REVERSE CHARGE ON “ANY SERVICE” RECEIVED FROM GOVERNMENT: ALARM BELL FOR ALL BUSINESS ENTITIES FROM 1st APRIL 2016

[Vivek Jalan]

The striking difference between the Service Tax and Income Tax is that under Income Tax Government is not included in the definition of person and, thus, is not a taxable entity. However, under the Service Tax as per section 65B(37) of the Finance Act, 1994 person includes Government and, thus, the Government is a taxable entity and the services provided by them, unless included in negative list and Mega Exemption Notification, are taxable. Further, the term "Government" which was not defined in the Act or any notification has now been defined by means of a new section 65B(26A).

However, many of the services provided by the Government or local authorities are in the negative list. Generally, only those services are taxed where similar or substitutable services are provided by private entities.

1. POSITION BEFORE AMENDMENT IN 2016

As per section 66D(a) of the Chapter V of the Finance Act, 1994, the negative list comprised of the following:-

services by Government or a 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 services 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;

* Substituted by "any service " by the Finance Act, 2015 w.e.f. 1-4-2016.

Accordingly, apart from specified services of the Department of Post, services in relation to aircraft or vessel or transportation of goods or passengers, only the support services provided to business entities were excluded from the negative list. Services provided by the Government in terms of sovereign right to business entities, which are not substitutable in any manner by any private entity, were not support services, e.g., grant of mining or licensing rights and, thus, not exigible to service tax.

However, the services provided by Police to PSUs or Corporate entities or sports events held by private entities, being support services as similar services can be provided by private entities and would be taxable.

In this regard it is important to note the following terms –

S 65B

(26A)

"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

S65B(31)

"local authority" means-

(a)		a Panchayat as referred to in clause (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;

Support Service of Government/Local Authority covered under full reverse charge mechanism – 

The provisions regarding Reverse Charge Mechanism are encapsulated under rule 2(1)(d) of the Service Tax Rules, 1994, read with section 68(2) of the Finance Act, 1994 and Notification No. 30/2012-ST, dated 20-6-2012 (as amended).

As per rule 2(1)(d) (i) (EE) of the Service Tax Rules, 1994, the person liable for paying service tax in relation to support services provided or agreed to be provided by Government or local authority except:

(1)		renting of immovable property, and
(2)		services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory, is the recipient of such service.

In consonance to above Notification No. 30/2012-ST, dated 20-6-2012 also prescribes that 100% of service tax in respect to support services provided (except renting of immovable property) by Government or Local Authority would be payable by the service recipient.

2. POSITION AFTER AMENDMENT IN 2016

Section 66D(a)(iv) has been amended, by which for the words "support services" the words "any service" has been substituted with effect from a date to be notified after the enactment of the Finance Bill, 2015.

Accordingly, 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.

Amended section 66D(a) is as under:-    

“Services by Government or a Local Authority excluding the following services to the extent they are not covered elsewhere (iv) any service, other than those covered by clauses (i) to (iii) above, provided to business entities.”

Hence ANY SERVICE by Government or a Local Authority except as exempt or in negative list shall be exigible to Service Tax.

Consequential amendment to Reverse Charge provisions - In parity with the above proposed change in the negative list, the Union Budget, 2016 vide Notification No. 18/2016-ST dated March 1, 2016, has amended Reverse Charge Notification No. 30/2012-ST dated June 20, 2012 (“the Reverse Charge Notification”), to delete the words “by way of support services” appearing at Sl. No. 6 of the Table in the said notification with effect from April 1, 2016.

Corresponding changes have also been made in Rule 2(1)(d)(i)(E) of the Service Tax Rules and Section 65B(49) ofthe Finance Act containing definition of the term ‘support services’ is also deleted.

Hence all services by Government or a Local Authority except as exempt or in negative list, shall be under reverse charge mechanism and hence would effect all entities.

Impact of the amendment on the negative list - Services which were provided by Government in terms of their sovereign right to business entities and which were not substitutable in any manner by any private entity, were not support services, e.g., grant of mining or licensing rights and, thus, were not taxable. But from the date the said amendment in the negative list is enforced whereby "any service" and not only "support services" are taxable suchservices, viz., grant of mining rights or licensing rights would also become taxable, unless same are covered elsewhere in the negative list or mega exemption notification.

However, all payments to Government or Local Authority would not be taxable. In order to trigger taxability, a "service", i.e., activity for a consideration should be provided by the Government. The term 'service' as we know is defined in section 65B(44) of the Finance Act, 1994.

