Kumari Palany & Co

Businessmen - CAVEAT !!! Service Tax on Government Services

Posted on: 22/Mar/2016 9:45:50 AM
Normally, any service provided by any person to another person is liable for service tax (except those services mentioned in negative list or exemptions).

One of such exception is that services by Government / Local Authority are not taxable as they are specifically mentioned in Negative List.

However, following services, even by Government are taxable:

(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, in a port or an airport; 

(iii) Transport of goods or passengers; 

(iv) Support services, (Except above) provided to business entities

If one goes through the above list, the first 3 points are self - explanatory. Point (iv) "Support Services" primarily mentioned those services which the business entities can carry out themselves but are outsourced from others like advertisement, security, cleaning, maintenance etc.

So the intention of the Legislators was to levy service tax only on those Government Services where private businesses are also engaged in, so that there is no bias on taxation between Private Businesses and Government.

This further implies that there are various activities which the government only can provide in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, 

Such sovereign services 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-Generals (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statute and cannot be performed by the business entity themselves and thus do not constitute support services.)

However, in the last year`s budget proposed an amendment that  any service of Government to Business Entity is taxable. But the effective date of such amendment was put on hold, but it comes into operation from 01.04.2016.

It should be remembered that for the services by Government to business entity, the Business Entity must pay service tax under reverse charge.

On the plain reading of the law as it stands now, it looks like all the services enjoyed by business entity from government must be subject to service tax. 

For eg. Fees paid to CMDA for approval purposes, Fees paid to Ministry of Company Affairs, fees paid for government tender, licence fees for mines etc. may attract service tax.

This would escalate the cost of operations for any businessman unless the Government brings out its intention clear by a separate circular / clarification.

So it is suggested that the businessmen consider the service tax  impact on all payments made by them to the Government as the new rule comes into effect from 01.04.2016.

CA T.R.Srinivasan
Shree Guru Kripas Institute of Management
Ph.No.: 97899 76079
Mail ID: trs.connects@gmail.com

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