INTRODUCTION & POSITION UNDER PRE – GST REGIME
1. In
India, administration is divided into three tiers, namely Central Government,
State Government & Municipality/Local Authority. Each tier is entrusted
with specific powers & responsibility to carry out the various activities
and functions. In the said course, the said authority receives various
goods/services and at times, might even supply goods/services. Article 285
& 289 of the Constitution stipulates that the property of Union/ States is
exempted from taxes levied by the States/Union respectively. However, the same
does not apply to Indirect Taxes. The Supreme Court has held1 that
indirect taxes levied by the Union/State shall be borne by the recipient
State/Union since the same would not be governed by immunity provided by the
Constitution vide Articles 285 & 289 respectively.
2. Therefore,
considering the above constitutional background, not only the Union/States were
liable to bear the indirect taxes levied, viz., VAT, Central Excise &
Service Tax, there was also a liability fastened to discharge service tax on
sale of goods/services provided by the Union/State. For instance, in the
context of sale of goods, under the VAT regime, certain class of person were
deemed to be a dealer with specific intention to tax specific sales, such as
sale of essential commodities at subsidised rates, auctions undertaken by the
Authorities, scrap, etc., carried out by such Government/Local Authority. This
included Customs Department, Department of Union Government/ any State
Government, Local Authorities, Port Trust, Public Charitable Trusts, Railways,
etc.
3. However,
in the context of services tax, the levy had to be analysed for two different
regimes, one being pre-negative list regime and second being the negative list
regime. Under the positive list regime, only selective services were being
taxed. Further, vide Circular No. 89/7/2006 – ST dated 18.12.2006, CBEC had
clarified that performance of statutory function could not be considered as
rendition of service. However, it was further clarified that “if such authority
performs a service which is not in the nature of statutory activity and the
same is undertaken for a consideration not in the nature of statutory fee/levy,
service tax would be leviable in such cases if the activity undertaken was
classifiable within the ambit of a taxable service”. In other words, the said
Circular prescribed tests to determine the applicability of service tax
vis-à-vis the nature of activity involved.
___________________________________________
1 Sea
Customs Act [AIR 1963 (SC)], Karya Palak Engineer, CPWD vs.
Rajasthan Taxation Board, Ajmer [2004 (171) ELT 3 (SC)]
4. However,
under the negative list regime, the definition of person specifically included
“Government” and provided that all services provided by the Government would be
covered under the negative list, except for following:
(a) Services
by Department of Posts by way of speed post, express parcel post, life
insurance and agency services provided to a person other than Government
(b) Services
in relation to an aircraft or a vessel, inside or outside the precincts of a
port or an airport
(c) Transport
of goods or passengers
(d) Any2
services other than services covered above provided to business entities.
5. While
(a) to (c) above were covered under forward charge, i.e., the Government/Local
Authority providing the service would be required to collect and discharge
service tax, service under (d) were covered under reverse charge, i.e., the
business entity receiving the service would be required to discharge tax.
However, upto 31.03.2016, clause (d) covered only support services which was
defined to mean 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.
_____________________________________
2 Substituted
for “Support services” w.e.f 01.04.2016
6. Further,
the Education Guide had also clarified that 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
u/s. 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.)
7. The
above position was amended w.e.f 01.04.2016 to provide that any service
provided by Government to business entities would be excluded from the scope of
negative list. Further, CBEC vide Circular 192/02/2016 dated 13.04.2016
clarified that whether or not any activity is carried out as statutory function,
the same would be liable to service tax (subject to specific exemptions) so
long as payment is being made for getting a service in return. However, it was
clarified that fines and penalty chargeable by Authority were not leviable to
service tax.
LEGAL POSITION UNDER THE GST REGIME
8. The
charging section for levy of GST provides for levy of tax on all supplies of
goods, except alcoholic liquor for human consumption on the value determined
u/s. 15 and at such rates as may be notified and collected in such manner as
may be prescribed and paid by the taxable person
9. The
term “taxable person” has been defined u/s 2 (107) to mean a person
who is registered or liable to be registered u/s. 22 or 24. Section 2
(84) defines the term “person” to include, among others a local authority;
Central Government or a State Government. Section 22 provides that every
supplier shall be liable to be registered in the state from where he makes
taxable supplies. Therefore, the issue that would need consideration is whether
the Government (Central/State) or Local Authority can be said to be engaged in
making taxable supplies, either of goods or services? To answer the said
question, one needs to determine whether the activities undertaken by the
Government or Local Authority can be classifiable as supply or not. For the
same, reference to section 7 becomes necessary. Section 7 (1) which defines the
scope of supply to include all forms of supply of goods or services or both
such as sale, transfer, barter, exchange, license, rental, lease or disposal
made or agreed to be made for a consideration by a person in the course or
furtherance of business.
