Services by Government or a local authority - Service Tax Practice Manual / Ready Reckoner - Service Tax

Chapter 1 Services by Government or a local authority Effective date: 1.7.2012 Scope of Negative Service Section 66D (a) Services by Government or a local authority excluding the following services to the extent they are not covered elsewhere: (i) 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; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers; or (iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities. Meanings and Definitions: [Section 65B (26A) 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;] (Inserted vide THE FINANCE ACT, 2015 w.e.f. 14th May 2015) Section 65B(7) - aircraft has the meaning assigned to it in clause (1) of section 2 of the Aircraft Act, 1934; Section 65B(8) - airport has the meaning assigned to it in clause (b) of section 2 of the Airports Authority of India Act, 1994; Section 65B(17) - business entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business; Section 65B(25) - goods means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale; Section 65B(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; Section 65B(38) - port has the meaning assigned to it in clause (q) of section 2 of the Major Port Trusts Act, 1963 (38 of 1963) or in clause (4) of section 3 of the Indian Ports Act, 1908; (15 of 1908.) Section 65B(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; Section 65B(53) - vessel has the meaning assigned to it in clause (z) of section 2 of the Major Port Trusts Act, 1963; (38 of 1963.) Section 65B(54) - works contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land; Clarification by the Board (Taxation Guide Guidance Note 2 Exemptions dated 20.06.2012) 2.4.5 Are Government and local authorities also liable to pay tax? Yes. However, most of the services provided by the Government or local authorities are in the negative list 2.4.6 What is the rationale behind taxing certain activities of the Government or local authorities? Only those activities of Government or local authorities are taxed where similar or substitutable services are provided by private entities. The rationale is as follows- to provide a level playing field to private entities in these areas as exemption to Government in such activities would lead to competitive inequities; and to avoid break in Cenvat chain as the support services provided by Government are normally in the nature of intermediary services. 2.4.7 What is the meaning of Government ? The phrase Government has not been defined in the Act. As per clause (23) of section 3 of the General Clauses Act, 1897 Government includes both Central Government and any State Government. As per clause (8) of section 3 of the said Act Central Government , in relation to anything done or to be done after the commencement of the Constitution, mean the President. As per article 53 of the Constitution the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, in terms of article 77 of the Constitution all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the 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. Similarly as per clause (60) of section 3 of the General Clauses Act, 1897 State Government , as respects anything done after the commencement of the Constitution, shall have been, in a State the Governor, and in Union Territory the Central Government. Further as per article 154 of the Constitution the executive power of the State shall be vested in the Governor and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, as per article 166 of the Constitution all executive actions of the Government of State shall be expressed to be taken in the name of Governor. Therefore, State Government means the Governor or the officers subordinate to him who exercise the executive power of the state vested in the Governor and in the name of the Governor. 2.4.8 What is a local authority? Local authority is defined in clause (31) of section 65B and means the following:- A Panchayat as referred to in clause (d) of article 243 of the Constitution A Municipality as referred to in clause (e) of article 243P of the Constitution 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 A Cantonment Board as defined in section 3 of the Cantonments Act, 2006 A regional council or a district council constituted under the Sixth Schedule to the Constitution A development board constituted under article 371 of the Constitution , or A regional council constituted under article 371A of the Constitution . 2.4.9 Are all local bodies constituted by a State or Central Law local authorities? No. The definition of local authority is very specific as explained in point no 2.4.8 above and only those bodies which fall in the definition comprise local authorities . It would not include other bodies which are merely described as a local body by virtue of a local law. However it may be noted that services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution are specifically exempt under the mega exemption. Governmental authority has been defined in the said mega exemption as a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution . Thus some of these local bodies may comprise governmental authorities. 2.4.10 Would various entities like a statutory body, corporation or an authority constituted under an Act passed by the Parliament or any of the State Legislatures be Government or local authority ? A statutory body, corporation or an authority created by the Parliament or a State Legislature is neither Government nor a local authority as would be evident from the meaning of these terms explained in point nos. 2.3.7 and 2.3.8 above respectively. Such statutory body, corporation or an authority are normally created by the Parliament or a State Legislature in exercise of the powers conferred under article 53(3)(b) and article 154(2)(b) of the Constitution respectively. It is a settled position of law Government ( Agarwal v. Hindustan Steel 1969 (12) TMI 109 - Supreme Court of India ) that the manpower of such statutory authorities or bodies do not become officers subordinate to the President under Article 53(1) of the Constitution . Such a statutory body, corporation or an authority as a juristic entity is separate from the state and cannot be regarded as Central or State Government and also do not fall in the definition of local authority . Thus regulatory bodies and other autonomous entities which attain their entity under an act would not comprise either government or local authority. 