One of the crucial changes proposed in the Union Budget 2015-16 (‘the Union Budget’) is in relation to applicability of Service Tax on the services provided by Government[1] and Local Authorities[2] (jointly, ‘the Government’) to a business entity[3].
As per the existing provisions contained in Finance Act, 1994 (‘the Finance Act’), services provided by the Government, except certain specified services, are covered in the negative list of services[4] and, thus, not subject to Service tax. The specified services (excluded from the negative list) include ‘support services’[5] provided by the Government to business entities. In other words, ‘support services’ received by a business entity from the Government are currently subject to Service tax. The liability to deposit Service tax on such services is on the recipient of service[6], except for services in the nature of renting of immovable property.
Further, in the Education Guide dated 20 June 2012 (‘the Guide’) issued by the Central Board of Excise and Customs, it is mentioned that activities of the Government are currently taxable only where similar or substitutable services are provided by private entities[7]. On a combined reading of the statutory provisions along with the Guide, it is apparent that the activities which are undertaken by the Government as a discharge of their sovereign rights to business entities, and which are not substitutable in any manner by any private entity, are not covered within the ambit of support services and hence not subject to Service tax.
The Union Budget has proposed to prune the existing exclusion with respect to the services provided by Government contained in the negative list of services by substituting the words ‘any service’ for ‘support services’[8] and by omitting the existing definition of ‘support service’ in the Finance Act[9].
Thus, the proposed amendment seeks to do away with the distinction between services provided by the Government as sovereign function or otherwise.
Given that the definition of the term ‘service’[10] is wide enough to cover any activity carried out by a person[11] for another for consideration, post coming into effect of these amendments, it appears that Service tax may be applicable on consideration payable towards any activity undertaken by the Government for a business entity.
An illustrative list of activities undertaken by Government for business entities that could be subject to Service tax is provided below:
- Fee payable by a builder to obtain a license to develop a residential or commercial complex
- Fee payable by telecom operating companies for allotment of spectrum
- Fee payable for allotment of a coal block/ grant of mining license
- Fee payable for obtaining a stage carriage or contract carriage route permit under the Motor Vehicles Act, 1988
- Fee payable to the Registrar of Companies for incorporation of a company
One may argue that in case of a regulatory fee, the element of quid-pro-quo is absent and, therefore, the same may not qualify as an activity for consideration. Accordingly, such fee does not fall within the ambit of ‘service’ and is not subject to Service tax.
It is pertinent to mention that the determination of the true nature of fee, i.e. compensatory vis-a-vis regulatory, is in itself a complex exercise. Also, any non-payment of Service tax on fee paid to the Government due to such interpretation is bound to give rise to long drawn litigation for the business entities. At the same time, payment of Service tax on such services would entail high working capital requirements for various business entities and huge costs specifically for power, mining and other sectors that are not subject to Service tax or Excise Duty on their output activity.
Thus, by virtue of this proposed amendment, an altogether new jurisprudence is sought to be devised regarding taxability of various activities undertaken by the Government. Unless, the levy is restricted to specified Government services or a clarification is provided as regards the scope of services covered under the Service tax net, this change shall remain a hotbed of debates.
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[1] As per the proposed sub-section (26A) to Section 65B of the Finance Act, “Government” means the Departments of the Central Government, State Government, Union territory, but excludes 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 of India
[2] As per Section 65B(31) of the Finance Act, “Local Authority” means Panchayat, Municipality, Municipal Corporation, Cantonment Board, regional council or a district council constituted under the 6th Schedule to the Constitution of India, development board and regional council constituted under Article 371 and Article 371A respectively of the Constitution of India
[3] As per Section 65B(17) of the Finance Act, “business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession
[4] Section 66D(a) of the Finance Act
[5] As per Section 65B(49) of the Finance Act “support services” means infrastructural, operational, administrative, 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
[6] Rule 2(1)(d)(i)(E) of the Service Tax Rules, 1994
[7] Clause 2.4.6 and second paragraph of Clause 4.1.7 of the Guide
[8] Section 107(1) of the Finance Bill, 2015
[9] Section 105(h) of the Finance Bill, 2015
[10] Section 65B(44) of the Finance Act
[11] Definition of “person” under Section 65B(37) of the Finance Act among others includes Government and Local Authority