereignty (ii) 'Law' in the context of Article 265 means an Act of legislature and cannot comprise of an executive order or rule without express statutory authority (iii) The term 'tax' under article 265 read with Article 366(28) includes imposts of every kind viz. tax, duty, cess or fees (iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a 'tax' in its technical sense as an impost, general, local or special - CIT v. McDowell & Co. Ltd. [2009] 314 ITR 167/180 Taxman 514 (SC) [In this case, it was held that bottling fees payable for acquiring right of bottling IMFL under State Excise Act and Rules, is not a 'tax' within the meaning of section 43B of Income Tax Act].
In Empire Industries Ltd. v. Union of India 1985 taxmann.com 426, it was observed that taxes are not in nature of a penalty or contractual obligation but rather a means of apportioning the costs of Government among those who benefit from it.
Difference between tax and fee
Fee is a charge for a special service rendered to individuals or a class by some governmental agency. A fee is a sort of return or consideration for services rendered, though it may not be based upon expenses or costs incurred by Government. Fee is a payment for a special benefit or privilege [e.g. licence fees]. On the other hand, tax is levied as a part of common burden under statutory powers. The imposition is made for public purposes without any special benefit conferred on the payer of tax. It is not a payment for service rendered - Om Parkash Agarwal v. Giri Raj Kishori [1987] 164 ITR 376 (SC) - similar views in Sri Lakshmindra Tirtha Swamiar (supra).
In Jindal Stainless Ltd. v. State of Haryana[2006] 152 Taxman 561 (SC) (SC 5 member bench), it has been held that regulatory fees can be only compensatory in nature – quoted in Jantia Hill Truck Owners Association v. Shailang Area Coal Dealer & Truck Owner Association [2009] 8 SCC 492.
Main difference in tax and fee is source of power. A charge or fee, if levied for purpose of raising revenue under taxing power is a 'tax'. Similarly, imposition of fees for the primary purpose of regulation and control may be classified as fees, as it is in exercise of 'police power' i.e. power to regulate, control and prohibit, but if revenue is the primary purpose and regulation is merely incidental, it is a 'tax' – Calcutta Municipal Corpn. v. Shrey Mercantile (P.) Ltd. AIR 2005 SC 1879 (SC 3 member bench).
Further, even in case of fees, 'quid pro quo' in strict sense in not necessary. There should be a 'reasonable relationship' between levy of fee and the services rendered. Exact mathematical exactitude is not necessary - Sreenivasa General Traders v. State of AP [1983] 3 SCR 843 (SC) - followed in Municipal Corpn., of the City of Baroda v. Babu Bhai Himat Lal 1990 taxmann.com 1554 (SC).
In Agricultural Marketing Committee v. Rajam Jute and Oil Millers Association [2003] 131 STC 472 (SC) it was observed that though quid pro quo between levy of fees and facilities provided is necessary, exactitude in such matters is neither required nor possible. Traditional view about actual quid pro quo has undergone a sea change. The extent of service/amenities cannot have correlation with the fee levied. Secondly, it is not that all required services must be in place before a fee can be levied.
Similar views have been expressed in Sri Krishna Das v. Town Area Committee, 1990 taxmann.com 1508 (SC) 183 ITR 401 (SC) * Kewal Krishna Puri v. State of Punjab 1982 taxmann.com 364 (SC Constitution Bench) * Southern Pharmaceuticals v. State of Kerala AIR 1981 SC 1863 * * Dewan Chand Builders v. Union of India [2011] 274 ELT 161 (SC) * Delhi Race Club Ltd.supra.
Service tax can be imposed on fee but not tax
Based on above principles, it can be stated that service tax can be imposed on fee as there is 'consideration', but not on 'tax' as there is no 'consideration'.
If a levy is unilaterally imposed, it is not 'at the desire of promisor' and then service tax cannot apply, as there is no 'consideration'.