2.4.11 Would services provided by one department of the Government to another Department of the Government be taxable? If services are provided by one department of the Central Government to another department of the Central Government or by a department of a State Government to another department of the same State Government then such service would not be taxable as it would amount to self-service. To be taxable a service has to be provided to another person. On the other hand if a service is provided by a Central Government department to a State Government department or vice versa or a by a State to another State Government or by a Government to an autonomous body, the same would be taxable if such service does not fall in the negative list. It is another matter that most of the services provided by the Government are in the negative list. For details please refer to point no. 4.1 of this Guide. 2.4.12 Would taxable services provided by Government or local authorities still be liable to tax if they are covered under any other head of the negative list or are otherwise exempted? No. For example, transport services provided by Government to passengers by way of a stage carriage would not be taxable as transport of passengers by stage carriage has separately been specified in the negative list of services. The specified services provided by the Government or local authorities are taxable only to the extent they are not covered elsewhere i.e. either in the negative list or in the exemptions. (Taxation Guide Guidance Note 4 Exemptions dated 20.06.2012) 4.1.1 Are all services provided by Government or local authority covered in the negative list? No. Most services provided by the Central or State Government or local authorities are in the negative list except the following : ( a ) services provided by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services carried out on payment of commission on non government business; ( b ) services in relation to a vessel or an aircraft inside or outside the precincts of a port or an airport; ( c ) transport of goods and/or passengers; ( d ) support services, other than those covered by clauses (a) to (c) above, to business entities. 4.1.2 Would the taxable services provided by the Government be charged to tax if they are otherwise exempt or specified elsewhere in the negative list? No. If the services provided by the government or local authorities that have been excluded from the negative list entry are otherwise specified in the negative list then such services would also not be taxable. 4.1.3 Government has not been defined in the Act. What is the meaning of Government? Please refer to point no. 2.4.7. 4.1.4 Are various corporations formed under Central Acts or State Acts or various government companies registered under the Companies Act, 1956 or autonomous institutions set up by a special Acts covered under the definition of Government ? No. For detailed analysis please refer to point no. 2.4.10. 4.1.5 What entities are then covered under Government ? 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. 4.1.6 Would a department of the Government need to get itself registered for each of the services listed in answer to Q. No.4.1.1 above? For the support services provided by the Government, other than where such support services are by way of renting of immovable property, to business entities government departments will not have to get registered because service tax will be payable on such services by the service receiver i.e. the business entities receiving the service under reverse charge mechanism in terms of the provisions of section 68 of the Act and the notification issued under the said section as well Service Tax Rules, 1994 . For services mentioned at (a) to (c) of the list (point 4.1.1 above refers) tax will be payable by the concerned department. 4.1.7 What is the meaning of support services which appears to be a phrase of wide ambit? 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, and which are not substitutable in any manner by any private entity, are not support services e.g. grant of mining or licensing rights or audit of government entities established by a special law, which are required to be audited by CAG under section 18 of the Comptroller and Auditor-General s (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statue and cannot be performed by the business entity themselves and thus do not constitute support services.) 4.1.8 Will the services provided by Police or security agencies to PSUs or corporate entities or sports events held by private entities be taxable? Yes. Services provided by government security agencies are covered by the main portion of the definition of support service as similar services can be provided by private entities. In any case it is also covered by the inclusive portion of the definition. However the tax will be actually payable on reverse charge by the recipient. 4.1.9 What is the meaning of local authority? Please refer to point no 2.4.8 and 2.4.9. 4.1.10 Department of Posts provides a number of services. What is the status of those services for the purpose of levy of service tax? As per sub-clause (i) of clause (a) of section 66D services provided by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services carried out on payment of commission on non government business are excluded from the negative list. Therefore, the following services provided by Department of Posts are not liable to service tax. Basic mail services known as postal services such as post card, inland letter, book post, registered post provided exclusively by the Department of Posts to meet the universal postal obligations. Transfer of money through money orders, operation of savings accounts, issue of postal orders, pension payments and other such services. 4.1.11 Would agency or intermediary services on commission basis (distribution of mutual funds, bonds, passport applications, collection of telephone and electricity bills), which are provided by the Department of Posts to non-government entities be liable to service tax? Yes. Agency services carried out on payment of commission on non-government business are excluded from the negative list entry relating to services provided by Government or a local authority.