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Exemption to 'Local Authority' unraveled!

SEPTEMBER 14, 2023

By Gurinder Pal Singh

THE term 'Local Authority' is not new to the Indirect tax laws. In Service Tax era, wide variety of services were exempt when provided to a 'local authority'. The legacy continued with the advent of GST with Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017 which provided exemption to various services when provided to a local authority. Alongside Local Authority, the exemption was extended to the other forms of the Government like the Central Government, State Government, Government Authority and Government Entity. Among the various forms of the Government listed for exemption, the Central Government and the State Government are undisputedly the purest forms of the Government and generally remain away from the disputes, whereas a Government Authority and a Government Entity are the most diluted ones and remain embroiled in legal tussles. The Local Authority was sandwiched somewhere in the middle. It was natural too as the entities failing to qualify as a local authority could get shelter under Governmental Authority or Government Entity. However, the fortunes of a Local Authority changed w.e.f 1.1.2022 when the Government withdrew the available tax exemptions from the Governmental Authority and Government Entity. Such withdrawal of exemption made Local Authority a talking point as there was a rush, and rightly so, for the existing Government Authorities and Government Entities to look at the legal possibility of reincarnating themselves as a Local Authority.

Let us have a closer look at the definition of 'Local Authority' as contained in section 2(69) of the CGST Act, 2017.

"Local authority" means —

(a) a "Panchayat" as defined in clause (d) of article 243 of the Constitution;

(b) a "Municipality" as defined in clause (e) of article 243P of the Constitution;

(c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State 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 [and article 371J] of the Constitution; or

(g) a Regional Council constituted under article 371A of the Constitution.

The authorities referred to in clause (a) and (b) of the definition viz. Panchayats and Municipalities are the forms of local Self-Government which were created with an intention to decentralize the democracy. These institutions are comprehensively defined in the Constitution and, therefore, rarely create litigation.

Then, we have clauses (d), (e), (f) and (g) of section 2(69) which contain Cantonment Board, Development Boards, Regional Councils, etc. These bodies are not mainstream local bodies but created for a specific purpose and for a specific area or community. The members comprise both nominated by the State Government or the Governor and elected by the people.

Lastly, we have clause (c) in the definition which encompasses Municipal Committee, Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund. Well, bodies like Municipal Committee or Zila Parishad are the specie of a municipality and generally elected by the local inhabitants and have control over the local fund, the challenge lies in deciphering the phrase "……any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund". In effect, any authority has control over the local fund and such control is granted by the Central or a State Government, it is considered a 'Local Authority' for the purpose of section 2(69) CGST Act.

Judiciary's View

Let us now understand how the judiciary has attempted to define the term 'Local Authority'. The landmark judgment of the Hon'ble Supreme Court in the matter of Union of India & Others versus R.C Jain & Others 1981 AIR 951 dealt with the definition of 'Local Authority'. While deciding whether Delhi Development Authority is a Local Authority or not, it held that an authority, to qualify itself as a 'local authority', it must possess many, if not all, of the distinctive attributes and characteristics of a Municipal Committee, District Board, or Body of Port Commissioners, but, possessing one essential feature, namely, that it is legally entitled to or entrusted by the Government with, the control and management of a municipal or local fund. It elaborated the distinctive attributes and characteristics viz. (i) It must have separate legal existence as a corporate body; (ii) it must not be a mere governmental agency but a legally independent entity; (iii) it must function in a defined area and must ordinarily be elected, wholly or partly, directly or indirectly by the inhabitants of the area; (iv) it must enjoy a certain degree of autonomy, which, though not complete, must be appreciable; (v) the statute must entrust the authority with such governmental functions and duties as are usually entrusted to a municipal body for providing such amenities, as health and education services, water and sewerage, town planning and development, roads, markets, transportation etc. to the inhabitants; (vi) it must have power to raise funds in the furtherance of its activities and the fulfillment of the projects entrusted to it by levying taxes, rates, charges, fees etc. all of which may be in addition to the moneys provided by Government: (vii) the control and management of the fund must vest in the authority.

Local Fund

Since the key element in the phrase is 'Local Fund' and unfortunately it is not defined in the GST law, we will find its meaning and scope from its references available in other laws.

The expression 'Local Fund' is defined in The Maharashtra Local Fund Audit Act, 1930 as any fund, the control or management of which the local authority is legally entitled and includes the proceeds, if any, Cess, rate, duty, or tax, which such authority is legally entitled to impose, and any property, vested in such authority.

Article 243X of the Constitution of India also speaks about the funds of the Municipalities, which appears very relevant for the present purpose. The said Article empowers the legislature of a state to fund the municipalities through various means. Firstly, the legislature gives power to the municipality to levy, collect and appropriate such taxes, duties, tolls and fees subject to the prescribed procedure and limits. The legislature can also assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government. It can also make grants-in-aid to the Municipalities from the Consolidated Fund of the State. It can alternatively provide for the constitution of such Funds for crediting all money received, respectively, by or on behalf of the Municipalities and also for the withdrawal of such money there from. Thus, as per Article 243X, the funds for municipalities need not be sourced through imposition of taxes, levies, etc. by the municipalities itself, it can be provided by the state Government through assigning the portion of taxes, etc. collected by it, or providing grants thereto or creating such funds where the moneys can be credited from different sources and withdrawn by the municipalities to discharge their functions.

