The striking difference between the Service Tax and Income Tax is
that under Income Tax Government is not included in the definition of
person and, thus, is not a taxable entity. However, under
the Service Tax as per section65B(37) of the Finance Act, 1994 person
includes Government and, thus, the Government is a taxable entity and
the services provided by them, unless
included in negative list and Mega Exemption Notification, are taxable. Further, the term "Government" which was not defined in the Act or any notification has now been defined by means of a new section 65B(26A).
However, many of the services provided by the Government or local authorities are in the negative list. Generally, only those services are taxed where similar or substitutable services are provided by private entities.
* Substituted by "any service " by the Finance Act, 2015 w.e.f. 1-4-2016.
Accordingly, apart from specified services of the Department of Post, services in relation to aircraft or vessel or transportation of goods or passengers, only the support services provided to business entities were excluded from the negative list. Services provided by the Government in terms of sovereign right to business entities, which are not substitutable in any manner by any private entity, were not support services, e.g., grant of mining or licensing rights and, thus, not exigible to service tax.
However, the services provided by Police to PSUs or Corporate entities or sports events held by private entities, being support services as similar services can be provided by private entities and would be taxable.
In this regard it is important to note the following terms –
Support Service of Government/Local Authority covered under full reverse charge mechanism –
The provisions regarding Reverse Charge Mechanism are encapsulated under rule 2(1)(d) of the Service Tax Rules, 1994, read with section 68(2) of the Finance Act, 1994 and Notification No. 30/2012-ST, dated 20-6-2012 (as amended).
As per rule 2(1)(d) (i) (EE) of the Service Tax Rules, 1994, the person liable for paying service tax in relation to support services provided or agreed to be provided by Government or local authority except:
In consonance to above Notification No. 30/2012-ST, dated 20-6-2012 also
prescribes that 100% of service tax in respect to support services
provided (except renting of immovable property) by Government or Local
Authority would be payable by the service recipient.
Accordingly, all services provided by the Government or local authority to a business entity, except the services that are specifically exempted or covered by any another entry in the Negative List shall be liable to service tax.
Amended section 66D(a) is as under:-
“Services by Government or a Local Authority excluding the following services to the extent they are not covered elsewhere (iv) any service, other than those covered by clauses (i) to (iii) above, provided to business entities.”
Hence ANY SERVICE by Government or a Local Authority except as exempt or in negative list shall be exigible to Service Tax.
Consequential amendment to Reverse Charge provisions - In parity with the above proposed change in the negative list, the Union Budget, 2016 vide Notification No. 18/2016-ST dated March 1, 2016, has amended Reverse Charge Notification No. 30/2012-ST dated June 20, 2012 (“the Reverse Charge Notification”), to delete the words “by way of support services” appearing at Sl. No. 6 of the Table in the said notification with effect from April 1, 2016.
Corresponding changes have also been made in Rule 2(1)(d)(i)(E) of the Service Tax Rules and Section 65B(49) ofthe Finance Act containing definition of the term ‘support services’ is also deleted.
Hence all services by Government or a Local Authority except as exempt or in negative list, shall be under reverse charge mechanism and hence would effect all entities.
Impact of the amendment on the negative list - Services which were provided by Government in terms of their sovereign right to business entities and which were not substitutable in any manner by any private entity, were not support services, e.g., grant of mining or licensing rights and, thus, were not taxable. But from the date the said amendment in the negative list is enforced whereby "any service" and not only "support services" are taxable suchservices, viz., grant of mining rights or licensing rights would also become taxable, unless same are covered elsewhere in the negative list or mega exemption notification.
However, all payments to Government or Local Authority would not be taxable. In order to trigger taxability, a "service", i.e., activity for a consideration should be provided by the Government. The term 'service' as we know is defined in section 65B(44) of the Finance Act, 1994.
