ST clarificatory Circular 192 falls short of expectations : 26-04-2016

By S Sivakumar, LL.B, FCA, FCS, ACSI, MBA, Advocate

THE TRU has come out with four notifications and a circular dated April 13, 2016, seeking to clarify the levy of service tax on services rendered by the Government.

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These are –

Notification No. 22/2016-Service Tax, Dated: April 13, 2016

Notification No. 23/2016-Service Tax, Dated: April 13, 2016

Notification No. 24/2016-Service Tax, Dated: April 13, 2016

Notification No. 24/2016-Central Excise (NT), Dated: April 13, 2016

CBEC Circular No. 192/02/2016-Service Tax, Dated-April 13, 2016

While the intent behind these is laudable, it would seem that the Circular would create more confusion than clarify.

In Sl Nos 3 and 4, the circular clarifies that, there would be no service tax on taxes, cesses, duties, fines and penalties including fines and penalties payable to the Government for violation of a statute, bye-laws, rules or regulations, on the basis that, these are not consideration for any particular service as such and hence not leviable to service tax. Thanks to this clarification, any late fee or penalty payable for, let’s say, late or non-filing of the ST-3 return is also not subject to service tax levy. Also, in terms of Notification No. 22/2016-ST dated 13-4-2016, fines and liquidated damages payable to the Government for non-performance of contracts are not subject to service tax. There are also welcome clarifications in terms of services provided by one Government to another Government or local authority, in terms of Sl.No. 1 of the circular. There is also a welcome exemption in terms of services provided by way of grant of passport, visa, etc. to an individual who may be carrying out a profession or business, in terms of Notification No. 22/2016-ST dated 13-4-2016, as is the exemption provided in Notification No. 22/2016-ST dated 13-4-2016 where the gross amount charged does not exceed Rs 5,000/-. So far so good.

I have an arguable issue in the matter of clarification given at Sl.No. 5, wherein, it has been clarified as under :

“It is clarified that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As long as the payment is made (or fee charged) for getting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. It is also clarified that Service Tax is leviable on any payment, in lieu of any permission or license granted by the Government or a local authority.”

The Government seems to believe there is always a quid pro quo in terms of a service rendered by the Government, whenever a ‘fee’ is paid (as contrasted to a case where a ‘tax’ is paid). It would then become necessary to understand and appreciate the difference between a ‘fee’ and a ‘tax’, as a ‘fee’ which is essentially in the nature of a ‘tax’ cannot be subjected to the levy of service tax.

In Sri Krishna Das v Town Area Committee, Chirgaon [(1990) 3 SCC 645], the Apex Court has succinctly discussed the difference between a ‘fee’ and a ‘tax’ by observing, as under:


“22. A fee is paid for performing a function. A fee is not ordinarily considered to be a tax. If the fee is merely to compensate an authority for services performed or as compensation for the services rendered, it can hardly be called a tax. However, if the object of the fee is to provide general revenue of the authority rather than to compensate it, and the amount of the fee has no relation to the value of the services, the fee will amount to a tax. In the words of Cooley, “A charge fixed by statute for the service to be performed by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the government whose officer or officers collect the charge is not a fee but a tax.”

23. Under the Indian Constitution the State Government’s power to levy a tax is not identical with that of its power to levy a fee. While the powers to levy taxes is conferred on the State legislatures by the various entries in List II, in it there is Entry 66 relating to fees, empowering the State Government to levy fees “in respect of any of the matters in this list, but not including fees taken in any court”. The result is that each State legislature has the power, to levy fees, which is co-extensive with its powers to legislate with respect to substantive matters and it may levy a fee with reference to the services that would be rendered by the State under such law. The State may also delegate such a power to a local authority. When a levy or an imposition is questioned, the court has to inquire into its real nature inasmuch as though an imposition is labelled as a fee, in reality it may not be a fee but a tax, and vice versa. The question to be determined is whether the power to levy the tax or fee is conferred on that authority and if it falls beyond, to declare it ultra vires.

24. We have seen that a fee is a payment levied by an authority in respect of services performed by it for the benefit of the payer, while a tax is payable for the common benefits conferred by the authority on all tax payers. A fee is a payment made for some special benefit enjoyed by the payer and the payment is proportional to such benefit. Money raised by fee is appropriated for the performance of the service and does not merge in the general revenue. Where, however, the service is indistinguishable from the public services and forms part of the latter it is necessary to inquire what is the primary object of the levy and the essential purpose which it is intended to achieve. While there is no quid pro quo between a tax payer and the authority in case of a tax, there is a necessary co-relation between fee collected and the service intended to be rendered. Of course the quid pro quo need not be understood in mathematical equivalence but only in a fair correspondence between the two. A broad co- relationship is all that is necessary.”


