MARCH 14, 2015

By Sonal Singh & Jagannadh Grandhi

THE much awaited budgetary proposals for the year 2015-16 were made by Mr. Arun Jaitley on 28th February, 2015 and his proposals are being termed as ‘bold', ‘futuristic' and ‘reformist' by the experts. Mr. Jaitley has admittedly tried to widen the tax base and in order to do so has, amongst other changes, proposed to prune the Negative List of services provided under Section 66D of Chapter V of Finance Act, 1994 ("Act"). In the present article, we shall discuss one such major change in the existing entries in the Negative List pertaining to services provided by the Government and Local Authorities.

Post 1st July, 2012 Service Tax is leviable on any activity carried out by a person for another for consideration, including declared services except those specified in the negative list under Section 66D, or otherwise specifically exempt by the mega exemption notification issued by the Central Government. As the definition of ‘person' under Section 65B of the Act inter alia includes Government and local authorities, activities undertaken by government and local authorities for another person are also chargeable to tax. However, most of the activities by the government or local authorities are covered within the negative list of services provided under Section 66D(a) of the Act and hence no tax is payable on the same. Section 66D(a) excludes certain activities undertaken by the Government or local authorities from its ambit making only those specified services chargeable to Service Tax. One such service excluded from the scope of Section 66D(a) is support services provided to business entities. Thus, whenever the Government or local authority provides any support services to business entities then such activities are chargeable to Service Tax.

‘Support services' has been defined under Section 65B(49) to mean any support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain services by outsourcing from others for any reason whatsoever. Thus, only such services which a business entity may have carried on its own but has opted to outsource will amount to support services. As per the Taxation of Services: CBEC's Education Guide dated 20th June, 2012 only those activities of Government or local authorities are taxed where they compete with private entities and the rationale is to provide a level playing field to private entities in these areas as exemption to Government in such activities would lead to competitive inequities. The Education Guide further clarifies that services provided by the Government in terms of its sovereign right to business entities and which are not substitutable in any manner by any private entity are not support services and hence will not be taxable.

Vide Clause 107 of the Finance Bill, 2015 a proposal has been made to substitute the words ‘support services' in Section 66D(a)(iv) with ‘any services'. As a result of the above proposed amendment, any services provided to business entities by the Government or local authority will be taxable. Further, the definition of ‘support services' under Section 65B(49) has also been proposed to be omitted as the same would be rendered redundant after the amendment in Section 66D(a)(iv). These changes have been proposed to be brought to effect from a date to be notified after the enactment of the Finance Bill, 2015. Thus, a plain reading of the amended provision indicates that any services of any nature provided by the Government or local authority to a business entity, unless otherwise exempt, will be liable to Service Tax.

The question that arises here for consideration is whether this limitless and unrestricted increase in the scope of taxation also covers functions such as granting of mining right or granting of license for restaurant etc. which may be in the nature of sovereign functions of the Government. In absence of any clarification in this regard the question may be answered in affirmative by the departmental authorities. However, such a levy of Service Tax on all services provided by the Government and local authorities is way beyond the initial intent and rationale behind the levy on support services by the Government. Therefore, it is desirable that the sovereign functions of the government are granted exemption by way of a notification.

It is noteworthy that as per Notification No. 30/2012-ST dated 20th June, 2012 as amended, Sl. 6 refers, Service Tax on taxable services provided or agreed to be provided by Government or local authority excluding renting of immovable property and other services specified under Section 66D(a)(i),(ii) and (iii) are payable by the recipient of service. Meaning thereby, business entities which will be at the receiving end of any service provided by the Government will be liable to pay Service Tax on payments made by them in respect of such services. Therefore, at every instance where the business entity is making payment to the Government, it will have to be evaluated if the transaction with the government satisfies the definition of service or not and the payment is in the nature of consideration for services received by the Government or local authority or not.

[The authors are associated with Lakshmikumaran & Sridharan and the views expressed are personal]