The concept of GST on Government Services under the Service Tax era as well as GST regime has been under the cloud of confusion and much debated. Payments made to Government can be broadly classified into fees and taxes. Reverse charge on Government Services puts an additional burden on the business community to keep track of such payments, bifurcate such payments into fees or taxes, take a prudent call and if required pay tax on reverse charge and thereafter avail input tax credits if eligible. The biggest stumbling block in this whole process is the proper classification of payment into fees or taxes. In this paper, an attempt has been made to decode the taxation issues of so-called ‘Government Services’.

Taxability of Government Services in Service Tax Regime

Scope of taxability of Government Services has been enlarged significantly w.e.f. 1st April 2016. Accordingly, from the said date all the services provided by the Government or Local Authority to a business entity, except services that are specifically exempted or are covered by any entry of negative list were made liable to service tax. Further, recipient was made liable to pay 100% of applicable service tax on a reverse charge basis.

Taxability of Government Services in GST regime

CGST Act defines ‘reverse charge’ under section 2(98), as to mean, the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both…..Section 9(3) of the CGST Act and Section 5(3) of the IGST Act empowers the Central Government to notify supplies subject to reverse charge. Exercising powers under aforesaid sections Notification No. 13/2017-CT(R) dated and Notification No. 10/2017-IT(R) both dated 28.06.2017 (hereinafter ‘RCM Notifications’) have been issued to notify various services on which the recipient is liable to pay applicable GST on reverse charge basis.

Entry No. 5

Entry No. 5 of said Notification fasten RCM liability on Government services received by the business entity. Said entry can be explained in detail as under:

Particulars Description
Category of Supply of Services under Reverse charge Services supplied by the Central Government (CG), State Government (SG), Union territory (UT) or Local Authority (LA) to a business entity
Supplier of Services CG,SG,UT or LA
Recipient of Services Any business entity located in the taxable territory
Services excluded from the operation of reverse charge Following services even though provided by the aforesaid supplier of services to a business entity shall not be subject to reverse charge

(1) renting of immovable property, and

(2) services specified below-

  1. 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 Central Government, State Government or Union territory or local authority;
  2. services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
  3.  transport of goods or passengers

Entry No. 5A

Further w.e.f. 25th January 2018, Entry No. 5A has been added in the aforesaid RCM Notifications. As per Entry No. 5A, services supplied by the CG,SG,UT or LA by way of renting of immovable property to a person registered under GST is covered under reverse charge. Before moving ahead, it would be apt to highlight that Entry No. 5A expands the scope of reverse charge mechanism in as much as earlier (till 24th January 2018) such supply was under forward charge1.

Before assimilation of the detailed GST implications on Governments services, let us first understand the meaning of various relevant terms used in aforesaid reverse charge entries.

Meaning of Business Entity

The term ‘business entity’ has not been defined in the above RCM Notifications. However, reference can be made to clause 2(n) of Notification No. 12/2017- CT(R) dated 28.06.2017, which defines a business entity means any person carrying out business.

Meaning of Government

Section 2(53) of the CGST ACT, respective State/UT GST Act defines the term ‘Government’. It simply means the Central Government, State Government or Union Territory as the case may be. Term ‘Central Government’, ‘State Government’ or ‘Union Territory’ have not been defined in the GST law, hence we would need to look at the definition of these terms, as are available in General Clauses Act, 1977.

A conjoint reading of Section 3(8) of General Clauses Act, Article 53 and 77 of Constitution of India it can be inferred that Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President. Applying same analogy and as supported by a reading of Section 3(60) of General Clauses Act r.w. Article 154 and 166 of the Constitution, State Government means the Governor or the officers subordinate to him who exercise the executive powers of the State vested in the Governor and in the name of the Governor

Meaning of Local Authority

Definition of the term ‘local authority’ as defined in section 2(69) of the CGST Act is verbatim reproduced as under:

“Local Authority” means––

(a) a “Panchayat” as defined in clause (d) of Article 243 of the Constitution;

(b) a “Municipality” as defined in clause (e) of Article 243P of the Constitution;

(c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State 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;

(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;

It is to be highlighted that the scope of clause(c) above is very wide. Many State and Central boards though may not fall within the definition of Central/State government but depending upon facts and circumstances may be covered under clause(c) above. Further to understand the correct meaning of various constituents of local authority one may have to refer to various clauses/articles of the constitution and other legislation as referred to in the above definition. It is worth mentioning that Public Sector Undertaking (PSU), Autonomous bodies etc are not covered within the ambit of Local Authority.