However, if some amount or fee is payable only when someone applies (actually or through an act), service tax should be applicable.
House property tax – Service tax should not be imposed as there is no 'consideration'.
License, authorization, registration or permission is a privilege granted by Government or local authority
License, authorization, registration or permission is a privilege granted by Government or local authority to the applicant. It is an activity carried out by Government for consideration. It squarely falls within the definition of 'service'
Quid pro quo is not required for license fee or registration charges
In Har Shankar v. Dy Excise & Taxation Commissioner (supra) (Constitution bench), it was observed that fee is a charge for special services rendered to individuals by some Governmental agency and such charge has an element of quid pro quo. However, 'licensing fee' where consideration for parting with its (Government's) privileges (in this case - rights in regard to intoxicants through medium of auctions or the 'fixed fees') need not bear quid pro quo. - similar views in State of Haryana v. Jage Ram AIR 1980 SC 2018 and State of UP v. Sheopat Rai AIR 1994 SC 813, where it was held that licence fee for retail vend of foreign liquor connotes consideration received for parting with Government's exclusive privilege to deal in intoxicants and such fee is neither a tax nor a fee nor an excise duty nor cess.
Licence fee is not intended to be a fee for services rendered - Corporation of Calcutta v. Liberty Cinema AIR 1965 SC 1107 (Constitution Bench) Licence fees are regulatory fees. These are not charged for any services and hence existence of quid pro quo is not necessary. However, the fee imposed should not be excessive.
License fee is regulatory in nature. There is no requirement of quid pro quo - Delhi Race Club Ltd. (supra).
In A P Paper Mills Ltd. v. Government of AP [2000] 8 SCC 167 (SC 3 member bench), it was held that factory license fee is a regulatory fee and not a fee for any special service rendered. The purpose is to enable the authorities to supervise, regulate and monitor activities relating to factories with a view to secure proper enforcement of the statutory provisions. Since the licence fee is regulatory in character, quid pro quo in strict sense does not apply.
Motor vehicle registration charges
The motor vehicle registration charges are partly regulatory and partly compensatory. It is permission to run vehicle on road. It is activity for consideration. These should be subject to service tax.
Charges for registration, inspection
A business entity is required to pay various types of inspection charges and fees e.g. PFadministration charges, document registration charges, factories license fees, Motor Vehicles Inspection charges, Building inspection fee and what not.
These charges are paid as the person paying these charges is given right to enjoy various facilities.
When a person sets up a factory, purchases a vehicle, constructs a building or employs person, by necessary implication, he agrees to pay necessary fees.
It can be argued that thesecharges are not at the 'desire of promisor' – rather against the desire of promisor. However, the fact is that he is willing to pay those charges as he gets privileges and advantages after paying those charges. For example, RTO registration charges grant him right to run vehicle on roads. Hence, it cannot be said that these are against his desire.
Fee for getting authorisations, permissions, licenses
A business entity is required to pay fees for getting various authorisations, permissions, licenses etc. for various purposes like import and export etc.
Fee is a charge for a special service rendered to individuals or a class by some governmental agency. A fee is a sort of return or consideration for services rendered, though it may not be based upon expenses or costs incurred by Government. Fee is a payment for a special benefit or privilege [e.g. licence fees]. On the other hand, tax is levied as a part of common burden under statutory powers. The imposition is made for public purposes without any special benefit conferred on the payer of tax. It is not a payment for service rendered - Om Parkash Agarwal (supra) - similar views in Commissioner, Hindu Religion Endowment v. Sri Lakshmindra Tirtha Swamiar of Sri Shirur Mutt (supra).
In Jindal Stainless Ltd. (supra) (SC 5 member bench), it has been held that regulatory fees can be only compensatory in nature – quoted in Jantia Hill Truck Owners Association (supra).