In effect, the fund which section 2(69)c) of the CGST Act refers to is the money or property to which the local authority is entitled under the applicable laws, and it includes any grants by the Govt., or the property vested therein or the taxes, fees collected thereby directly or indirectly. Regardless of the source of the money or property, what seems to be important is the control and authority over such money or other property constituting the fund.

Elected Body – whether a mandatory attribute.

In ordinary parlance, the term 'Local Authority' is often misconstrued as a 'Local Body'. There is a reason for such misconception as the definition is loaded with words such as Panchayat, Municipality, Zilla Parishad, etc., which represent the local bodies elected by the local electorate. Though the apex court has mentioned that the authority should be elected wholly or partially, directly, or indirectly, it does not appear to be mandatory condition as wished the presence of "many, if not all" of the listed attributes. Moreover, the answer is available in section 2(69) of CGST Act itself as most of the bodies referred to in clause (d), (e), (f) and (g) of section 2(69) CGST Act are not elected by its inhabitants.

Autonomous Organization

Another significant attribute listed by the apex court is that the entity should be an autonomous organization which means it should not be controlled by the Government and should be largely independent in its decision making. However, the apex court has relaxed this condition by saying that a certain degree of autonomy would suffice the requirement. Generally, such bodies are managed by a team of officers drawn from the State's bureaucracy and for that reason the autonomy of the Board is considered as compromised. I believe we should look at the position whether the decisions of such officers are mandatorily required to be approved by the State Government. If that is the position, surely autonomy is compromised. Else, the Board qualifies the test of being an autonomous authority. On a case-to-case basis, Constitution of such bodies and the rules of their management can be studied, though the answer would generally be subjective and open to alternative views.

Jal Boards

I could find few advance rulings on the issue whether the Jal Boards constituted in various states are 'Local Authority'. The answer was generally negative because such Boards do not enjoy an appreciable degree of autonomy, which is one of the key attributes listed by the Apex Court in R C Jain. Also, the ruling found that the fund to which such Boards are entitled is not entrusted thereto by the respective Governments. It appears a debatable issue as Article 243X provide a wide range of sources to fund municipalities, which inter alia includes money assigned or granted by the State Government. There is no denial of the fact that such Boards are performing Municipal functions. Can one take a position, that one of the key municipal functions i.e. provision of water to the inhabitants has been consolidated and assigned to a specialized agency instead to the mainstream municipalities? Is it a new form of governance? The matter is still sub-judice at various forums and more clarity will emerge in due course.

Industrial Townships

Proviso to Article 243Q of the Constitution talks about the establishment of Industrial Townships in lieu of a municipality. Can we call such an Industrial township a local authority? Before we venture to get the answer, it is important to know that the Central Government has unveiled National Industrial Corridor Development Program under which various townships are being developed alongside the Delhi Mumbai Freight Dedicated Corridor and in other regions of the country, basically to accelerate the industrial growth. The specific area is notified as Industrial Township and a body corporate with equity, from the Central and/or State Govt is notified as a 'Special Planning Authority' by the concerned state Government in terms of proviso to Article 243Q. The said 'Special Planning Authority' is all empowered to manage the notified area and inter alia provide municipal services to its inhabitants apart from developing the area by way of creating necessary infrastructure. In terms of the attributes listed by the Hon'ble Supreme Court in the matter of R.C Jain, the 'Special Planning Authority'/ Industrial Township notified under proviso to Article 243Q appears to be fulfilling the criteria set for a Local Authority. It is a body corporate and, therefore, operates in terms of its Memorandum of Association and Articles of Association through a set of Board of Directors. Its primary function is to provide municipal services to the inhabitants. Pertinently, there is no other authority which governs or interferes in the management of the notified area. It is funded through various sources which include equity and other grants by the respective Governments, user charges and other cesses collected from the inhabitants and the moneys so collected is termed as a local fund and being a body corporate, it undisputedly controls the utilization of such fund. Admittedly, it is not an elected body. However, the Hon'ble Court has mandated fulfillment of many, if not all, the attributes. Moreover, the condition of being an elected body is also not envisaged by the definition of 'local authority' in section 2(69)of CGST Act, which is evident from the fact that few authorities referred in clause (d), (f) and (g) of section 2(69) are not wholly elected bodies. Considering the above, we can take a view that the Industrial Townships established under proviso to Article 243Q fall within the purview of clause (c) of section 2(69) and safely be termed as a "local authority".

Conclusion

While we have discussed the attributes of a local authority as listed by the apex court, we should be mindful of the fact that such attributes are relevant only for the purpose of clause (c) of section 2(69) of the CGST Act, 2017. The various kinds of authorities as listed in clauses other than clause (c) are not open to interpretation as they are linked to one or the other articles of the Constitution or other statutes and, therefore, the space for alternative interpretations is less or non-existent. For the purpose of clause (c), the essential condition is control over a local fund. We have also understood the meaning and scope of local fund from the inferences available in Article 243X of the Constitution and other statutes. Independence is one of the key attributes which can be demonstrated from the constitution of the body and through its memorandum and articles.

Hopefully, a clarification from the CBIC on the above understanding would be welcome before un-necessary litigation plays spoilsport!

[The author is Head, Indirect Taxes, L&T Construction and the views expressed are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

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