For Eg. - Government has imposed a fine or penalty for violation of a provision of law. It would not be regarded as a service because to be a service, an activity has to be carried out for a consideration. Therefore, fines and penalties which are the legal consequences of people's actions are not in nature of consideration for an activity.

3. VARIOUS DOUBTS CLEARED

The definition of the term ‘service’ under Section 65B(44) of the Finance Act is wide enough to cover any activity carried out by a person for another for consideration, effective from April 1, 2016, all Governmental services would be exigible to Service tax.  Further there are a series of notifications on issues of exemptions, points of taxation, etc on the subject. There is also a circular which clarifies various issues on the subject matter.

An attempt has been made to compile the doubts and clarifications and in this article as follows -

1. A question may arise as to when all services have been excluded from negative list, then what is use of retaining section 66D(a)?

In this regard, it is worthwhile mentioning here that under sub-clause (iv) only the services which are provided to business entities have been excluded from the negative list. Thus, when this amendment will come into effect the negative list would continue to operate in respect to the services other than those mentioned in sub-clauses (i), (ii) and (iii) which have been provided to non-business entities/persons.

2. Amendment in the Mega Exemption Notification to exempt certain services provided by Government or a local authority to a Business entity

Notification No. 22/2016-ST dated April 13, 2016, has amended the Mega Exemption Notification No 25/2012, to amend/insert the Entries in the following manner:

Relevant Entry	Particulars of Exemption
Exemption Amended
Entry No. 39	After the words “Services by, the words “Government, a local authority or” shall be inserted. The amended Entry No. 39 reads as under: “Services by Government, a 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.”
New Exemptions Provided
Entry No. 54	Services provided by Government or a local authority to another Government or local authority. Provided that nothing contained in this Entry shall apply to services specified in sub-clauses (i),(ii) and (iii) of Section 66D(a) of the Finance Act, i.e. Tax shall continue to be payable on services by the Department of Posts other than as specified, services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport and transport of goods or passengers
Entry No. 55	Services provided by Government or a local authority by way of issuance of passport, visa, driving licence, birth certificate or death certificate
Entry No. 56	Services provided by Government or a local authority where the gross amount charged for such services does not exceed ₹ 5000/- This exemption is not applicable to services specified in sub-clauses (i), (ii) and (iii) of Section 66D(a) of the Finance Act; In case of continuous supply of service, the exemption shall apply only where the gross amount charged for such service does not exceed ₹ 5000/- in a Financial Year.
Entry No. 57	Services provided by Government or a 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 Government or the local authority under such contract. Hence, fines and penalty chargeable by Government or a local authority imposed for violation of a statute, bye-laws, rules or regulations are not leviable to Service Tax.
Entry No. 58	Services provided by Government or a local authority by way of- (a) registration required under any law for the time being in force; (b) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under any law for the time being in force However vide circular 192/02/2016-ST, DATED 13-4-2016, It is clarified that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As long as the payment is made (or fee charged) for getting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. It is also clarified that Service Tax is leviable on any payment, in lieu of any permission or license granted by the Government or a local authority.
Entry No. 59	Services provided by Government or a local authority by way of assignment of right to use natural resources to an individual farmer for the purposes of agriculture
Entry No. 60	Services by Government, a 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
Entry No. 61	Services provided by Government or a local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Government or the local authority before the April 1, 2016: Provided that the exemption shall apply only to Service tax payable on one time charge payable, in full upfront or in instalments, for assignment of right to use such natural resource
Entry No. 62	Services provided by Government or a local authority by way of allowing a business entity to operate as a telecom service provider or use radio frequency spectrum during the financial year 2015-16 on payment of licence fee or spectrum user charges, as the case may be. (It may be noted here that the Union Budget, 2016, under Section 66E of the Finance Act, after clause (i), clause (j) is inserted to include “assignment by the Government of the right to use the radio-frequency spectrum and subsequent transfers thereof” under the list of Declared services. But such changes shall be effective from the date of enactment of the Finance Bill, 2016 (“FB, 2016”), leading to dispute for taxability for the interim period i.e. from April 1, 2016 to date of enactment of FB, 2016
Entry No. 63	Services provided by Government 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 (MOT).