Main difference in tax and fee is source of power. A charge or fee, if levied for purpose of raising revenue under taxing power is a 'tax'. Similarly, imposition of fees for the primary purpose of regulation and control may be classified as fees, as it is in exercise of 'police power' i.e. power to regulate, control and prohibit), but if revenue is the primary purpose and regulation is merely incidental, it is a 'tax' – Calcutta Municipal Corpn. (supra) (SC 3 member bench).
Fee – whether compensatory fees or regulatory fee should be subject to service tax
On the basis of aforesaid decisions, it can be said that 'fees' for rendering a service should be subject to service tax. The business entity has to apply for the same.
Even in case of regulatory fees, he pays the same for getting some privileges which he will not otherwise get. Thus, there is 'consideration'.
Filing fees with Registrar of Companies for registration of documents
The fees payable are of course statutory. However, the fees paid are to get privileges to run business as a 'company'. Hence, there is quid pro quo. Service tax should be payable.
MOT charges payable to excise and customs authorities
A business entity is required to pay MOT (Merchant Overtime Charges) to excise and customs authorities for export and import clearances [These are in addition to the unofficial charges payable to them].
These can some under 'services provided by Government', as these are 'at the desire of business entity' and service tax should be payable.
Charges paid to Government for coal blocks, spectrum
Government has collected and is also in process of collecting huge amounts by allocation of coal blocks, telecom spectrum etc. Service tax would be payable if it is 'service'.
Really, these payments are in nature of payment of royalty to Government for use of natural resources.
Royalty, a payment reserved by grantor of a patent, lease of a mine or similar right, and payable proportionately to the use made of the right by the grantee. It is usually a payment of money, but may be a payment in kind, that is, part of the produce of the exercise of right – State of Orissa v. Titaghur Paper Mills Co. Ltd. AIR 1985 SC 1293.
Royalty is a payment reserved by the grantor of a patent, lease of a mine or similar right, and payable proportionately to the use made of the right by grantee - State of Himachal Pradesh v. Gujarat Ambuja Cement Ltd. 2006 taxmann.com 1823 (SC) (SC 3 member bench).
Royalty is a tax on forest produce grown on a forest land – District Council of Joweri Autonomous District v. D Wet Singh AIR 1986 SC 1930.
Thus, payment of royalty is for getting specified permission/privilege from Government. It cannot be said that there is no 'consideration'
Hence, service tax should be applicable.
Charges for providing amenities
If Government levies some charges for providing amenities, these should be subject to service tax.
However, charges for supplying electricity or water should not be subject to service tax, as these are 'goods'. Supply of goods cannot be a 'service'.
Is payment of penalty or late fee a 'service'?
Penalties are payable for violation of tax laws. Late fee is payable for late filing of returns etc.
It can be argued that the amount paid is for 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' and is a 'declared service' under section 66E(e) of Finance Act, 1994.
Really, while imposing penalty or late fee, there is no promise by Government (express or implied) that Government will not take any further penal action.
Imposition of penalty itself means Government is not 'tolerating an act or situation'. If it was tolerating the Act, penalty or late fee would not have been imposed.
Composition fee and amount paid for settlement of case
Fee paid for composition of offence may be subject to service tax, since, in case of composition fee, there is consideration that further criminal action will not be taken.
Even amount paid in settlement by order of Settlement Commission is for consideration that further criminal proceedings will not be initiated.
Such payments can come under 'refrain from act' which is a 'declared service'. This may be subject to service tax.
Whether service tax will be payable on Stamp duty?
One interesting issue is whether service tax will be payable on stamp duty or court fees.
Both are no doubt statutory levies, but on payment of these amounts, the person gets some privileges or advantages. Hence, it is very difficult to say that there is no 'consideration' at all.
It can be argued that stamp duty is 'fee' and not 'tax'.
Really, this appears to be a border line case.
What about court fee and fees paid to Tribunals?
Court fee cannot be said to be a tax. However, it is not levied by Government and should not be subject to service tax.
