No service tax on grants, subsidy, donations, gifts etc. - a wider circular is desired.

[C.A. DEV KUMAR KOTHARI]

Charitable and philanthropic institutions:

Many institutions are engaged in activities on charitable and philanthropic basis. In course of such activities they may be rendering some services which are in category of taxable services. Charges levied are generally of nominal nature to keep a check on the nature of real beneficiaries who avail such services and to recover a part of cost of services. The main purpose of such institutions is to perform a function for public utility and general welfare. Many of such institutions are sponsored by government and many by private charities. When such institutions are run by private organizations, they are popularly called (Non government Organization) NGO

Grants or donations:

Such charitable and philanthropic organizations receives grants, aids, donations etc. from government, public, other institutions etc. as corpus fund or a part of cost is met by way of donations. The person who gives donations, contribution, grants or aids etc. gives the same as a general contribution for the purposes of the institutions or any of its program as may be specified. Such contribution are not for availing any service or to render any service to any specified person or group of person. The grants or donations are given on general basis for general public purposes. Therefore, the donor does not have relationship of service receiver. The donations given is not a consideration for any service. Therefore, there is no question of levy of service tax.

Disputes are going on:

In case of many services there are disputes about taxability of subsidy, grant, donations etc. received by such institution. Merely because an institutions is engaged in performing some functions which are in list of taxable category, the revenue officers have tendency to issue show cause notice and raise demands. This is done without examining preconditions for levy of service tax namely- type of service rendered, purpose of service rendered, relationship of service provider and service receiver, and nature of amount received as a service charge etc.

Even government grants have been subject matter of disputes:

Cases have been for levy of service tax even on subsidies given by government to business for example in case of subsidy given by government to sugar mills for maintaining buffer stock of sugar had been a matter of dispute for levy of service tax.

Desirability of general exemption:

It is desirable that general exemption or clarification for exemption should be given from levy of service tax on any grant , subsidy, donations etc. received by any organization which is not in nature of consideration for services rendered, if at all any service is assumed of taxable category.

Circular about commercial training and coaching service:

Circular No. 127/9/2010-ST dated 16-8-2010 is to clarify that donations or grant-in-aid received by commercial training or coaching service providers shall not be in nature of value of taxable services.

Salient features of the circular is analyzed below in tabular form:

From circular	Observations and analysis of author.
A representation has been received seeking clarification	This shows that there are some doubts or disputes
whether donations and grants-in-aid received	It is about donations and grants thus also include similar receipts of contributions and gifts.
from different sources	Source may be of different type like government, business and industry, NGO, individual etc.
by a charitable Foundation	Receipt is by a charitable organization ( it can also be for charitable activity carried by commercial concern as a part of total activity)
imparting free livelihood training to the poor and marginalized youth,	The training or similar facility is to needy people.
will be treated as 'consideration' received for such training and subjected to service tax under 'commercial training or coaching service'.	Whether donation etc. is consideration for service ?
On examination it is clarified as follows:
The important point here is regarding the presence or absence of a link between 'consideration' and taxable service.	Clear and definite link between 'consideration' and taxable service is essential.
It is a settled legal position that unless the link or nexus between the amount and the taxable activity can be established, the amount cannot be subjected to service tax.	In absence of such link there cannot be levy of ST
Donation or grant-in-aid is not specifically meant for a person receiving such training or to the specific activity, but is in general meant for the charitable cause championed by the registered Foundation.	Donation or grant-in-aid is in general meant for the charitable cause championed by the registered Foundation or other institution who receive such donation. It is not in nature of any consideration.
Between the provider of donation/grant and the trainee there is no relationship other than universal humanitarian interest.	The relationship of service provider and service receiver is a necessary condition.
In such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to specific trainee or training.	In absence of link and relationship and nature of donation not being in nature of consideration for service donation or grant-in-aid, or gifts etc. are  not includible in taxable value of service.

Readers may also read the following article which is on related subject:

Sugar buffer stock subsidy is not warehousing charges. Not liable to service tax- unnecessary litigation by revenue fit cases for allowing cost of appeal and damages in favor of tax payers.