Meaning of Taxable Territory

On a combined reading of Section 2(109) of the CGST Act and Section 1(2) of the CGST Act, taxable territory refers to the whole of India.

To understand the taxability of Government Services it is imperative for us to discuss whether so-called Government Services fall within the meaning of ‘supply’ in GST? This question also assumes significance as Section 9(3)/5(3) of the CGST/IGST Act empowers the Government to specify only categories of supply for reverse charge levy. Therefore, unless the existence of supply is demonstrated there cannot be a reverse charge levy.

Wider Scope of the term supply

In terms of Section 7(1)(a) of the CGST Act following points merit consideration to determine whether an activity or transaction can be characterised as supply:

  • Supply should be made for a consideration

  • Supply should be made by a person

  • Supply should be made in the course or furtherance of business

  • Only a few instances of supply are narrated in Section 7(1)(a) of the CGST Act. Therefore scope of supply is much wider than generally perceived.

It is to be noted that the definition of ‘Person’ u/s. 2(84) of the CGST Act includes a Central Government, State Government and Local Authority.

Government Services – whether fits into the realm of Business?

The prime issue to decide is whether the so-called government services are covered within the definition of Business? Reference is invited to relevant extract of Section 2(17) of the CGST Act. Said section defines ‘business’ to include:

(a) ….

(b) …

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

Clause (i) above makes very interesting reading. Even activity or transactions undertaken by Central or State Government or any Local Authority in which they are engaged as public authorities are considered as business.

Final question that arises is whether there is a consideration? To answer this vexatious issue, one needs to delve deep into the domain of sovereign functions in subsequent paragraphs.

Sovereign Functions – Meaning

In laymen’s language, sovereign functions are those functions that can only be discharged by the state and not by a private person. Term sovereign functions are not defined. Even Apex court over the years could not conclusively explain the contours of the term ‘Sovereign Functions’. Five-Judge Constitution Bench of the Supreme Court In State Of Up. Versus Jai Bir Singh [(2005) 5 SCC 1] observed as under:

“The concept of sovereignty in a constitutional democracy is different from the traditional concept of sovereignty which is confined to ‘law and order’, ‘defence’, ‘law making’ and ‘justice dispensation’. In a democracy governed by the Constitution, the sovereignty vests in the people and the State is obliged to discharge its constitutional obligations contained in the Directive Principles of the State Policy in Part -IV of the Constitution of India. From that point of view, wherever the government undertakes public welfare activities in the discharge of its constitutional obligations, as provided in part-IV of the Constitution, such activities should be treated as activities in the discharge of sovereign functions falling outside the purview of ‘industry’…….”

It is pertinent to note that the issue of sovereign functions is pending with the nine-judge bench of Apex court and the final verdict is still awaited.

Having understood the litigation around sovereign functions let us now evaluate whether performance of sovereign functions can be equated with a rendering of supply?

Sovereign Functions – Whether tantamount to service/supply?

There is a catena of judgements wherein it was held that sovereign functions performed in terms of the powers granted/obligations cast in the constitution of India are not subject to Service Tax2. In a recent judgement, Hon’ble Bangalore CESTAT in Karnataka Industrial Areas Development Board v. Commr of Central Tax, Bangalore north[2020-TIOL-860-CESTAT-BANG] held that appellant is a statutory body performing statutory functions and exercising statutory powers as per Karnataka Industrial Areas Development Act and is not liable to pay Service Tax. Bombay High Court in the case of CCE, Nashik v. Maharashtra Industrial Development Corporation [TIOL-2629-HC-MUM-ST] held that no service tax could be demanded on the charges collected by MIDC in terms of the Maharashtra Industrial Development Act, 1961 towards the maintenance of the industrial areas, as the same is in the nature of statutory functions performed in terms of the statute.

Aforesaid rulings put an interesting pauser with respect to the existence or otherwise of consideration/quid pro quo in relation to sovereign functions. While the above judgments may bring in a wave of relief for the taxpayers, the likelihood of further litigation with respect to the impugned issue cannot be ruled out and the issue is yet to attain finality.

Flip Flop by CBIC on the taxability of Sovereign Function

It is equally important to note that the vide Circular No. 96/7/2007-Service Tax, dated 23rd August 2007 CBIC has earlier clarified as under:

“Activities assigned to and performed by the sovereign/public authorities under the provisions of any law are statutory duties. The fee or amount collected as per the provisions of the relevant statute for performing such functions is in the nature of a compulsory levy and are deposited into the Government account.

