Preliminary With effect from July 01, 2012, service tax regime has undergone a complete overhaul and most of the services are now covered under the service tax ambit. Earlier, every activity (service), which was liable for service tax was defined by way of specific nomenclature and a definition was provided for each service. However, since the definition of ‘service’ is now introduced, the onus is shifted to the service provider and in some cases to service receiver under Reverse Charge Mechanism (RCM), to ascertain whether a particular activity is a service or not and failure to do so would result into a tax liability or lead to a litigation.
One of the significant amendments made in the negative list based taxation of services governed u/s. 66D (a) (iv) of the Finance Act, 1994 (“Act”) comes into effect from April 01, 2016. For many business enterprises receiving services provided by a government or a local authority, this is very important as it is likely to have far reaching implications. To understand the said amendment in its entirety, one needs to go through section 66D (a) (iv) of the Act before the amendment was made which is reproduced below for easy reference:
Position before the amendment
“Section 66D of the Act (Negative List of Services)
“The Negative list shall comprise of the following services, namely:-
a) Services by Government or local authority excluding the following services to the extent they are not covered elsewhere
i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency service provided to a person other than Government;
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) Support services, other than services covered under clauses(i) to (iii) above, provided to business entities;”
b) ……….
c) ……….”.
………….
“Support Service” was defined u/s 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.”
If above stated support services are provided by the government or a local authority, the liability of discharging service tax is shifted to the services receiver under RCM in terms of Section 68(2) of the Act read with Notification No. 30/ 12 – ST dated 20/6/12 (as amended).
Position after the amendment
Section 66D(a)(iv) of the Act
Vide Clause 107 of the Finance Act, 2015, section 66D (a) (iv) of the Act has been amended, which has been made effective from April 01, 2016 vide Notification No 15/2016 – ST dated March 01/2016. The amended section 66D (a)
(iv) of the Act is reproduced below:
Section 66D (Negative List of Services)
The Negative List shall comprise of the following services, namely:-
“a) Services by government or a Local Authority excluding the following services to the extent they are not covered elsewhere-
i) (unchanged)
ii) “
iii) “
iv) Any services, other than services covered under clauses i) to iii) above, provided to business entities.”
Also, vide clause 105 (h) of the Finance Act, 2015, the definition of “support service” as defined under section 65B (49) of the Act has been omitted with effect from April 01, 2016.
Notification No. 30/2012 – ST dated 20/6/12 (as amended vide Notification No. 18/2016 – ST dt. 1/3/16 (Relevant Extracts) I The taxable services – ……..
(A) (iv) provided or agreed to be provided by – …….
(C) Government or local authority excluding,-
1) Renting of immovable property, and
2) Services specified in sub-clauses (i), (ii) and (iii) of the clause (a) of section 66D of the Finance A ct, 1994.
to any business entity located in the taxable territory;
II The extent of service tax payable thereon by the person who provides the service and any other person liable for paying service tax for the taxable services specified in paragraph I shall be as specified in the following Table, namely: –
Brief Analysis of Amendment
Criteria for taxability
A large number of the services provided by the government or a local authority to a business entity may get covered under the service tax net if they satisfy the following criteria for taxability:
Whether any activity carried out or done falls under the definition of ’service’ or not? (‘Service’)
Whether such service is provided or agreed to be provided by the government or a local authority? (‘Government’ / Local Authority)
Whether the recipient of such service is a Business Entity? (“Business Entity”)
Whether there is a consideration paid or payable for such activity/ service? (‘Consideration’)
Whether such activity carried out/ service provided is covered under exemption/ negative list of services or falls under exclusion portion of the definition of service?(Excluded/Exempted)
If the answers to the criteria stated in (a) to (d) above is ‘YES’ and the answer to the last criteria (e) is ‘NO’”, service tax would become payable by the recipient of the service under RCM
Criteria to ascertain whether any activity constitutes ‘service’ u/s. 65B (44) of the Act As mentioned earlier, the major task that would have to be decided is whether a particular activity performed by one person for another is still a service or not. Also, in view of a declared service definition u/s. 66E (e) of the Act [viz. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”,] it is very difficult to arrive at a conclusion as to which activity amounts to service and which does not. To ascertain whether any activity falls under the definition of a service or not, the following criteria need to be applied:
Whether any activity constitutes merely – a transfer of title in goods or immovable property, by way of sale, gift or in any other manner?
