SCOPE AND RELEVANCE OF 'GOVERNMENT' IN SERVICE TAX

[Dr. Sanjiv Agarwal]

As we all know, Service Tax is levied when an activity is carried out by one person for another for a consideration i.e., two persons are involved - a service provider and a service receiver. The term 'person' is defined in clause 37 of section 65B of the Finance Act, 1994 which, inter alia includes 'government'.

Clause 37 provides an inclusive definition of person which includes individuals, and certain specified types of entities/bodies etc. including government. The above list covers almost all types of entities and organizations as the residual entry covers the persons not covered in earlier specified types.

The statutory provision of Service Tax law define a 'local authority' under section 65B (31) of the Act and a 'governmental authority' under Notification No. 25/2012-ST dated 20.06.2012. The term 'government' was never defined in Service Tax provisions prior to Finance Bill, 2015.

Since ‘Government’ had not been defined in the Act, the definition of ‘Government’ as contained in the General Clauses Act, 1897 would be applicable as per which ‘Government’ includes both State Government and Central Government. Further as per the General Clause Act 1897, State includes Union Territory.

‘Government’ would include various departments and offices of the Central or State Government or the U.T. Administrations which carry out their functions in the name and by order of the President of India or the Governor of a State.

Meaning of 'Government'

"Government" has now been defined by clause 26A in section 65B being inserted by the Finance Bill, 2015.

The proposed new definition reads as under -

"Government means the Departments of the Central Government, a State Government and its Departments and a Union territory and its Departments, but shall not include 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 or the rules made thereunder".

Accordingly, the definition of 'government' is both, an inclusive and an exclusive definition. The expression, 'government' means and includes the following -

• Departments of Central Government,
• State Government and its departments, and
• A Union Territory and its departments

It implies that nothing except the aforementioned three classes of governments / departments shall constitute the 'government'. Again, what is 'department' is not defined but any department or part of government will be considered as integral part of government. It would obviously include ministries and various departments comprised therein. For example, Ministry of Finance of a government may have revenue department, expenditure department, planning / budgeting department, department of banking, economic affairs department and so on.

According to the definition, 'government' shall not include entity or enterprise which has been created under a statute or otherwise, the accounts of which are not required to be kept as per article 150 of the constitution or any rules framed under article 150.

This exclusion category would include entities and body corporate such as -

• Banks / financial constitutions
• Housing Boards
• Central or State Public Sector Undertakings (PSUs)
• Autonomous bodies
• State Financial Corporations
• Development authorities
• Institutes such as ICAI, ICSI, ICWAI etc.

An agency or entity getting grants or subsidy from government does not become a government. Further, there is a difference between government, governmental authority, local authority and government PSU. Only the 'government' as explained above shall be considered as government and entitled to benefits and privileges of negative list and exemptions available to government.

According to article 150 of the constitution of India, the accounts of the union and of the states shall be kept in such form as the president of India may, on the advise of Comptroller and Auditor - General of India (CAG), prescribe.

Usually such accounts are also subject to audit by office of CAG of India whose report is submitted to the President who then cause them to be laid before both the houses of the Parliament. In case of Sates, report is submitted to the Governor of the State, who shall cause them to be laid before the state legislature. Thus only those departments whose accounts are so prescribed and maintained will be covered under the scope of government.

Why it is important to understand the scope of 'government'

'Government' is a person and as such if government is involved in a transaction as a service receiver or service provider, such a transaction could be liable to Service Tax if it is not covered under negative list (section 66D of Finance Act, 1994) or any exemption notification.

Negative List

Under clause (a) of section 66D, following services are covered under negative list and as such, not liable to Service Tax.

(a) Services by Government or a local authority excluding the following services to the extent they are not covered elsewhere-

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 Government;
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. support services, other than services covered under clauses (i) to (iii) above, provided to business entities;

Clause 49 of section 65B of Finance Act, 1994 defines support services as follows -

“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.

Support services have been defined in section 65B of the Act as ‘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 movable or immovable property, security, testing and analysis’. Thus services which are provided by government in terms of their sovereign right to business entities are not support services e.g. grant of mining or licensing rights.

‘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
• shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis;
• Services provided by Government Security agencies are covered under support service- under reverse charge, Service Receiver is liable to tax.

Finance Bill, 2015 has expanded the scope of tax and in other words, curtailed the scope of negative list by following two amendments -

1. Substitution of words 'support service' by 'any service', and
2. Omission of clause 49 of section 66D; i.e., definition of support services

Both these amendments shall be effective from a notified date after the enactment of Finance Bill, 2015.

Exemptions

Then, there are certain exemptions which are available to service received or provided by the government under Notification No. 25/2012-ST. These include -

• Services to government in relation to erection, construction, maintenance, repair, alteration, renovation etc (Clause 12)
• Services provided to government in relation to water supply, public health, sanitation conservancies, slum improvement and up-gradation and solid waste management (Clause 25)

The sovereign functions performed by government departments are also not liable to levy of Service Tax.