10. Section
2 (17), which defines the term business provides that business shall include any
activity or transaction undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
authorities. In other words, the activities or transactions undertaken by
the Government or Local Authority are deemed to be business and therefore as
long as there is supply of goods/service by such Government/ Local Authority,
they would be classifiable as supply.
TAXABILITY UNDER GST REGIME
11. Therefore,
the question that would need consideration is whether all activities/functions
undertaken by Government/Local Authority has to be treated as supply of goods
or services or not? This question may not be relevant in the context of goods;
however, it would be very relevant in the context of services. This is because
though service has been defined in a very wide manner to mean anything other
than goods, section 7 (1), which defines supply, pre-necessitates the existence
of a contract for treating an activity/transaction as supply. The same is
evident from the fact that section 7 (1) uses the phrase made or agreed to
be made. This would necessarily require the presence of quid pro quo
for any activity undertaken by the Government/ Local Authority, i.e., the
person making the payment should receive something in return. Some instances
where quid pro quo exists in the activities undertaken by Government/
Local Authority include:
- companies
engaged in telecommunication sector have to pay license fee to the Department
of Telecommunication for spectrum allocation
- builders
are required to pay various charges to the Local Authority in the form of
permission charges, lease premium, staircase allowance, etc., for undertaking
construction activities. Such transactions may amount to service
- companies
making payment to ROC in the form of filing fees, fees for increasing
authorised share capital, etc., thus enabling them to comply with the
provisions of the law
12. However,
there can be instances where the element of quid pro quo may not exist.
For instance, in Gupta Modern Breweries vs. State of Jammu & Kashmir
[(2007) 6 SCC 317], the Court was required to decide whether the fees
recovered for audit conducted by Excise Authorities on the records of assessee
were in the nature of a fee or tax? In the said case, the Court held that there
was no quid pro quo between the taxpayer and the Government/Authority
and therefore the amounts were in the nature of tax and not fee. Therefore, if
such amounts recovered by the Government are treated as tax and not fees, the
same would not amount to a service to the licensee by the Government. That
being the case, such payments to the Government may not attract GST.
13. With
regard to taxes levied by Government/Local Authorities under other statutes,
such as property tax, stamp duty, etc., they cannot be treated as being consideration
for any service provided. This view was also expressed by the CBEC in its’
Circular 192/02/2016. One important fact to support this view is perhaps that
tax is a compulsory exaction of funds, not involving any quid pro quo
and no specific performance can be enforced upon payment of the same from the
Government or Local Authority.
14. Similarly,
penalties or fines levied for violation of any statute, bye-laws, rules or
regulations will also not amount to a service. This would be for the reason that
the penalty or fine would not be paid by the recipient for receiving any
specific service, but are infact in the nature of compulsory payments imposed
on him. For instance, car towing charges collected by the State Government for
a car parked in No-Parking Zone. Even if the owner of car would be paying for
the said charges, yet, the same should not be treated as service supplied by
Government since there was no agreement to receive the said service.
15. To
support the above view, one may refer to the Judgment by the New Zealand
Tribunal in Case S65 (1996) 17 NZTC 7408 wherein a taxpayer, who was a
solicitor, was the subject of a disciplinary hearing by the New Zealand Law
Practitioners Disciplinary Tribunal. The taxpayer argued that the costs he was
ordered to pay were a supply of goods or services to him by the Law Societies.
In the said case, it was held that
costs imposed by a disciplinary tribunal were not subject to GST because there
was no “supply”. The costs of prosecuting an allegedly defaulting solicitor
could not be described as the supply of a service; and in the context of the
Goods and Services Tax Act, “services” are generally considered to be some
activity which helps or benefits the recipient. In other words, penalties,
fines, etc., imposed by the Government/ Local Authorities cannot be treated as
consideration for service provided and hence should not attract GST.
LIABILITY TO PAY GST
16. In
a manner similar to the service tax regime, substantial services provided by
the Government/Local Authority to business entities have been covered under
reverse charge mechanism, except for following specific services where the
respective Government/Local Authority is liable to collect and discharge the
tax liability:
- Renting of
immovable property services3
- 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 the Central
Government, State Government, Union territory
- Services
in relation to an aircraft or a vessel, inside or outside the precincts of a
port or an airport;
- Transport
of goods or passengers
17. In
all other cases of services provided by Government to business entities, the
liability to pay service tax has been fastened on the recipient of service.