Whether any activity constitutes- a transaction in money or actionable claim?
Whether any activity constitutes- a provision of service by an employee to the employer in the course of or in relation to his employment?
Whether any activity constitutes – fees taken in any Court or Tribunal established under any law for the time being in force?
Whether any activity constitutes – the functions performed by the members of Parliament, members of State Legislative, members of Panchayats, members of Municipalities and members of other local authorities who receive any consideration in performing the functions of that office as such member?
Whether any activity constitutes – the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity?
Whether any activity constitutes – the duties performed by any person as a Chairperson or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section?
Whether such activity is covered under exempted list of services/negative list of services?
Determination of Taxability
It is important to note that, after ascertaining whether a particular activity is a service or not per se so as to attract service tax, taxability will be determined on satisfaction of the following two conditions viz.:
Whether such service is provided or agreed to be provided by a ‘person’ for “another person”?
Whether such service is provided for a consideration?
If the answers to the above two conditions is ‘YES’, then service tax becomes payable
For the correct interpretation of the amended section 66D (a) (iv) of the Act, understanding of the following important definitions would be very much essential:
“Business Entity” defined u/s. 65B (17) of the Act is as under:
“business entity” means any person ordinarily carrying out any activity relating to industries, commerce or any other business or profession.
“Government” defined u/s. 65B (26A) of the Act as under:
“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.
“Local Authority” defined u/s. 65B(31) of the Act as under :
“local authority” means –
a) a Panchayat as referred to in cause (d) of article 243 of the Constitution;
b) a Municipality as referred to in clause (e) of article 243P of the Constitution;
c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the government with the control or management of a municipal or local fund;
d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);
e) a regional council or a district council constituted under the Sixth Schedule to the Constitution;
f) a development board constituted under article 371 of the Constitution; or
g) a regional council constituted under article 371A of the Constitution.”;
Taxability Position
With effect from April 01, 2016, a large number of activities /services provided by government/local authority to business entities would come within the ambit of service tax under RCM. Hence, it would be a huge challenge to determine taxability, on the basis of criteria discussed above.
It needs to be expressly noted that, under RCM there is no threshold limit prescribed for payment of service tax. Hence, say when a trader who is not registered with service tax department makes a payment of fees for Rs. 10,000/- to government/local authority which is liable to service tax he would have to register and comply with the service tax law despite very low service tax liability of Rs.1,500/-. This is likely to enhance compliance burden on small and medium businesses, in particular and would be totally contrary to government’s initiative to promote “ease of doing business.”
Taxability Position is discussed hereafter with some illustrations :
Merchant Overtime Charge (MOT)
MOT charge paid for availing services of verification of export goods and sealing thereof by the Department of Excise, Government of India, provided to a business entity would get covered within service tax net under RCM since it fulfills all the conditions/criteria for taxability.
Registration Fees for registering title documents
Since registration fees are collected for providing the service by a state government department for registration of the title documents and preservation thereof in their records to a business entity, service tax under RCM would become payable. However, if the said fees are paid by an individual personally & not as business entity, service tax would not be payable.
Deduction made by government departments for the deposit of Service provider for poor service quality
Since tolerating an act by the government department of poor quality of construction is a service specified under a Declared Service [section 66E (e) of the Act,] and the consideration for such service is the amount so deducted from the deposit, service tax under RCM may become payable by the service provider as a service recipient.
Fees for Filing of Appeals etc paid to CESTAT
Such service falls under the exclusion portion of the definition of ‘Service’ and hence would be not taxable under service tax nor under RCM in terms of Clause (c) of section 65B (44) of the Act.
The above are only a few illustrations. However, facts of every case would have to be examined to determine taxability. Implications of taxability in cases like license fees for 3G/4G, Allocation of coal blocks for mining and related work could have a far reaching implications. The same would require a very detailed study and examination.
Conclusion
Considering far reaching implications of taxability of services provided by government/local authority to business entities with effect from April 01/2016, the following is suggested:
Applicability of RCM needs a serious consideration so as to ease compliance burden, particularly on small and medium business enterprises, who may not be registered with service tax department.
If taxability under RCM is maintained, it is essential that for ease of doing business a transaction threshold (say Rs. 50,000/-) is prescribed.
Detailed guidelines/clarifications need to be issued by CBEC with practical examples to facilitate understanding & avoid litigation.