In another interesting decision, viz. Jindal Stainless Ltd. & Anr. v. State of Haryana & Ors . [(2006) 7 SCC 241] = 2006-TIOL-34-SC-MISC-CB, a Constitution Bench of the Apex Court has stated as under:


“40. Tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the taxpayer to pay. The principle behind the levy of a tax is the principle of ability or capacity. In the case of a tax, there is no identification of a specific benefit and even if such identification is there, it is not capable of direct measurement. In the case of a tax, a particular advantage, if it exists at all, is incidental to the State’s action. It is assessed on certain elements of business, such as, manufacture, purchase, sale, consumption, use, capital, etc. but its payment is not a condition precedent. It is not a term or condition of a licence. A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden.

41. On the other hand, a fee is based on the “principle of equivalence”. This principle is the converse of the “principle of ability” to pay. In the case of a fee or compensatory tax, the “principle of equivalence” applies. The basis of a fee or a compensatory tax is the same. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. In the case of a tax, even if there is any benefit, the same is incidental to the government action and even if such benefit results from the government action, the same is not measurable. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is measurable.”


In another interesting decision, the Supreme Court in Calcutta Municipal Corporation and Others v M/s Shrey Mercantile Pvt Ltd &Others 2005 AIR SC 1879 held as under:


“According to “Words & Phrases”, Permanent Edition, Vol. 41 Page 230, a charge or fee, if levied for the purpose of raising revenue under the taxing power is a “tax”. Similarly, imposition of fees for the primary purpose of “regulation and control” may be classified as fees as it is in the exercise of “police power”, but if revenue is the primary purpose and regulation is merely incidental, then the imposition is a “tax”. A tax is an enforced contribution expected pursuant to a legislative authority for purpose of raising revenue to be used for public or governmental purposes and not as payment for a special privilege or service rendered by a public officer, in which case it is a “fee”. Generally speaking “taxes” are burdens of a pecuniary nature imposed for defraying the cost of governmental functions, whereas charges are “fees” where they are imposed upon a person to defray the cost of particular services rendered to his account.”


Applying the law laid down by the Apex Court in these decisions, it would seem that in many instances, the so-called ‘fee’ is actually a ‘tax’ and consequently, service tax cannot be levied. An example that immediately comes to my mind are the fees that are charged by the Municipal Corporations on owners of flats, which are normally charged on a per square feet basis, which have to be treated as ‘taxes’. Similarly, fees collected by the State Government agencies towards providing various connections related to electricity, water, etc. might also be considered as ‘taxes’ and consequently, service tax may not be leviable.

Taking this discussion forward…in terms of the circular, even sovereign and statutory functions of the Government can be treated as ‘services’. In its circular No. 96/7/2007-ST dated August 23, 2007 , (serial no. 999.01) the Board had expressed the following view, viz.

“Many sovereign/public authorities (i.e. agencies constituted/ set up by Government) perform various functions and duties which are statutory in nature (e.g. Regional Transport Officer issuing fitness certificate, Factories inspector inspecting factories, Directorate of Boilers inspecting and certifying boilers etc.). These are mandatory and statutory functions. It cannot be said that these authorities are providing any service to any individual for consideration. Hence, these are not taxable services. However, if these authorities provide any non-statutory service, those will be liable to service tax, if the service falls within the definition of taxable service”.

One would wonder as to how this view could have undergone a change with the advent of the negative list based service tax regime. Can the Government, while performing a sovereign or statutory function be ever regarded as a service provider? There are several decisions that were rendered in the context of the positive list based service tax regime, wherein, it has been held that, service tax cannot be levied on statutory functions performed by Government Agencies.

In State of Madhya Pradesh v CCE, Gwalior – 2006-TIOL-1227-CESTAT-DEL, the CESTAT took the view that, supervision charges collected as levy cannot be described as consideration for services provided for storage and warehousing. In M/s ELECTRICAL INSPECTORATE – 2007-TIOL-2175-CESTAT-BANG, the CESTAT took the view that, State Government Departments actions carried in furtherance of Sovereign functions and in terms of legislations cannot be a subject matter of Service Tax.

As we know…. consideration, which is a sine qua non for an activity to be considered as a service, is defined in Section 2(d) of the Indian Contract Act, as under:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”.

Unlike a commercial transaction, it cannot be said that, the Government, i.e. the promisee is undertaking an activity at the desire of the business entity, i.e. the promisor, especially in respect of sovereign and statutory functions, as the Government is in any case, required to perform these functions as part of its constitutional mandate. To bring these sovereign and statutory functions and activities under the service tax net is fraught with legal complications, for sure.

Before concluding…

In my view, fees paid under statutes such as the Companies Act, Factories Act, Shops and Establishments Act, etc. cannot be subjected to service tax.

Notwithstanding the fact that the Government’s move to collet service tax from the business entities on ‘services’ rendered by Government, etc. is likely to face legal challenges, business entities should expect a tough time from the overzealous Department, for whom, a Board Circular, however, illegal it might be, is more sacrosanct than a binding decision of the Apex Court.

It is not certain that the business entities that pay service tax under the reverse charge mechanism, in respect of services rendered by the Government, would be able to avail of CENVATcredit. The Department could always seek to deny credit on the basis that the fees that are paid to Government Departments have no ‘nexus’ with the output service.

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