In any case, fees taken in any Court or tribunal established under any law for the time being in force have been specifically excluded from definition of 'service' itself, vide clause (c) of section 65B(44) of Finance Act, 1994 and hence issue of service tax cannot arise.
Audit by C&AG
Audit is conducted by C&AG under section 18 of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1997.
I am now aware whether the Government companies have to pay audit fees to C&AG. However, if audit fees are payable, these should be subject to service tax.
Earlier views that statutory activities undertaken by sovereign/public authorities is not 'service'
CBE&C Circular No. 89/7/2006-ST dated 18-12-2006 – reiterated in Ref Code 999.01/23.8.07 of CBE&C Circular No. 96/7/2007-ST dated 23-8-2007, stated as follows –
Many sovereign/public authorities (i.e. agencies constituted/ set up by Government) perform various functions and duties which are statutory in nature (e.g. Regional Transport Officer issuing fitness certificate, Factories inspector inspecting factories, Directorate of Boilers inspecting and certifying boilers etc.). These are mandatory and statutory functions. It cannot be said that these authorities are providing any service to any individual for consideration. Hence, these are not taxable services. However, if these authorities provide any non-statutory service, those will be liable to service tax, if the service falls within the definition of taxable service.
State Government department/agencies implementing programmes of Central Government cannot be said to be providing any service to Central Government. Such activity cannot be subject to service tax – MF(DR) circular No. 125/7/2010-ST dated 30-7-2010.
Statutory levy cannot be subject to service tax – Port Officer, Gujarat Maritime Board v. CCEST (2014) 68 VST 257 (CESTAT).
In State of Madhya Pradesh v. CCE [2007] 6 STT 467 (New Delhi - CESTAT), State Government was collecting supervision charges on activities relating to liquor as per statutory provisions. It was held that State Government is not providing any service.
In Kerala State Electricity Board (T.M.R. Division) v. CCE (2007) 11 STT 361 (CESTAT - Bang.) (SMB), it was held that testing which was carried out in terms of statutory requirement is not liable to service tax.
In Kerala State Insurance Department v. Union of India [2013] 30 taxmann.com 324/39 STT 227 (Ker.), it was held that activities under statutory obligation, relating to life insurance coverage to Government employees and general insurance coverage for assets of Government are not taxable, but insurance of commercial institutions and individuals is taxable.
In Electrical Inspectorate/Chief Electrical Inspector to Government of Karnataka v. CST [2008] 17 STT 161 (Bang. - CESTAT), it was held that sovereign activity of inspection and certification of electrical installations under Electricity Act performed by State Government undertaking is a sovereign activity and service tax cannot be levied.
Certification of film by Central Board of Film Certification (termed as 'censor') is a statutory requirement. Activity performed by sovereign/public authority under provisions of law do not constitute taxable service under 'technical testing or certification' – DGST letter No. V/DGST/30-Misc.-185/2008/429 dated 16-1-2009 [20 STT 22 (St)]
Statutory body providing guidance and assistance as per statutory obligation without acting as a commercial concern is not liable to service tax – CCE v. MP State Dairy Co-operative Federation [2009] 23 STT 23 (Bang. - CESTAT).
Mandatory charges under a law or statutory order is not service if there is no direct link between service provided and consideration received - Apple and Pear Development Council v. CC&E [2012] 36 STT 678/25 taxmann.com 274 (ECJ).
Activity of issuing/allocation of telecommunication licenses by regulatory authority is not an economic activity. Such activity is with a view to control and regulate use of electromagnetic frequencies. Though payment is made, it is not a service - Hutchison 3G UK Ltd. v. CC&E (2012) 37 STT 729/28 taxmann.com 116 (ECJ) * T-Mobile Austria GmbH v. Republic of Austria [2012] 37 STT 749/28 taxmann.com 115 (ECJ).
Audit by C&AG is not support service - Audit is conducted by C&AG under section 18 of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 197. Such services are performed by CAG under the statute and cannot be performed by the business entity themselves and thus do not constitute support services - Para 4.1.7 of CBE&C's 'Taxation of Services : An Education Guide' published on 20-6-2012
Are these decisions and circulars valid after 1-4-2016?
