Service tax implications on services provided by the government or local authority after considering the amendments made in Finance Bill, 2016

Introduction

The Government or Local Authority along with performing statutory duties also provide services as like any other commercial business entity viz., advertisement services, logistic services etc. In this article an attempt, has been made to analyse the service tax implications on service provided by Government/s or local authorities, post budget 2016.

Does the activities performed by the Government/s or local authorities qualify as a ‘service’?

When any activity assigned to and performed by the Government/s or local authorities to any person, under the provisions of law, are statutory in nature, same cannot be treated as “Service” though consideration is received for the same. Since such activities are purely in a public interest and are undertaken as a mandatory and statutory function.

Applicability of service tax with respect to activities carried out by Government/s or local authorities

• In order to levy service tax on any activity, firstly the activity must fall within the ambit of definition of “Service”1, under the Finance Act, 1994 and such service must be a “Taxable service”. Thus, all services, other than those specified in the negative list2 or other than those which are specifically exempt, would be liable to service tax.

• With respect to services provided by Government/s or local authorities, it is relevant to note that there exists few services which are covered under negative list of services and few services which are exempt.

• Hitherto, only ‘support services’ provided by the Government were liable to Service tax. However, w.e.f 1-4-2016, “any service” provided to business entities would be liable to tax. The term “any service” was introduced in the place of “support services”, in budget 2015-16. However same was made effective from 1-4-2016.

Payment of service tax with respect to activities carried out by Government/s or local authorities

• Normally, the service provider is liable to discharge the service tax liability. However, in specific cases, the onus of payment of service tax is cast upon the recipient of services. Amongst others, in case of services received from Government or Local Authority, the recipient of services (business entities) will be liable to discharge the Service tax.

• Exceptions to this are – services by way of Renting of Immovable property, services by Department of Posts by way of speed post, express parcel post, life insurance and agency services; services in relation to aircraft or vessel, inside or outside the precincts of a port or an airport; and transport of goods or passengers.

• Services other than the above will be liable to service tax when the same are received by the business entities, whose
turnover exceeds
₹ ten lakh in the preceding financial year. Thus, the business entities will be liable to remit service tax as “Service recipient”, when they receive any such services from Government/s or local authorities.

The term “any service”
and “all services” used in both Negative list of services and in case of specified services covered under “RCM” respectively, has created ambiguity on the taxability of services provided by Government/s or local authorities.

Analysis of services provided by Government/s or local authorities as taxable and exempted services

After considering the services which are covered by notifications/circulars3 issued after amendment to Finance Bill 2016, and those which continues to exist even
after the amendments, the following should be noted:

Nature of service	Services received by
	Government	Local authority	Business entities whose turn-over is more than ₹ 10 lakhs in the preceding financial year	Business entities with a turnover up to ₹ 10 lakhs in the preceding financial year	Other persons other than Govern-ment, local authorities and business entities
1	2	3	4	5	6
Department of Posts by way of speed post, express parcel post, life insurance and agency services	Not Taxable	Taxable	Taxable	Taxable4	Taxable
Aircraft or vessel, inside or outside the precincts of a port or an airport	Taxable	Taxable	Taxable	Taxable4	Taxable
Transport of goods or passengers	Taxable	Taxable	Taxable	Taxable4	Taxable
Renting of immovable property	Not Taxable	Not Taxable	Taxable	Taxable4	Not Taxable [Note-3]
Any service where the gross amount charged in respect of each service exceeds ₹ 5,000/-. Further, in case of continuous supply of service, if the gross amount charged exceeds ₹ 5,000/- in a financial year	Not Taxable	Not Taxable	Taxable [Note-1]	Not Taxable [Note-2]	Not Taxable [Note-3]
1	2	3	4	5	6
One time charge payable in full upfront or in instalments for assignment of right to use natural resources assigned after 1-4-2016	Not Taxable	Not Taxable	Taxable [Note-1]	Not Taxable [Note-2]	Not Taxable [Note-3]
License fee or spectrum user charges paid by business entities for allowing them to operate as telecom service provider or use radio frequency spectrum after the year 2015-16	Not Applicable	Not Applicable	Taxable [Note-1]	Not Taxable [Note-2]	Not Applicable
Any other services other than those covered in exempted services list, as provided below	Not Taxable	Not Taxable	Taxable [Note-1]	Not Taxable [Note-2]	Not Taxable [Note-3]

Note:-

1. The service tax to be remitted by Business entities under “RCM” and in such case the Service provider i.e., Government/s or local authorities need not charge service tax.

2. Since services provided by Government/s or local authorities to business entities with a turnover upto ₹ 10 lakhs, in the preceding financial year is exempt.

3. Since in the Negative list of services “Any service” provided to business entities alone are taxable.

However, apart from the services covered above, the following are the list of exempted services covered by way of Mega exemption notification and clarifications provided by department by way of circular

1. Services by a Government, a local authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution. This includes matters listed in the Twelfth Schedule which is as under:

• Urban planning including town planning; Regulation of land-use and construction of buildings, slaughter houses and tanneries; Roads and bridges; Urban forestry, protection of the environment and promotion of ecological aspects; Planning for economic and social development; Slum improvement and upgradation; Water supply for domestic, industrial and commercial purposes; Public health, sanitation conservancy and solid waste management; Fire services; Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded; Urban poverty alleviation; Public amenities including street lighting, parking lots, bus stops and public conveniences; Promotion of cultural, educational and aesthetic aspects; Provision of urban amenities and facilities such as parks, gardens, playgrounds; Cattle pounds; prevention of cruelty to animals; Burials and burial grounds; cremations, cremation grounds and electric crematoriums; and vital statistics including registration of births and deaths.

