By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate
IN a move having widespread ramification, ‘all services’ rendered by ‘Government’ to business entities have being brought under the Reverse Charge Mechanism, with effect from 01.04.2016.
Section 65B(26A) of the Finance Act, 1994 defines ‘Government’ as under :
(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”
Section 3(23) of the General Clauses Act, 1897, reads as under:
(23) “Government” or “the Government” shall include both the Central Government and any State Government ;
A combined reading of the above provisions would indicate that, public sector companies, electricity and public utility boards formed under the respective Acts, public sector banks and other corporations controlled by the Central and State Governments would not be treated as ‘Government’. It would seem that only the Government Departments would be treated as ‘Government’ for purposes of Section 65B(26).
In terms of Section 66D of Finance Act, 1994, except for services rendered by the Department of Posts, Renting of Immovable Property services, Transport of goods and/or passengers and Services in relation to a vessel or an aircraft, etc., all other services rendered by Government to business entities would be covered under the Reverse Charge Mechanism, due to the substitution of the words ‘support service’ by the words ‘any service’ in Clause (iv) of Section 66D(a) of the Finance Act, 1994. This development has manifold ramifications inasmuch as any service rendered by the Government would be liable to service tax under the Reverse Charge Mechanism.
Here is my take on some of the contentious issues that could emerge, post 1-4-2016 ….
Is RCM applicable on taxes and duties paid to the Government – It cannot be said that the Government is rendering services to the taxpayers by collecting taxes. The Apex Court had held in, D G Ghouse v State of Kerala (1980) 2 SCC 410 that, ‘tax’ is its widest sense would include all money raised by taxation and would include taxes levied by the Central or State legislatures and also those known as ‘rates’ or other charges levied by the local authorities under statutory powers. Hence, in my view, duties, taxes and penalties levied under the Income tax Act, Central Excise Act, Finance Act, 1994, etc. cannot be subject to the levy of service tax under RCM.
In general, it would seem that, RCM would be attracted in cases involving levy of ‘fee’ by the Government. In the case of a ‘fee’, there is an underlying assumption of a ‘service’ that is provided by the Government, inasmuch as, it can be stated that a ‘fee’ is a charge for the rendering of certain services by the Government. However, the Apex Court in Agricultural Marketing Committee v Rajam Jute and Oil Millers Association 131 STC 472(SC), it was held that, though quid pro quo between the levy of fees and the provision of services is a necessary pre-requisite, it is not necessary that there should be an exactitude between the two.
However, in terms of the ‘late fee’ that is levied for late filing of the ST-3 returns, RCM would be applicable, in my view, as this is not a tax or a penalty.
In practical situations, there could be a lot of confusion as to the applicability of service tax on fees levied for the purpose of raising revenue under the tax laws, as in these cases the fees so collected could be treated as ‘tax’.
Government’s sovereign activities vs support activities
In its master circular No. 967/2007-ST, dated: August 23, 2007, the Government had issued the following clarification, in respect to the issue raised in Sl.No. 999.01 viz.
Sovereign/public authorities perform functions assigned to them under the law in force, known as “statutory functions”. For example, ·
– Regional Reference Standards Laboratories (RRSL) undertake verification, approval and calibration of weighing and measuring instruments;
– Regional Transport Officers (RTO) issue fitness certificate to motor vehicles;
– Directorate of Boilers inspects and issues certificates for boilers; or
– Explosive Department inspects and issues certificate for petroleum storage tank, LPG/CNG tank in terms of provisions of the relevant laws.
Authorities providing such functions, required to be performed as per law, may collect specific amount or fee and the amount so collected is deposited into government account.
Whether such activities of a sovereign / public authority, performed under a statute, can be considered as ‘provision of service’ for the purpose of levy of service tax and the amount or fee collected, if any, for such purposes can be treated as consideration for the services provided?
Activities assigned to and performed by the sovereign / public authorities under the provisions of any law are statutory duties. The fee or amount collected as per the provisions of the relevant statute for performing such functions is in the nature of a compulsory levy and are deposited into the Government account.
Such activities are purely in public interest and are undertaken as mandatory and statutory functions. These are not to be treated as services provided for a consideration. Therefore, such activities assigned to and performed by a sovereign / public authority under the provisions of any law, do not constitute taxable services. Any amount / fee collected in such cases are not to be treated as consideration for the purpose of levy of service tax.
However, if a sovereign / public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of a taxable service as defined.
To what extent, the view expressed in the above referred Circular that no service tax can be levied on the activities undertaken by a sovereign or a public authority, would be valid post 1-4-2016 is not known, given the insertion of the words ‘all services’ in Section 66D(a)(iv) of the Finance Act, 1994. Obviously, the Government feels that most of the activities performed by the Government are ‘services’, exigible to the levy of service tax with effect from 1-4-2016. There could be a lot of confusion regarding activities involving payment of fees to the Central Governments for obtaining permits, licenses, approvals including licenses for imports and exports, registrations, etc., as a view can be taken that these fees or charges are paid against the sovereign functions performed by the Government which cannot be treated as ‘services’ within the meaning of the service tax law.
However, it would seem that fees paid for certain specific services could be straightway covered under the RCM. Thus, inspection fees paid to Government Departments, fee paid to the Ministry of Corporate Affairs for accessing third party public documents, Merchant Overtime Charges paid to customs officers, etc. could be subject to payment of service tax under RCM, as these charges are paid for obtaining specific services from the Government. However, filing fee paid to the MCA for filing of documents and financial statements under the Companies Act may not be treated as a ‘service’ as these fees are paid to the Government under the statute.
Taking this discussion forward…fees or charges paid to the Police Department for seeking private protection should involve RCM, as providing protection to private parties on request cannot be treated as an activity performed under a statutory or sovereign power.
Stamp duties paid on registration of properties would also not be subject to RCM, in my view, as these charges are levied under the Stamp Duty Acts of the State Governments.
It would seem that, by seeking to insert clause (j) in Section 66E, in terms of which, assignment by the Government of the right to use the radio-frequency spectrum and subsequent transfers thereof, would be treated as a ‘declared service’, the Government has ensured that it would collect tens of thousands of crores as service tax on the spectrum related charges collected from the corporates. This would seem to be a masterstroke, as this insertion in the list of declared services cannot even be challenged in the Courts.
Whenever in doubt, the business entities would be advised to play it safe by paying service tax under RCM and claim cenvat credit of the same.
It cannot be gainsaid that the Government has indeed opened a Pandora’s box by seeking to levy service tax on ‘all services’ rendered by the Government without clearly specifying as to whether the sovereign or statutory functions performed by the Government can be treated as ‘services’.
The Board would do well to come with a clarificatory circular on whether the fees or charges paid against sovereign or statutory powers exercised by the Government are liable to the levy of service tax under RCM, post 1-4-2016.