For Eg. - Government has imposed a fine or penalty for violation of a provision of law. It would not be regarded as a service because to be a service, an activity has to be carried out for a consideration. Therefore, fines and penalties which are the legal consequences of people's actions are not in nature of consideration for an activity.
included in negative list and Mega Exemption Notification, are taxable. Further, the term "Government" which was not defined in the Act or any notification has now been defined by means of a new section 65B(26A).
However, many of the services provided by the Government or local authorities are in the negative list. Generally, only those services are taxed where similar or substitutable services are provided by private entities.
- POSITION BEFORE AMENDMENT IN 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; |
Accordingly, apart from specified services of the Department of Post, services in relation to aircraft or vessel or transportation of goods or passengers, only the support services provided to business entities were excluded from the negative list. Services provided by the Government in terms of sovereign right to business entities, which are not substitutable in any manner by any private entity, were not support services, e.g., grant of mining or licensing rights and, thus, not exigible to service tax.
However, the services provided by Police to PSUs or Corporate entities or sports events held by private entities, being support services as similar services can be provided by private entities and would be taxable.
In this regard it is important to note the following terms –
| (26A) | "Government" means the Departments of the Central Government, a State Government and its Departments and a Union territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made thereunder |
| "local authority" means- |
(a)
| a Panchayat as referred to in clause (d)of article 243 of the Constitution; | |
(b)
| a Municipality as referred to in clause (e) of article 243P of the Constitution; | |
(c)
| a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund; | |
(d)
| a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006); | |
(e)
| a regional council or a district council constituted under the Sixth Schedule to the Constitution; | |
(f)
| a development board constituted under article 371 of the Constitution; or | |
(g)
| a regional council constituted under article 371A of the Constitution; |
The provisions regarding Reverse Charge Mechanism are encapsulated under rule 2(1)(d) of the Service Tax Rules, 1994, read with section 68(2) of the Finance Act, 1994 and Notification No. 30/2012-ST, dated 20-6-2012 (as amended).
As per rule 2(1)(d) (i) (EE) of the Service Tax Rules, 1994, the person liable for paying service tax in relation to support services provided or agreed to be provided by Government or local authority except:
| (1) | renting of immovable property, and | |
| (2) | services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory, is the recipient of such service. |
- POSITION AFTER AMENDMENT IN 2016
Accordingly, all services provided by the Government or local authority to a business entity, except the services that are specifically exempted or covered by any another entry in the Negative List shall be liable to service tax.
Amended section 66D(a) is as under:-
“Services by Government or a Local Authority excluding the following services to the extent they are not covered elsewhere (iv) any service, other than those covered by clauses (i) to (iii) above, provided to business entities.”
Hence ANY SERVICE by Government or a Local Authority except as exempt or in negative list shall be exigible to Service Tax.
Consequential amendment to Reverse Charge provisions - In parity with the above proposed change in the negative list, the Union Budget, 2016 vide Notification No. 18/2016-ST dated March 1, 2016, has amended Reverse Charge Notification No. 30/2012-ST dated June 20, 2012 (“the Reverse Charge Notification”), to delete the words “by way of support services” appearing at Sl. No. 6 of the Table in the said notification with effect from April 1, 2016.
Corresponding changes have also been made in Rule 2(1)(d)(i)(E) of the Service Tax Rules and Section 65B(49) ofthe Finance Act containing definition of the term ‘support services’ is also deleted.
Hence all services by Government or a Local Authority except as exempt or in negative list, shall be under reverse charge mechanism and hence would effect all entities.
Impact of the amendment on the negative list - Services which were provided by Government in terms of their sovereign right to business entities and which were not substitutable in any manner by any private entity, were not support services, e.g., grant of mining or licensing rights and, thus, were not taxable. But from the date the said amendment in the negative list is enforced whereby "any service" and not only "support services" are taxable suchservices, viz., grant of mining rights or licensing rights would also become taxable, unless same are covered elsewhere in the negative list or mega exemption notification.