Such activities are purely in public interest and are undertaken as mandatory and statutory functions. These are not to be treated as services provided for consideration. Therefore, such activities assigned to and performed by a sovereign/public authority under the provisions of any law, do not constitute taxable services. Any amount/fee collected in such cases are not to be treated as consideration for the purpose of levy of service tax.

However, if a sovereign / public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of taxable service as defined.”

It was a welcome clarification from CBIC affirming the widely prevalent view of statutory/sovereign functions is outside the purview of taxability. Surprisingly it seems that vide Circular No. 192/02/2016-Service Tax, dated April 13 2016, CBIC has changed its stand while clarifying as under:

“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 local authority.”

Further, it has been clarified that Circular No. 96/7/2007-Service Tax (supra) is no longer applicable. In the humble opinion of author of this article position taken by CBIC in 2016 circular (supra) deserves a re-look. In the humble opinion of author of this article views expressed by CBIC may not stand the scrutiny of the MIDC and Karnataka Industrial Areas Development Board judgments (discussed in preceding para).

Escape route of Section 7(2)

It is highlighted that Section 7(2) overrides Section 7(1) of the CGST Act. Accordingly, activities or transactions undertaken by the Central Government, State Government or any Local Authority in which they are engaged as public authorities do not amount to supply if covered under schedule III of the Act or notified by the Government on the recommendations of the Council. It is interesting to note that vide Notification No. 25/2019-Central Tax (Rate) dated 30th September 2019, services by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name called is notified U/s 7(2) of the CGST Act. Accordingly, so-called government services of granting liquor license are outside the scope of term supply and therefore fees paid for such license is not subject to either forward or reverse charge.

It is highlighted that in Builders Association of Navi Mumbai v. Union of India 2018 (4) TMI 461, Hon’ble Mumbai High Court observed that CIDCO is a town planning authority. Further, Court remarked that it is entirely for the legislature, therefore, to exercise the powers conferred by sub-section (2) of Section 7 of the CGST Act and issue the requisite notification. Absent that notification, merely going by the status of the CIDCO, we cannot hold that the lease premium charged by CIDCO would not attract or invite the liability to pay tax in terms of the CGST Act.

A combined reading of the definition of business (supra), Section 7(1) and 7(2) of the CGST Act and judicial pronouncements manifest a view that all activities or transactions undertaken by the Central Government, State Government or any Local Authority (even if they are acting as public authority) is leviable to GST and very few escape routes are available in the form of Schedule III or specific Notification u/s 7(2) or specific Exemptions u/s 11 of the CGST Act.

Exemption to Government Services

To soften rigours of Reverse Charge levy on Government Services, Notification No. 12/2017-CT(R) Notification No. 8/2017-IT(R) both dated 28.06.2017 (hereinafter, ‘Exemption Notifications’) have exempted various services provided by CG,SG,UT or LA. Needless to say, since such supplies are exempted there can’t be either forward or reverse charge levy on such supplies. Few Important exemption entries relating to Government Services are explained hereunder:

Attention is invited to Entry No.6 of Exemption Notifications. Said entry grants exemption to services by the CG,SG,UT or LA excluding the following services:

  1. 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 the Central Government, State Government, Union territory;

  2. services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

  3. transport of goods or passengers; or

  4. any service, other than services covered under entries (a) to (c) above, provided to business entities.

Services mentioned in clauses a,b and c are excluded from the exemptions and therefore it implies that they are taxable. A fine reading of clause (d) above suggests that said clause denies exemption to any services other than those in clauses (a) to (c) if provided to a business entity.

Moving further, Entry No. 7 of the Exemption Notifications exempts services provided by the CG,SG,UT or LA to a business entity with an aggregate turnover of up to ₹ 20 lakhs (₹ 10 lakhs in case of a special category state) in the preceding financial year. Therefore, even business entities having aggregate turnover up to ₹ 20/10 lakhs in the preceding financial year is not subject to reverse charge levy on Government Services. Entry no. 8 of the Exemption Notifications exempts all services supplied inter se Governments.

Entry No. 9 of the Exemption Notifications provides an exemption where the consideration against the services provided by CG,SG,UT or LA does not exceed ₹ 5,000/-. It is worth mention that in case of continuous supply of services limit of ₹ 5000/- is applicable on a yearly basis.

Entry No. 47 of the Exemption Notifications provides an exemption for Services provided by the CG,SG,UT or LA by way of

  1. registration required under any law for the time being in force

  2. testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for the time being in force.

Basis above exemption entry, it is safe to conclude that vehicle registration fees paid for registration of vehicles are exempt from the levy. Similar analogy can also be drawn for various registration fees paid e.g. ROC filing fees paid for incorporation of a company etc.

