PAYMENT OF SERVICE TAX BY GOVERNMENT

[Dr. Sanjiv Agarwal]

Service tax shall be payable on services provided by the Government or local authority which is not in negative list.

However, in terms of Notification No. 30/2012-ST dated 20-6-2012, in respect of services provided or agreed to be provided by way of support services by Government or local authority, service tax is payable by service receiver under reverse charge mechanism. In view of this, for the support services provided by the Government to business entities, government departments will not have to get registered because service tax will be payable on such services by the service receiver i.e., the business entities receiving the service under reverse charge mechanism in terms of the provisions of section 68 of 35 the Act and the notification proposed to be issued under the said section. For services mentioned at (a) to (c) above, tax will be payable by the concerned department.

Reverse charge shall be applicable only in case of support services.

Support services have been defined in section 65B of the Act as ‘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 movable or immovable property, security, testing and analysis. taxmanagementindia.com

Thus, 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 under section 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.)

In case of director's services, in case of directors who are government nominees, the services shall be deemed to be provided by the government and liable to be taxed under the exclusion sub clause (iv) of clause (a) of section 66D of the Finance Act, 1994, i.e. support services by Government to business. Such services are liable to be taxed on reverse charge basis.

As per sub-clause (i) of clause (a) of section 66D services provided by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services carried out on payment of commission on non-government business are excluded from the negative list. Therefore, the following services provided by Department of Posts are not liable to service tax.

• Basic mail services known as postal services such as post card, inland letter, book post, registered post provided exclusively by the Department of Posts to meet the universal postal obligations.
• Transfer of money through money orders, operation of savings accounts, issue of postal orders, pension payments and other such services.

Subsidy granted by business is generally in the nature of open offer to large public. Any person fulfilling the conditions of the subsidy may be granted the subsidy. There is no counter obligation to the Government by the business receiving the subsidy. Complying with the conditions of the subsidy is merely for the purpose of gaining own business advantage. There are no services rendered to Government which can be made liable to tax.

It is the statutory obligation of the CFTRI to carry out the testing of edible items before launch in the market. The activity performed by CFTRI is not outsourced to them by business entity and is not covered by the first limb of the definition of the support services. However, testing and analysis is specifically covered by the inclusive part of the definition and accordingly is in the nature of support service.

Services provided by government security agencies are covered by the main portion of the definition of support service as similar services can be provided by private entities. In any case it is also covered by the inclusive portion of the definition. However, the tax will be actually payable on reverse charge by the recipient. 

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