However, all payments to Government or Local Authority would not be taxable. In order to trigger taxability, a "service", i.e., activity for a consideration should be provided by the Government. The term 'service' as we know is defined in section 65B(44) of the Finance Act, 1994.
For Eg. - Government has imposed a fine or penalty for violation of a provision of law. It would not be regarded as a service because to be a service, an activity has to be carried out for a consideration. Therefore, fines and penalties which are the legal consequences of people's actions are not in nature of consideration for an activity.
- VARIOUS DOUBTS CLEARED
The definition of the term ‘service’ under Section 65B(44) of the Finance Act is
wide enough to cover any activity carried out by a person for another
for consideration, effective from April 1, 2016, all Governmental
services would be exigible to Service tax. Further there are a series
of notifications on issues of exemptions, points of taxation, etc on the
subject. There is also a circular which clarifies various issues on the
subject matter.
An attempt has been made to compile the doubts and clarifications and in this article as follows -- A question may arise as to when all services have been excluded from negative list, then what is use of retaining section 66D(a)?
- Amendment in the Mega Exemption Notification to exempt certain services provided by Government or a local authority to a Business entity
Notification No. 22/2016-ST dated April 13, 2016, has amended the Mega Exemption Notification No 25/2012, to amend/insert the Entries in the following manner:
| Relevant Entry |
Particulars of Exemption
|
Exemption Amended
| |
| Entry No. 39 | After
the words “Services by, the words “Government, a local authority or”
shall be inserted. The amended Entry No. 39 reads as under: “Services by Government, a local authority or governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution.” |
New Exemptions Provided
| |
| Entry No. 54 | Services provided by Government or a local authority to another Government or local authority. Provided that nothing contained in this Entry shall apply to services specified in sub-clauses (i),(ii) and (iii) of Section 66D(a) of the Finance Act, i.e. Tax shall continue to be payable on services by the Department of Posts other than as specified, services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport and transport of goods or passengers |
| Entry No. 55 | Services provided by Government or a local authority by way of issuance of passport, visa, driving licence, birth certificate or death certificate |
| Entry No. 56 | Services provided by Government or a local authority where the gross amount charged for such services does not exceed ₹ 5000/-
|
| Entry No. 57 | Services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract. Hence, fines and penalty chargeable by Government or a local authority imposed for violation of a statute, bye-laws, rules or regulations are not leviable to Service Tax. |
| Entry No. 58 | Services provided by Government or a local authority by way of-
(a) registration required under any law for the time being in force;
(b) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under any law for the time being in force
However vide circular 192/02/2016-ST, DATED 13-4-2016, It
is clarified that any activity undertaken by Government or a local
authority against a consideration constitutes a service and the amount
charged for performing such activities is liable to Service Tax. It is
immaterial whether such activities are undertaken as a statutory or
mandatory requirement under the law and irrespective of whether the
amount charged for such service is laid down in a statute or not. As
long as the payment is made (or fee charged) for getting a service in
return (i.e., as a quid pro quo for the service received), it has to be
regarded as a consideration for that service and taxable irrespective of
by what name such payment is called. It is also clarified that Service
Tax is leviable on any payment, in lieu of any permission or license
granted by the Government or a local authority. |
| Entry No. 59 | Services provided by Government or a local authority by way of assignment of right to use natural resources to an individual farmer for the purposes of agriculture |
| Entry No. 60 | Services by Government, a local authority or a governmental authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution |
| Entry No. 61 | Services provided by Government or a local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Government or the local authority before the April 1, 2016: Provided that the exemption shall apply only to Service tax payable on one time charge payable, in full upfront or in instalments, for assignment of right to use such natural resource |
| Entry No. 62 | 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 during the financial year 2015-16 on payment of licence fee or spectrum user charges, as the case may be. (It may be noted here that the Union Budget, 2016, under Section 66E of the Finance Act, after clause (i), clause (j) is inserted to include “assignment by the Government of the right to use the radio-frequency spectrum and subsequent transfers thereof” under the list of Declared services. But such changes shall be effective from the date of enactment of the Finance Bill, 2016 (“FB, 2016”), leading to dispute for taxability for the interim period i.e. from April 1, 2016 to date of enactment of FB, 2016 |
| Entry No. 63 | 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). |
- Service Tax on taxes, cesses or duties.