Entry No. 61 of the Exemption Notifications exempts services provided by way of issuance of passport, visa, driving licence, birth certificate or death certificate. Entry No. 62 of the Exemption Notifications provides an exemption for fines or liquidated damages payable to CG,SG,UT or LA for tolerating non-performance of a contract entered into with such Authority.

Exemption Notifications contains many other exemption entries pertaining to Government Services, however after going through the most relevant entries let us move further to discuss other intricate issues.

Governmental Authority, Government Entity and RCM implications

Notification no. 11/2017-CT (R) and Notification no. 12/2017- CT(R) both dated 28th June 2017 have specifically defined these terms and reproduced hereunder for quick reference:

Governmental Authority” means an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out any function entrusted to a Municipality under Article 243 W of the Constitution or to a Panchayat under Article 243 G of the Constitution.

Government Entity” means an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

At this juncture, it would be important to notice that Government authorities and Government entities are eligible for concessional rates of tax/exemptions. For this limited purpose aforesaid notifications carry the explicit definition of these 2 terms. However, services rendered by Government authority and Government entities would not be covered by Entry no. 5 and 5A of RCM Notifications, unless such entities and authorities fall within the meaning of CG,SG, UT or LA.

After going through the gamut of taxability of government services stage is now set to discuss the taxability of various payments made to Governments.

Applicability of levy on taxes, duties, cess, fines and penalty

As discussed earlier condition of supply should be satisfied first to levy GST on taxes, duties and cesses. CBIC vide its Circular No. 192/02/2016-Service Tax, dated April 13, 2016, has aptly clarified that taxes, cesses or duties levied are not consideration for any particular service as such and hence not leviable to tax.

It is further clarified by CBIC that fines and penalties chargeable by Government or a local authority imposed for violation of a statute, bye-laws, rules or regulations are also not leviable to Service Tax.

Applicability of levy on Fees paid to Government

It is a settled position that there is no element of ‘quid pro quo’ in cases of taxes, but fee is collected for a special service rendered. Hence taxes should not be subject to levy, but fees can be. The biggest problem is how to determine, whether a particular levy is a tax or a fee? Following landmark judicial pronouncements can be referred for guidance in this matter:

In Sri Krishna Das v. Town Area Committee, Chirgaon [(1990) 3 SCC 645], the Apex Court has succinctly discussed the difference between a ‘fee’ and a ‘tax’ by observing, as under:

“A fee is paid for performing a function. A fee is not ordinarily considered to be a tax. If the fee is merely to compensate an authority for services performed or as compensation for the services rendered, it can hardly be called a tax. However, if the object of the fee is to provide general revenue of the authority rather than to compensate it, and the amount of the fee has no relation to the value of the services, the fee will amount to a tax.”

Supreme Court in Calcutta Municipal Corporation and Others v. M/s Shrey Mercantile Pvt Ltd & Others 2005 AIR SC 1879 held as under:

“According to “Words & Phrases”, Permanent Edition, Vol. 41 Page 230, a charge or fee, if levied for the purpose of raising revenue under the 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 the exercise of “police power”, but if revenue is the primary purpose and regulation is merely incidental, then the imposition is a “tax”. A tax is an enforced contribution expected pursuant to a legislative authority for purpose of raising revenue to be used for public or governmental purposes and not as payment for a special privilege or service rendered by a public officer, in which case it is a “fee”. Generally speaking “taxes” are burdens of a pecuniary nature imposed for defraying the cost of governmental functions, whereas charges are “fees” where they are imposed upon a person to defray the cost of particular services rendered to his account.”

In the case of P. Kannadsan, etc. v. State of Tamil Nadu & Other etc. J.T. 1996 (7) S.C. 16, it has been observed that:

“Even in the matter of fees, it is not necessary that element of quid pro quo should be established in each and every case, for it is well settled that fees can be both regulatory and compensatory and that in the case of regulatory fees, the element of quid pro quo is totally irrelevant.”

Above pronouncements makes it amply clear that there is quite an overlap between fees and taxes. Many instances can be cited where fees may partake character of taxes. A common example could be ROC fees or shop and establishment fees. In the humble view of author of this article, such payment may not be subjected to GST.

Taxability of Liquor License fees

GST Council in its 26th meeting has recommended that GST shall not be levied on license fee and application fee, “by whatever name called”, payable for alcoholic liquor for human consumption. Subsequently, Notification No. 25/2019-CT (R) (supra) was issued u/s 7(2) of the CGST Act for providing an exemption for liquor license fees.

