MARCH 20, 2015

By Mohammad Salim, CA

THE Finance Minister has, while presenting the Union Budget, 2015-16, introduced the Finance Bill, 2015 which inter alia contains the provisions regarding pruning of negative list contained in Section 66D of Chapter V of Finance Act, 1994. One of the proposed amendments in the negative list is exclusion of “any service” (as against “support services') provided by Government or Local Authorities to business entities from the negative list. Further the burden of compliance and tax payment on enlarged scope of taxability will also be passed onto the service recipients.

Before appreciating the amendment let us briefly peruse the current provisions regarding the taxability of services provided by Government or Local Authorities.

Currently as per clause (a) of section 66D all the services provided by Government or Local Authorities are part of negative list except the specified services provided by the Department of Posts to a person other than Government (sub clause (i)), services in relation to an aircraft or a vessel inside or outside the precincts of a port or an airport (sub clause (ii)), Transport of goods and/or passengers (sub clause (iii)) and support services (other than services covered in sub clause (i) to (iii)) provided to business entities. (sub clause (iv))

The term Support services is defined in section 65B (49) of the Act as under:-

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.

In light of above definition of “support services” various services provided by Government in terms of sovereign right to business entities, and which cannot be provided by any private entity, are not support services e.g. grant of mining or licensing rights, services provided during land acquisition etc and thus would be covered by the negative list (clause (a) of section 66D) and would not be exigible to service tax.

However the services provided by Government e.g. Security provided by Police to sports events held by private entities being support services as similar services can be provided by private entities, are taxable.

To sum up, as per the current provisions apart from specified services of Department of Post, services in relation of aircraft or vessel or transportation of goods or passengers, only the support services provided to business entities have been excluded from the negative list. Rest of services i.e. services other than support services to business entities and also provision of support services to non business entities would be covered by the negative list and thus out of ambit of service tax as per the charging section 66B.

Further in order to save the Government / Local Authority from the compliance rigors the Rule 2(1)(d) of the Service Tax Rules, 1994 read with Notification No 30/2012-ST dated 20th June, 2012 (as amended) mandates that in regard to support services (other than renting of immoveable property) provided by Government / Local Authority to any business entity located in the taxable territory, the person liable to pay tax is the recipient of such service who needs to pay 100% of service tax.

Amendment by Finance Bill, 2015 .

Finance Bill, 2015, has proposed to amend section 66D(a)(iv), by which, for the words “ support services” the words “any service” shall be substituted with effect from a date to be notified after the enactment of Finance Bill, 2015. Consequently, the definition of “support service” [section 65 B (49)] has been proposed to be deleted.

The impact of this amendment would be that as and when this amendment is given effect to, all services provided by the Government or local authority to a business entity, except the services that are specifically exempted, or covered by any another entry in the Negative List, shall be liable to service tax . Therefore the services that were hitherto non taxable as they did not qualify as “support services” i.e. services provided by Government in terms of sovereign right to business entities, and which cannot be provided by any private entity e.g. grant of mining or licensing rights, services provided during land acquisition etc, would now become taxable.

Besides the increased scope of taxability another bad news for the service recipients is that in parity with the above proposed change in the negative list consequential amendment has been made in the reverse charge notification No 30/2012-ST dated 20-6-2012 through Notification No 07/2015-ST dated 1-3-2015 wherein also the reference to support services would be deleted and thus all taxable service provided excluding renting of immoveable property and services specified in sub-clauses (i),(ii) and (iii) of clause (a) of section 66D would be covered under full reverse charge mechanism.

Thus besides enlarging the scope of taxability on services provided by Government or Local Authority, the burden of compliance and payment of service tax on such enhanced scope has also been shifted onto the service recipient. Thus all we can say is “Support withdrawn and Service Recipient to Pay”.