Service tax on Postal Services – Controversial Provisions - Ignorance of law is no excuse

[Surender Gupta]

In India, general public is being expected to know the law and statutory provisions. Ignorance of law is no excuse.

But, if such ignorance is on the part of Central Government or the Members of our Parliament and Central Board of Excise and Customs, what is to say?

We are discussing the controversial issue of service tax on postal services.

Vide its circular no. 83/1/2006-ST 4th July, 2006 the has clarified the issue of, "Levy of service tax on banking and financial services - Services provided by Department of Posts"

In paragraph 3 of the circular the board says that,

3 "Banking and other financial services are defined under section 65(12). Such services provided to a customer by a banking company or a financial institution including a non-banking financial company or any other body corporate or any other person to a customer are liable to service tax under section 65(105)(zm).   The expression 'any other person' appearing in section 65(105)(zm) is to be read ejusdem generis with the preceding words. The expression 'other financial services' appearing under section 65(12)(a)(ix) is a residuary entry and includes those services which are normally rendered by banks or financial institutions."

Further in paragraph 4 and 5 of the circular the board says that,

4. Hence, banking and other financial services provided by a banking company or a financial institution or a non-banking financial company or any other service provider similar to a bank or a financial institution are liable to service tax under section 65(105)(zm) of the Finance Act, 1994. Department of Posts is not similar to a bank or a financial institution and hence does not fall within the category of any other similar service provider.

5. In view of the foregoing, it is clarified that services such as transfer of money through money orders, operation of savings accounts, issue of postal orders provided by the Department of Posts are not liable to service tax under section 65(105)(zm) read with section 65(12) of the Finance Act, 1994.

From the circular see what the board has clarified:-

Board has clarified the scope of the word "other financial services'. Accordingly the express "other financial services" includes those services which are normally rendered by banks or financial institutions. Further it says that Department of Posts is not similar to a bank or a financial institution and hence does not fall within the category of any other similar service provider.

In simple words, if any service is being provided which is not normally being providing by a bank shall not be liable to tax.

For an example, the services related to PPF (Public Provident Fund) facility are being provided by State Bank of India. Now a question of million arises that whether this service is a part of normal banking channel or not. And if this service is a part of normal banking channel, then why not in the hands of Department of Posts.

Now look what our Honorable Minister of State for Communications & Information Technology, Dr. Shakeel Ahmad, has informed the Rajya Sabha on 27-7-2006.

It was initially introduced on the following postal services:

(i) Speed post and express parcel post

(ii) Banking and financial services run by Department of Posts

(iii) Postal Life Insurance and Rural Postal Life Insurance

(iv) Retail Post services rendered to non-government organisations/ individuals

Subsequently it has been decided by Ministry of Finance to withdraw service tax from Banking and financial services run by Department of Posts (such as money orders, operation of Savings accounts, issue of postal orders, etc.), through a circular dated 4.7.2006   The circular further clarified that service tax need not be recovered on money order.   So service tax will now have no impact on cost of money orders, Dr. Ahmad said.

Though in the above statement Mr. Ahmad has referred to the circular of the board dated 4-7-2006 but there is inherent difference between the above statement and the circular.

The statement of Minister of State in the Rajya Sabha states that there was service tax on Banking and Financial Services run by the Department of posts (such as money orders, operation of Saving accounts, issue of postal orders, etc.) but the same has been withdrawn by Ministry of Finance vide its circular dated 4-7-2006. Whereas, in the circular, it has been clarified that such services were not taxable at all.

Who is right? Whether the above services of Department of Post were liable to service tax?

Now, from the above statement a question of law arises that whether the Board has power to withdraw any Service Tax by way of circular.

The power to withdraw or exempt service tax on any taxable services vests into the Central Government (Ministry of Finance obviously). And such exemption can be granted only through a notification under section 93 of the Act.

Therefore, issuance of clarification on the above issue is an attempt the bypass the procedure of issuing notification under section 93.

The author is unable to understand that, what has prevented the Ministry of Finance to issue Exemption Notification mentioning the services of Department of Posts exempting certain services from service tax.

What will happen, if in the court of law, the above clarification would have been held as 'ultra virus? Who will be responsible?