Taxability of other License fees

CBIC Circular No. 121/40/2019-GST dated 11.10.2019 has surprisingly clarified that special dispensation/exemption applies only to supply of services by way of grant of liquor license and such exemption has no applicability or precedence value in relation to grant of other licenses and privileges for a fee in other situations, where GST is payable. In the opinion of author of this article in absence of intelligible differentia between exemption for liquor license fees and other license fees, it is open for taxpayers to argue violation of Article 14 of the Constitution of India.

Taxability of Toll Tax / Marg Sudharan Shulk

Question of taxability of toll tax came up for ruling in the case of Forest Department [2018 (14) G.S.T.L. 159 (A.A.R. – GST)]. Advance Ruling Authority observed that the stated purpose of said ‘marg sudharan shulk’ is for maintenance of forest road. Further, it was pointed out that services by way of access to a road or a bridge on payment of toll charges are included in the list of exempted services. It was accordingly held that no GST is leviable on marg sudharan shulk/toll tax.

Taxability of Abhivahan Shulk (Charges on Forest Produce/Transit fees)

Appellate Authority for advance ruling, Uttarakhand in Divisional Forest Officer 2018 (18) G.S.T.L. 566 (App. A.A.R. – GST) affirmed findings of advance ruling authority and observed that a vehicle entering a forest area will have to pay the Abhivahan Shulk only if it comes out of forest with forest produce. Further in lieu of such fees, the forest department is providing the service of maintaining and regulating the forest produce and ensuring the continuous availability of the forest produce and its safe transit Finally, it was held that such fees are taxable and therefore recipient shall discharge liability @ 18% on RCM basis.

Taxability of fees paid to Pollution Control Board

Many business entities are statutorily required to pay fees for monitoring pollution levels and protecting the environment to state pollution control board. Such board may fall within the definition of local authorities by virtue of Section 2(69)(c) of the CGST Act. Uttarakhand Advance Ruling Authority had occasion to deal with taxability of such fees in Purewal Stone Crusher [2018 (18) G.S.T.L. 641 (A.A.R. – GST)]. Authority observed that such fees are exempted by virtue of Entry no. 4 of Exemption Notifications.

Taxability of Khanij sampada sulk or Royalty or Mining Fees

Authority for Advance ruling in Purewal Stone Crusher (supra) held that said fee relates to consideration for transportation/release of Natural Sand & Grit and other similar River Bed Material. Further in absence of specific exemption entry authority held that such services are taxable @ 18% on Reverse charge basis. Similar advance rulings were delivered in many other cases. In the opinion of author of this article, this issue is not simple as it appears to be. multiple writ petitions have been filed across High Courts challenging the levy on Royalty/Mining Fees on various grounds. An important issue for consideration whether royalty is a tax is pending before 9 judge bench in the case of Mineral Area Development Authority v. Steel Authority of India and Ors[(2011) 4 SCC 450]. It would be interesting to observe the apex court verdict on constitutional issues raised in the said matter. Further Apex court in Udaipur Chambers Of Commerce And Industry v. Union Of India has also granted interim stay on recovery of service tax on grant of Mining Lease/ Royalty.

Taxability of Spectrum Fees

It can be argued that the allocation of Radio Frequency Spectrum to telecom companies for its proper utilization is a sovereign function and thus should not be subject to GST, But it is not so simple. CBIC in its 2016 circular (supra) has clarified that service tax is payable on license fees and spectrum user charges. Even for argument sake levy of GST is accepted on such fees and charges then by virtue of Section 15(2) of the CGST Act, GST shall also be payable on delayed payment interest for delayed payment of such fees and charges.

Taxability of fees paid for change of land use

Services in the nature of change of land use, building approval, utility services provided by Government, or a local authority are listed in the Twelfth Schedule to the Constitution and have been entrusted to Municipalities under Article 243W of the Constitution. Entry No. 4 of Exemption Notifications specifically exempts said services from GST levy.

Parting Note

In the backdrop of the above legal provisions, it is critical for a business entity to periodically undertake detailed scrutiny of various payments made to governments to cull out transactions subject to reverse charge. Further issues of taxability of government services are highly debatable and would be settled only before Higher forums after long litigation. In the opinion of author of this article, taxpayers need to take an informed call on the taxability issue of government services considering their risk appetite. A pro-active approach would be more beneficial to avoid departmental enquiries and consequential demands/harassments otherwise, situations would be more of a professionals paradise.


  1. For the sake of convenience Services referred in Entry in 5 and 5A of RCM Notifications are referred to as ‘Government Services’ in this paper.

  2. It is to be highlighted that GST provisions of reverse charge of Government Services are similar to provisions existed in erstwhile Service Tax law.

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