While the term business entity has not been defined under GST law, the same
will have to be understood as a person carrying on any business, whether or not
liable to pay GST. For instance, a person dealing in non-GST goods, say
alcohol, is required to obtain liquor licenses for dealing in license. Since
such a person would be a business entity, even though there is no GST
applicable on his outward supplies, he would be required to obtain registration
under GST and discharge the applicable tax thereon. This would also require
such a person to comply with the various provisions of the GST law as well.
18. In
addition to the above, notification 12/ 2017 Central Tax (Rate) also provides
exemption for various other services provided to/by Government/Local
Authorities. Some of the relevant exemptions for services provided by
Government/Local Authorities are listed below:
(a) Services
by Central Government, State Government, Union territory, local authority or
governmental authority by way of any activity in relation to any function
entrusted to a municipality under Article 243 W of the Constitution
[Entry 4]
(b) Services
by a governmental authority by way of any activity in relation to any function
entrusted to a Panchayat under Article 243G of the Constitution [Entry 5]
(c) Services
by the Central Government, State Government, Union territory or local authority
excluding the following services—
(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 the Central Government, State Government, Union
territory;
(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) any service, other than services
covered under entries (a) to (c) above, provided to business entities [Entry 6]
(d) Services
provided by the Central Government, State Government, Union territory or local
authority to a business entity with an aggregate turnover of up to twenty lakh
rupees (ten lakh rupees in case of a special category state) in the preceding financial
year. However, the same is not applicable to services covered under (i) to
(iii) in (d) above as well as in case of renting of immovable property services
[Entry 7]
(e) Services
provided by the Central Government, State Government, Union territory or local
authority to a business entity where consideration does not exceed Rs. 5000.
However, this exemption is not available in case of services covered under (i)
to (iii) above and in case the services are in the nature of continuous supply
of services and the total consideration payable for the supply during the year
exceeds Rs. 5000. [Entry 9]
(f) Services
provided by the Central Government, State Government, Union territory or local
authority by way of allowing a business entity to operate as a telecom service
provider or use radio frequency spectrum during the period prior to the 1st
April, 2016, on payment of license fee or spectrum user charges, as the case
may be. [Entry 42]
(g) Services
provided by the Central Government, State Government, Union territory or local
authority by way of-
(i) registration required under any law
for the time being
in force;
_________________________________________________________________________________________________
3 Vide notification 3/2018 dated 25.01.2018, services
of renting of immovable property supplied by Central Government, State
Government, Union territory or local authority to a person registered under the
Central Goods and Services Tax Act, 2017 have been brought within the purview
of reverse charge.
(ii) testing, calibration, safety check
or certification relating to protection or safety of workers, consumers or
public at large, including fire license, required under any law for the time
being in force [Entry 47]
(h) Services
provided by the Central Government, State Government, Union territory or local
authority by way of issuance of passport, visa, driving license, birth
certificate or death certificate [Entry 61]
(i) Services
provided by the Central Government, State Government, Union territory or local
authority by way of tolerating non-performance of a contract for which
consideration in the form of fines or liquidated damages is payable to the
Central Government, State Government, Union territory or local authority under
such contract.
[Entry 62]
(j) Services
provided by the Central Government, State Government, Union territory or local
authority by way of assignment of right to use natural resources to an
individual farmer for cultivation of plants and rearing of all life forms of
animals, except the rearing of horses, for food, fibre, fuel, raw material or
other similar products. [Entry 63]
(k) Services
provided by the Central Government, State Government, Union territory or local
authority by way of assignment of right to use any natural resource where such
right to use was assigned by the Central Government, State Government, Union
territory or local authority before the 1st April, 2016. [Entry 64]
(l) Services
provided by the Central Government, State Government, Union territory by way of
deputing officers after office hours or on holidays for inspection or container
stuffing or such other duties in relation to import export cargo on payment of
Merchant Overtime charges
[Entry 65]
(m) Services
supplied by a State Government to Excess Royalty Collection Contractor (ERCC)
by way of assigning the right to collect royalty on behalf of the State
Government on the mineral dispatched by the mining lease holders.