- Whether Service Tax is payable on yearly installments due after 1-4-2016 in respect of spectrum assigned before 1-4-2016.
- Amendment in Valuation Rules to include in value of taxable services, payment of interest/ other consideration payable on Governmental services whose payment is allowed to be deferred on such payment of interest/ other consideration
In terms of Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 (“the
Valuation Rules”), the value of any taxable service shall not include
interest on delayed payment of any consideration for the provision of
services or sale of property, whether moveable or immoveable.
Now, the Central Government vide Notification No. 23/2016-ST dated April 13, 2016, has inserted following proviso to Rule 6(2)(iv) of the Service Tax Valuation Rules:
“Provided
that this clause shall not apply to any service provided by Government
or a local authority to a business entity where payment for such service
is allowed to be deferred on payment of interest or any other
consideration.”
- Point of Taxation (“POT”) under Reverse Charge in case of Governmental services
The Central Government vide Notification No. 24/2016-ST dated April 13, 2016, has amended Rule 7 of thePoint of Taxation Rules, 2011 to
provide that in case of services provided by the Government or local
authority to any business entity, the POT shall be the earlier of the
dates on which -
Any payment, part or
full, in respect of such service becomes due, as specified in the
invoice, bill, challan or any other document issued by the Government or
local authority demanding such payment; or Payment for such services is
made.
- Amendment in the Cenvat Credit Rules, 2004 (“the Credit Rules”)
The Credit Rules have been amended vide Notification No. 24/2016 CE (NT) dated April 13, 2016.
Consequently, the Cenvat credit of the Service tax on one time charges
(whether paid upfront or in installments) paid in a year, may be allowed
to be taken evenly over a period of 3 (three) years. [Rule 4(7) of Credit Rules as amended].
However,
the Service tax paid on spectrum user charges, license fee, transfer
fee charged by the Government on trading of spectrum would be available
in the year in which the same is paid. Likewise, Service tax paid on
royalty in respect of natural resources and any periodic payments shall
be available as credit in the year in which the same is paid. The
existing eighth proviso in sub-rule (7) of Rule 4 of the Credit Rules is being omitted.
Amendments
have also been made in the Credit Rules, so as to allow Cenvat credit
to be taken on the basis of the documents specified in sub-rule (1) of Rule 9 of the Credit Rules, even
after the period of 1 year from the date of issue of such a document in
case of services provided by the Government or a 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 the Credit Rules]
- WHAT IS STILL IN DOUBT
It may be noted that still complete clarity/relief is not granted to Business Entities and some doubts still remain like
- Whether incentive received from the Government (Central or States) will be liable to reverse charge
- While Interest paid to the Government would be taxable, yet, would the interest for delayed payment of taxes be liable to tax. Prima facie, it seems that such interest is not liable to tax as Taxes, cesses or duties levied are themselves not leviable to Service Tax
- Neither of the stated Notifications have been made applicable w.e.f April 1, 2016 i.e. these notification would be applicable w.e.f. April 13, 2016. What about the Governmental services rendered during the interim period i.e. from April 1, 2016 to April 13, 2016?
- CONCLUSION
However,
in the backdrop of this change, it is of utmost importance that Trade
& Industry carry out a complete scrutiny of their records and cull
out all the payments made to Government or Local Authorities.
Thereafter it has to be checked whether these payments would be liable to reverse charge.
This
becomes all the more important for Government Companies and Government
Authorities where major payments are made to Government and Local
Authorities.
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