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.