19. Similarly,
following services provided to Government/ Local Authority have been exempted:
(a) Pure
services (excluding works contract service or other composite supplies
involving supply of any goods) provided to the Central Government, State
Government or Union territory or local authority or a Governmental authority by
way of any activity in relation to any function entrusted to a Panchayat under
Article 243G of the Constitution or in relation to any function entrusted to a
Municipality under Article 243W of the Constitution [Entry 3]
(b) Composite
supply of goods and services in which the value of supply of goods constitutes
not more than 25 % of the value of the said composite supply provided to the
Central Government, State Government or Union territory or local authority or a
Governmental authority or a Government Entity by way of any activity in
relation to any function entrusted to a Panchayat under Article 243G of the
Constitution or in relation to any function entrusted to a Municipality under
Article 243W of the Constitution
[Entry 3A]
(c) Supply
of service by a Government Entity to Central Government, State Government,
Union territory, local authority or any person specified by Central Government,
State Government, Union territory or local authority against consideration
received from Central Government, State Government, Union territory or local
authority, in the form of grants. [Entry 9C]
(d) Services
by an old age home run by Central Government, State Government or by an entity
registered u/s. 12AA of the Income-tax Act, 1961 (43 of 1961) to its residents
(aged 60 years or more) against consideration upto twenty five thousand rupees
per month per member, provided that the consideration charged is inclusive of
charges for boarding, lodging and maintenance [Entry 9D]
(e) Service
provided by Fair Price Shops to Central Government by way of sale of wheat,
rice and coarse grains under Public Distribution System (PDS) and to State
Governments or Union territories by way of sale of kerosene, sugar, edible oil,
etc., under Public Distribution System (PDS) against consideration in the form
of commission or margin [Entry 11A/ 11B]
(f) Services
provided to the Central Government, State Government, Union territory
administration under any training programme for which total expenditure is
borne by the Central Government, State Government, Union territory
administration [Entry 72]
CERTAIN ISSUES & RULINGS
20. What
will be the scope of functions entrusted to a municipality under Article 243W?
- One
particular function performed by the Municipality is to provide permission to
various utility service providers (electricity, gas, etc.,) to carryout
excavation work to laydown underground wire, pipe-lines, etc., for which
charges in the form of access charges & reinstatement charges are levied by
the Municipality.
- An
application for Advance Ruling was made before the Authority in Maharashtra by
Reliance Infrastructure Limited [2018 (013) GSTL 0449 (AAR)] as to
whether the above charges would be covered under functions entrusted to a
Municipality under Article 243W or not? The Authority in the said case held as
under:
This restoration work would not result
in performing of the sovereign function. The sovereign function has already
been performed by constructing the road or undertaking maintenance works of the
roads. The restoration work can be equated neither to construction work nor to
maintenance work as suo motu undertaken by the Municipal Authorities. The
restoration charges are also not in the nature that the Municipal Authorities
are performing any job of construction for the applicant. The street or pavement
or road that is dug up is a general road. In view of all above, we are of the
firm view that it should not be disputed that the recovering of charges for
restoring the patches which have been dug up by business entities of the nature
as the applicant cannot be equated to performing a sovereign function as
envisaged under Article 243W of the Constitution.
- However,
the Authority in the above case has while appreciating the fact that the
function of construction and maintenance of road is entrusted to the
Municipality under Article 243W, erred in not appreciating the fact that the
reinstatement charges recovered from the utility service providers is merely to
meet the cost incurred for undertaking the functions entrusted to it under
Article 243W, i.e., to maintain the roads. This is done by the Municipality by
appointing contractors, who undertake the activity and charge the Municipality
for the same. The role of Municipality is to ensure that the said function
relating to construction and maintenance of road is properly performed, which
is performed by collecting the said charges from such public utility companies.
In fact, one can say that in case of access & reinstatement charges
collected by the Municipality, it is infact a case of service to self rather
than service to public utility companies as it helps the Municipality to
perform the function entrusted to it under Article 243W.
- Interesting
aspect to note in the above case is that there were two different charges
collected by the Municipality, namely reinstatement charges and access charges.
In the case of access charges, the Authority has arrived at a prima facie
conclusion that tax would be payable. However, it has failed to appreciate the
fact that in case of access charges, the Municipality has recovered GST from
the Applicant. The question that therefore would need analysis is whether there
would be double taxation, i.e., the supplier of service also charges GST and
the recipient also discharges GST on the same under reverse charge?