These decisions and circulars are prior to introduction of definition of 'service' , which is very broad. In my view, these decisions and circulars may not be valid for services provided by Government after 1-7-2012.
Exemption to services provided to small business entities
As per Sr No. 48 of Notification No. 25/2012-ST dated 20-6-2012 [inserted w.e.f. 1-4-2016], services provided by Government or a local authority to a business entity with a turnover upto rupees ten lakhs in the preceding financial year are exempt from service tax.
Most probably, other business entities will be made liable to pay service tax under reverse charge. Thus, practically, every business entity of even moderate size will be covered under service tax net.
Support service
"Support services" means infrastructural, operational, administra, tive, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis [section 65B(49) of Finance Act, 1994 inserted w.e.f. 1-7-2012.]
This definition is proposed to be omitted by section 107(h) of Finance Act, 2015. However, this section has not been notified when other provisions of Finance Act, 2015 were made effective from 1-6-2015. The definition is also not made effective on 18-2-2016 when provision relating to 'any service' were made effective. Thus, till notified, this definition is valid and effective.
However, the words 'support services' in section 66D(a) of Finance Act, 1994 have been replaced by 'any service'. Hence, the definition of 'support service' is not relevant w.e.f. 1-4-2016, so far as services provided by Government are concerned.
Whether reverse charge will apply in case of these services?
At present, the business entity is liable to pay service tax under reverse charge in respect of support services provided by Government.
Whether reverse charge will apply to other services provided by Government or Government department itself will be made liable is not clear.
As per the notification No. 30/2012-ST dated 20-6-2012 as it stands today, business entity is liable to pay service tax under reverse charge only in case of support services provided by Government.
Unless this notification is suitably amended, reverse charge will not apply. However, in my opinion, the notification will be suitably amended to provide for reverse charge.
Conclusion
There is no doubt that the issues are litigation prone and are subject to various interpretations.
My views are summarized below, but there is surely issues are subject to different interpretations.
Principally, where a person has to make application to Government for license/permission/ registration/ certificate etc. (either actual or through course of dealings), service tax should be payable as it is 'at the desire of promisor'.
Tax and penalty are unilateral impositions and not 'at desire of promisor'. Hence, service tax should not apply.
Court fee and fees paid to Tribunal are excluded from definition of 'service' itself and hence there cannot be question of service tax.
License fees, registration fees, motor vehicle registration etc. are regulatory and are used as revenue generation (e.g. liquor license, factory licnese). However, they do grant some privileges to the payee and hence are for 'consideration'.
PF administration fees, motor vehicle inspection etc. are as per statutory requirements, but they do grant certain privileges and hence are for 'consideration'.
Payment of 'royalty' to Government for natural assets like coal blocks, spectrum etc. are surely for consideration of getting permissions and should be subject to service tax.
MOT (Merchant Overtime Charges) paid to excise and customs authorities [besides unofficial charges], fees paid for getting licenses, authorisations, permissions, etc. which are compensatory in nature for services rendered, should be subject to service tax.
Penalty, fee for late filing of return etc. should not fall within definition of 'service', as it is not 'at the desire of promisor'.
However, composition fees, amount paid as per order of Settlement Commission are for 'consideration' and service tax pay be payable.
There should not be service tax on income tax, house property tax, land revenue, etc. as none of these can be said to be 'at desire of promisor'.
Stamp duty appears to be a border line case, as it is difficult to say that there is no consideration.
Mostly, service tax will be payable on services provided by Government, under reverse charge. If so, a business entity of even moderate size will get covered under service tax net.
Since
issues are highly litigation prone, whatever the assessee intends or
decides to do, it is advisable to make full disclosure to department to
avoid charge of suppression of facts and willful misstatement.
No comments:
Post a Comment