Hitherto, the exemption was restricted only if the above services were provided by Governmental authority

2. Any service where the gross amount charged in respect of each service does not exceed ₹ 5,000/-, except for services by Department of Posts by way of speed post, express parcel post, life insurance and agency services, services in relation to aircraft or vessel and service of transport of goods or passengers. However, in case of continuous supply of services the exemption will be available only if the gross amount charged does not exceed
₹ 5,000 in a financial year.

3. Fines or liquidation damages payable to Government or local authority for:-

• Non-performance of contract entered into with Government or local authority;

• Violation of a statute, bye-laws, rules or regulations;

4. Services provided by way of:

• Registration required under any law for time being in force;

• Testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under any law for time being in force;

• Issuance of passport, visa, driving licence, birth certificate or death certificate;

• Deputing officers after office hours or on holidays for inspection or such other duties in relation to import export cargo on payment of Merchant overtime charges;

• Assignment of right to use natural resources to an individual farmer for the purpose of agriculture;

5. Any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution. This includes matters listed in the Eleventh Schedule, which is as under:

• Agriculture, including agricultural extension; Land improvement, implementation of land reforms, land consolidation and soil conservation; Minor irrigation, water management and watershed development; Animal husbandry, dairying and poultry; Fisheries; Social forestry and farm forestry; Minor forest produce; Small scale industries, including food processing industries; Khadi, village and cottage industries; Rural housing; Drinking water; Fuel and fodder; Roads, culverts, bridges, ferries, waterways and other means of communication; Rural electrification, including distribution of electricity; Non-conventional energy sources; Poverty alleviation programme; Education, including primary and secondary schools; Technical training and vocational education; Adult and non-formal education; Libraries; Cultural activities; Markets and fairs; Health and sanitation, including hospitals, primary health centres and dispensaries; Family welfare; Women and child development; Social welfare, including welfare of the handicapped and mentally retarded; Welfare of the weaker sections, and in particular, of the Scheduled Castes and the Scheduled Tribes; Public distribution system; and Maintenance of community assets.

6. One time charge payable in full upfront or in instalments for assignment of right to use natural resources, where the assignment was assigned before 1-4-2016.

7. Licence fee or spectrum user charges paid by business entities for allowing them to operate as telecom service provider or use radio frequency spectrum during the year 2015-16.

8. All services provided to another government or local authority, except for Services by Department of Posts by way of speed post, express parcel post, life insurance and agency services, services in relation to aircraft or vessel, inside or outside the precincts of a port or an airport and service of transport of goods or passengers;

9. Services provided by a specified organisation like Kumaon Mandal Vikas Nigam Limited, a Government of Uttarakhand Undertaking and ‘Committee’ or ‘State Committee’ as defined in Section 2 of the Haj Committee Act in respect of a religious pilgrimage facilitated by the Ministry of External Affairs of the Government of India (“GOI”), under bilateral arrangement are exempted with effect from 1-7-2012, hitherto, same was effective from 19-8-2014.

10. Any services provided by:

• National Skill Development Corporation (“NSDC”) set up by the “GOI”;

• Sector Skill Council approved by the NSDC;

• assessment agency approved by the Sector Skill Council or the NSDC;

• training partner approved by the NSDC or the Sector Skill Council.

11. Services provided by Government or a local authority to a business entity with a turnover up to ₹ 10 lakhs in the preceding financial year, except for Services by Department of Posts by way of speed post, express parcel post, life insurance and agency services, Services in relation to aircraft or vessel, inside or outside the precincts of a port or an airport and Service of transport of goods or passengers and services by way of Renting of immovable property.5

12. Taxes, cesses or duties levied like Excise duty, Customs duty, Service tax, State VAT, CST, Income tax, wealth tax, stamp duty, taxes on professions, trades, callings or employment, octroi, entertainment tax, luxury tax, property taxes etc.

Thus, unless an activity falls squarely within the language of each of the above exemptions, the taxability of the services provided from Government or local authority will continue.

Availment of CENVAT Credit on taxes paid for services received from government or local authority

CENVAT credit can be claimed in respect of all such services which qualify as 'input services' within the meaning of CENVAT Credit Rules, 2004. The credit can be taken on the basis of invoice issued by Government or local authority and in case of service tax remitted by the service recipient under “RCM”, the credit can be taken on the basis of challan evidencing payment of Service tax by the service recipient, as provided under Rule 9 of the CENVAT Credit Rules, 2004.

However, specifically with respect to availment of CENVAT credit on assignment of rights, the following should be noted:

1. The credit should be taken evenly over a period of 3 years, irrespective of the fact that the one-time charges are paid in a financial year (upfront or in instalments);

2. The service tax paid on spectrum user charges, licence fee, transfer fee, royalty in respect of natural resources and any periodical payments shall be available in the year in which such payment is made.

3. The manufacturer or the service provider can take CENVAT credit even after 1 year of the date of issuance of invoice/ bill/ challan by Government, local authority or any other person, by way of assignment of right to use any natural resource.

4. Where the manufacturer of goods or provider of output service, further assigns such right assigned to him, in any financial year, to another person against consideration, the balance amount of CENVAT credit not exceeding the service tax payable on the consideration charged by him for such further assignment, shall be allowed in the relevant financial year (year in which the output tax liability arises).

The above comments/analysis are based on amendments to Finance Bill, 2016 and subsequent notifications/circulars issued by the department up to 20-5-2016. Every effort has been made to avoid errors or omissions in this write-up. In spite of this, errors may have crept in. Any mistake, error or discrepancy noted may be brought to the notice of the paper writers: [email protected].