- Further,
in another Ruling in the case of VPSSR Facilities [2018 (013) GSTL 0116
(AAR)], the Authority held that cleaning services provided to the Northern
Railways, classifiable as Central Government would not be eligible for
exemption under Entry 3 since the Railways do not carry out any function
entrusted to a Municipality under Article 243W. The Authority further held that
the Municipality was entrusted with functions only in relation to urban areas
and not in relation to railway properties. If this view is accepted, exemption
will not be available in case of services provided by Central/State Government
in relation to carrying out any function entrusted to a Municipality under
Article 243W.
21. Whether
exemption under Entry 6 will extend to other services provided by Department of
Posts?
- On going
through the website of Department of Posts, there are three different
categories of service provided, as under:
|
Premium
|
Domestic
|
International
|
|
Speed Post
|
Letter
|
Letter
|
|
Express Parcel
|
Book Packet
|
EMS Speed Post
|
|
Business Parcel
|
Registered Newspaper
|
Air Parcel
|
|
Logistics Post
|
Parcel
|
International Tracked Packets
|
- The
services relating to speed post & express parcel post are explicitly
covered under forward charge. However, other services provided to business
entities by Department of Posts will be covered under clause (d) of Entry 6 of
notification 12/ 2017 and therefore be liable to tax under reverse charge
mechanism.
- This
would be important in the case of business delivering goods through posts,
companies mailing annual reports/notices under normal post, magazines posted on
license to post without pre-payment, etc., Off-course, one can claim the exemption
of Rs. 5000 but the same would need to be analysed on a case to case basis.
22. In
case of exemption under Entry 72, can exemption be denied on the grounds that
only cost is borne by the Government and no service is received by the
Government?
- Entry 72
provides for exemption to services provided to Government under any training
programme for which total expenditure is borne by them. In such cases, there
are programmes where the service provider is required to identify candidates
for providing training and upon completion of training or as per agreed terms,
the Government makes the payment for such training to the service provider,
i.e., the service is not provided to the Government but only the cost is borne
by the Government.
- In such
a case, can the exemption be denied on the grounds that since service is not
provided to Government but the candidate, the exemption is not available.
- The
answer to the same would be in negative in view of the fact that the definition
of recipient of service u/s. 2 (93) provides that recipient of supply in case
where consideration is payable for supply shall be the person liable to pay the
service and not the person consuming the service. Therefore, since the claim
for payment for the service is to be made before the Government conducting the
programme, the payment can be enforced only from the Government and therefore,
in view of section 2 (93), it is the Government who is the recipient of
service.
TAX DEDUCTED AT SOURCE
23. Vide
notification 50/2018 – CT (Rate) dated
13.09.2018, in addition to specified class of people referred to in clause (a)
to (c) of section 51, i.e., Department/Establishment of Central Government or
State Government, local authority or Government agencies, following class of
people have been made liable to deduct tax at source on payments to be made on
various supplies received by them:
(a) an
authority or a board or any other body, –
(i) set
up by an Act of Parliament or a State Legislature; or
(ii) established
by any Government,
with 51 % or more participation by way
of equity or control, to carry out any function;
(b) Society
established by the Central Government or the State Government or a Local
Authority under the Societies Registration Act, 1860 (21 of 1860);
(c) public
sector undertakings (not applicable in case of supplies received from another
PSU)
24. The rate of TDS
applicable on such payments would be 2%, being 1% CGST and 1% SGST/UTGST in
case of intrastate supplies and 2% IGST in case of interstate supplies.
CONCLUSION
25. To
summarise, under the GST regime, while making payment for any activity or
function undertaken by Government or Local Authority, one will need to analyse
the GST implications on multiple fronts, such as :
- whether
the activity undertaken by the Government or Local Authority partakes the
character of a service or not?
- Whether
the activity is classifiable under the exemption list or not?
26. The
above exercise will need to be followed rigorously by a business not entitled
for full credit as payment of tax under reverse charge, even on a conservative
basis will have to be taken as cost, which may not be necessary. Off course, a
business eligible to claim full input tax credit might take a conservative view
and not go in to the above hassles by discharging tax on all payments since
there may not be any cash flow issues or unnecessary tax costs.
27. More care needs to be exercised in
case of services provided to Government/Local Authority in view of the fact
that claiming a wrong exemption can have significant repercussions involving
payment of tax out of pocket saddled with consequential interest and penalties.
One further needs to ensure that in each case, the exemption be analysed on
their own rather than depending on the recipients’ claim of exemption, since
the same may not be always correct. 