 

3. Service Tax on taxes, cesses or duties.

Taxes, cesses or duties levied are not consideration for any particular service as such and hence not leviable to Service Tax. These taxes, cesses or duties include excise duty, customs duty, Service Tax, State VAT, CST, income tax, wealth tax, stamp duty, taxes on professions, trades, callings or employment, octroi, entertainment tax, luxury tax and property tax.

4. Whether Service Tax is payable on yearly installments due after 1-4-2016 in respect of spectrum assigned before 1-4-2016.

Service Tax is payable on such installments in view of rule 7 of Point of Taxation Rules, 2011 as amended byvide Notification No. 24/2016-ST dated 13-4-2016. However, the same have been specifically exempted vide Notification No. 25/2012-ST dated 20-6-2012 as amended by Notification No. 22/2016-ST dated 13-4-2016 [Entry 61 refers]. The exemption shall apply only to Service Tax payable on one time charge, payable in full upfront or in installments, for assignment of right to use any natural resource and not to any periodic payment required to be made by the assignee, such as Spectrum User Charges, license fee in respect of spectrum, or monthly payments with respect to the coal extracted from the coal mine or royalty payable on extracted coal which shall be taxable.

5. Amendment in Valuation Rules to include in value of taxable services, payment of interest/ other consideration payable on Governmental services whose payment is allowed to be deferred on such payment of interest/ other consideration

In terms of Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 (“the Valuation Rules”), the value of any taxable service shall not include interest on delayed payment of any consideration for the provision of services or sale of property, whether moveable or immoveable.

Now, the Central Government vide Notification No. 23/2016-ST dated April 13, 2016, has inserted following proviso to Rule 6(2)(iv) of the Service Tax Valuation Rules:

“Provided that this clause shall not apply to any service provided by Government or a local authority to a business entity where payment for such service is allowed to be deferred on payment of interest or any other consideration.”

6.  Point of Taxation (“POT”) under Reverse Charge in case of Governmental services

The Central Government vide Notification No. 24/2016-ST dated April 13, 2016, has amended Rule 7 of the Point of Taxation Rules, 2011 to provide that in case of services provided by the Government or local authority to any business entity, the POT shall be the earlier of the dates on which -

Any payment, part or full, in respect of such service becomes due, as specified in the invoice, bill, challan or any other document issued by the Government or local authority demanding such payment; or Payment for such services is made.

7. Amendment in the Cenvat Credit Rules, 2004 (“the Credit Rules”)

The Credit Rules have been amended vide Notification No. 24/2016 CE (NT) dated April 13, 2016. Consequently, the Cenvat credit of the Service tax on one time charges (whether paid upfront or in installments) paid in a year, may be allowed to be taken evenly over a period of 3 (three) years. [Rule 4(7) of Credit Rules as amended].

However, the Service tax paid on spectrum user charges, license fee, transfer fee charged by the Government on trading of spectrum would be available in the year in which the same is paid. Likewise, Service tax paid on royalty in respect of natural resources and any periodic payments shall be available as credit in the year in which the same is paid. The existing eighth proviso in sub-rule (7) of Rule 4 of the Credit Rules is being omitted.

Amendments have also been made in the Credit Rules, so as to allow Cenvat credit to be taken on the basis of the documents specified in sub-rule (1) of Rule 9 of the Credit Rules, even after the period of 1 year from the date of issue of such a document in case of services provided by the Government or a local authority or any other person by way of assignment of right to use any natural resource [Fifth Proviso to sub-rule (7) of Rule 4 of the Credit Rules]

4. WHAT IS STILL IN DOUBT

It may be noted that still complete clarity/relief is not granted to Business Entities and some doubts still remain like

• Whether incentive received from the Government (Central or States) will be liable to reverse charge
• While Interest paid to the  Government would be taxable, yet, would the interest for delayed payment of taxes be liable to tax. Prima facie, it seems that such interest is not liable to tax  as Taxes, cesses or duties levied are themselves not leviable to Service Tax
• Neither of the stated Notifications have been made applicable w.e.f April 1, 2016 i.e. these notification would be applicable w.e.f. April 13, 2016. What about the Governmental services rendered during the interim period i.e. from April 1, 2016 to April 13, 2016?

5. CONCLUSION

However, in the backdrop of this change, it is of utmost importance that Trade & Industry carry out a complete scrutiny of their records and cull out all the payments made to Government or Local Authorities.

Thereafter it has to be checked whether these payments would be liable to reverse charge.

This becomes all the more important for Government Companies and Government Authorities where major payments are made to Government and Local Authorities.