FEBRUARY 22, 2016

By Bimal Jain, FCA, FCS, LLB, B.Com (Hons)

PRESENTLY, in terms of Section 66D(a)(iv) of the Finance Act, 1994 ("the Finance Act") read with Rule 2(1)(d) of the Service Tax Rules, 1994 ("the Service Tax Rules"), only 'support services' provided by Government or a Local authority to a Business Entity are liable to Service tax under Reverse Charge 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 .

Section 66D(a) of the Finance Act, 1994 existing as on date is reproduced hereunder for ease of reference:

"66D. 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) 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;"

However, the Finance Act, 2015 vide Section 109(1) thereof, proposed to substitute the words 'support services' by the words 'any service', which was supposed to come into effect from such date as the Central Government may notify, by notification in the Official Gazette.

April 1, 2016 is appointed as the date on which the provisions of Section 109(1) of the Finance Act, 2015 shall come into effect.

The Ministry of Finance, Department of Revenue vide Notification No. 06/2016-Service Tax dated February 18, 2016 ("the Notification No. 06") has notified that the changes in relation to the Negative List of services contained under Section 66D(a)(iv) of the Finance Act shall be effective from April 1, 2016.

Effective from April 1, 2016, under clause (iv) of Section 66D(a) of the Finance Act, the words 'support services' will be substituted by the words 'any service' thereby, to exclude from the Negative List, any services provided by the Government or Local authority to a Business Entity.

Exemption granted to the services provided by Government or Local authority to Business Entity having turnover upto Rs. 10 lakhs in the preceding Financial Year

Further to the above, the Ministry of Finance, Department of Revenue vide Notification No. 07/2016-Service Tax dated February 18, 2016 ("the Notification No. 07") has inserted a new entry in the Mega Exemption List of services contained under Notification No. 25/2012-Service Tax dated June 20, 2012 ("the Mega Exemption Notification"), to provide exemption to the services provided by Government or Local authority to Business Entity having turnover upto Rs. 10 lakh in the preceding Financial Year (Inserted after Entry No. 47).

In other words, after such amendment, any service provided by the Government or Local authority to a Business Entity with turnover exceeding Rs. 10 lakhs in the preceding Financial Year, would be exigible to Service tax, except for the services that are specifically exempted, or covered by any another entry in the Negative List of services.

Impact of above changes on chargeability of Service tax on Governmental Services

Given that 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, it appears that effective from April 1, 2016, all Governmental services would be exigible to Service tax.

However, there are certain services rendered as a sovereign right by Government/ various Public Authorities (set up by Government) which cannot be substituted by any private party. For example, there are various types of Statutory charges and fees e.g. ESI inspection, PF inspection, Motor Vehicles Registration charges, Motor Vehicles Inspection charges, fees payable to Registrar of Companies for filing statutory forms, Building inspection etc. A Business Entity is also required to pay fees for getting various authorisations, permissions, licenses etc. for various purposes like import and export etc. Even, the Government collects big chunk of money by allocation of coal blocks/grant of mining license, telecom spectrum etc., which are in the nature of payment of royalty to Government for use of natural resources.

Having said that, 'ANY service' provided by provided by Government or Local Authority to a Business Entity, it appears that all such services which are in the nature of sovereign rights would also come under the purview of Service tax. However, applying the inference of the meaning of the term 'Consideration' which has to be 'at the desire of promisor', it may be contended that only the 'fees' for rendering a service 'at the desire of business entity' should be subject to Service tax. But, in case of regulatory fees, there is no 'service' rendered and thus, no Service tax may be exigible. But, the same is definitely prone to litigation unless some clarification to this effect is provided from the Board, restricting the extent of Governmental services covered under the Service tax net.

No consequential amendments made in Reverse Charge Notification:

It would not be out of place here to mention that Notification No. 6, appoints April 1, 2016 as the date from which the changes in Section 66D(a)(iv) of the Finance Act would be effective, however, corresponding changes have not been made under the Reverse Charge Notification No. 30/2012-ST dated June 20, 2012 ("Reverse Charge Notification").

Rule 2(1)(d)(i)(E) of the Service Tax Rules - Reverse Charge liability: The term 'support' has not been omitted from Rule 2(1)(d)(i)(E) of the Service Tax Rules, which provides for liability of service receiver to pay Service tax under Reverse Charge in relation to support services provided or agreed to be provided by Government or Local authority with certain exceptions, as stated supra. Earlier vide Notification No. 05/2015-ST dated March 1, 2015, it was provided that the word "support" from the sub-rule shall be deleted from the date as the Central Government may notify, by notification in the Official Gazette.

Notification No. 30/2012-ST dated June 20, 2012 - Reverse Charge Notification: Further, in parity with the above proposed changes in the Negative list of services, consequential amendment has not been made in paragraph I, clause (A) sub clause (iv) Item (C) under Reverse Charge Notification, wherein the term 'by way of support services' has not been omitted for services provided or agreed to be provided by Government or Local authority except (1) renting of immovable property, & (2) services specified in sub-clause (i), (ii) & (iii) of clause (a) of Section 66D of the Finance Act, to any Business Entity located in the taxable territory. Earlier vide Notification No. 07/2015-ST dated March 1, 2015, it was provided that "by way of support services" from the said entry shall be deleted from the date as the Central Government may notify, by notification in the Official Gazette.

Definition of the term 'support services': Furthermore, Section 65B(49) of the Finance Act containing definition of the term 'support services' has also not been omitted as the power to delete the definition has been granted to the Central Government vide Section 107 of the Finance Act, 2015 and effective date has been appointed only for the provisions of Section 109(1) of the Finance Act, 2015 vide Notification No. 6.

Thus, the above disparity will raise questions on chargeability of Service tax under Reverse Charge as only the support services provided or agreed to be provided by Government or Local authority to a business entity in taxable territory (with certain exceptions) are covered under the Reverse Charge Mechanism in the light of no changes made in Rule 2(1)(d)(i)(E) of the Service Tax Rules and Reverse Charge Notification.

Thus, clarification from the Board is also required on stated issue before April 1, 2016.