SUPPORT SERVICE BY GOVERNMENT, LOCAL AUTHORITIES ETC. WILL BE TAXABLE UNDER REVERSE CHARGE METHOD- A MAJOR BURDEN ON SERVICE RECEIVERS AND LIKELY REVENUE LOSS. SERVICE PROVIDERS MUST BE TAXABLE IN SUCH CASES.

[C.A. DEV KUMAR KOTHARI]

On enactment of the Finance Bill 2012 the following relevant provisions will be effectuated  which are relevant to taxability of services rendered by government, local authority etc. under reverse charge method:

From the finance Bill 2012 – relating to Service Tax (with highlights of relevant portion for services rendered by government etc. :

From THE FINANCE BILL, 2012,

CHAPTER V relating to SERVICE TAX

Amendment of Act 32 of 1994.

Interpretations.

     '65B. In this Chapter, unless the context otherwise requires,––

           (17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business;

           (31) "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;

           (37) "person" includes,––

                (i) an individual,

                (ii) a Hindu undivided family,

                (iii) a company,

                (iv) a society,

                (v) a limited liability partnership,

                (vi) a firm,

                (vii) an association of persons or body of individuals, whether incorporated or not,

                (viii) Government,

                (ix) a local authority, or

                (x) every artificial juridical person, not falling within any of the preceding sub-clauses;

           (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

                (a) an activity which constitutes merely,––

                (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

                (ii) a transaction in money or actionable claim;

                (b) a provision of service by an employee to the employer in the course of or in relation to his employment;

                (c) fees taken in any Court or tribunal established under any law for the time being in force.

     Explanation 1.— For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,––

           (A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or

           (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

           (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.

               Explanation 2.–– For the purposes of this Chapter,—

      (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

      (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.

          Explanation 3.— A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;

           (49) "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;

Charge of service tax on and after Finance Act, 2012.

     '66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

From the above clause in the Finance Bill we find that there will be significant change in the provision relating to charge of tax. However, this will be applicable only when the Finance Bill 2012 becomes the Finance Act 2012 when the President of India gives his assent.

 Changes in relation to services by government etc:

By the amendments government shall also be included in the definition of ‘person’. The author had in earlier articles and some replies to queries expressed that government is not a person and therefore, services rendered to government or services rendered by government should not be taxable. The author had also suggested to include ‘government’ within meaning of ‘person’, if intention was to treat government and its departments like Indian Railways, within definition of person. It seems that the amendment is to the effect to bring in clarity.

In the notification, as discussed later on, we find that services rendered by government etc. shall be taxable in hands of recipient.

Present Reverse charge scope:

At present vide  Notification No. 36/2004-ST, Dated 31/12/2004, as amended from time to time some services are subjected to ST under reverse charge method of collection. At present any service rendered by government etc. is not chargeable under reverse charge method.  Through the  Finance Bill 2012 the scheme of taxation of services will be widened when it is enacted as an Act after receiving assent of the President. In expectation of the same Notifications have been issued which will come into force when some of the provisions of The Finance Bill become enactment. The scope of reverse charge method is to be widened in such eventuality as and when S.66B of The FA 2012 is enacted. From the notification we find that a variety of services rendered by government etc. will be taxable under reverse charge method.

Notifications issued in hurry:

After the presentation of budget, some notifications have been issued, apparently in very hurried manner and in expectation that the proposals in the budget 2012-13 will definitely become law.For example the notification  No.15/2012-Service Tax  issued on  17.03.2012 is one such notification which   shall come into force from the date on which section 66B of the Finance Act, 1994 comes into effect. Therefore, it appears that undue hurry has been shown in issuing notifications . It is felt that more thought could be given and notifications could be issued at proper time, instead of issuing notifications just on the basis of proposals in the budget.

service providers who are large in numbers and are much less organized than the service receivers can be brought under reverse charge method.

Relevant portion from the new notification is  reproduced below with highlights relating to services by government etc.: