The Ministry of Finance recently issued a Circular clarifying the issues on levy of Service Tax on the services provided by the Government or a local authority to business entities. Any service provided by the Government or a local authority to a business entity has been made taxable w.e.f 1st April 2016. Some of the relevant issues clarified in the Circular are the following.
It is clarified that 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. Fines and liquidated damages payable to Government or a local authority for non-performance of a contract entered into with Government or local authority have been exempted vide Notification No. 25/2012 – ST dated 20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016.
Though the services provided by Government ora local authority to another Government or a local authority, the said exemption does not cover services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994. In case of services provided by Government or a local authority to an individual who may be carrying out a profession or business, the services by way of grant of passport, visa, driving license, birth or death certificates have been exempted vide Notification No. 25/2012 – ST dated 20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016.
Taxes, cesses or duties levied are not a 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.
It is further clarified that any activity undertaken by the 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 local authority.
However, services provided by the Government or a local authority by way of (i) registration required under the law and (ii) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under the law, have been exempted vide Notification No. 25/2012 – ST dated 20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016. Further, services provided by the Government or a local authority where the gross amount charged for such service does not exceed Rs 5000/- have been exempted vide Notification No. 25/2012 –ST dated 20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016 [Entry 56 refers]. However, the said exemption does not cover services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994. Further, in case of continuous service, the exemption shall be applicable where the gross amount charged for such service does not exceed Rs. 5000/- in a financial year. It is also clarified that Circular No.89/7/2006-Service Tax dated 18-12-2006& and Reference Code 999.01/23.8.07 in Circular No. 96/7/2007-ST dated 23.8.2007 issued in the pre-negative list regime are no longer applicable.
Services by way of allocation of natural resources to an individual farmer for the purposes of agriculture have been exempted vide Notification No. 25/2012 –ST dated 20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016 [Entry 59 refers]. Such allocations/auctions to categories of persons other than individual farmers would be leviable to Service Tax.
Regulation of land-use, construction of buildings and other services listed in the Twelfth Schedule to the Constitution which has been entrusted to Municipalities under Article 243W of the Constitution, when provided by governmental authority are already exempt under Notification No. 25/2012 – ST dated 20.6.2012. The said services when provided by the Government or a local authority have also been exempted from Service Tax vide Notification No. 25/2012 – ST dated 20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016.
Services provided 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 have been exempted vide Notification No. 25/2012 – ST dated20.6.2012 as amended by Notification No. 22/2016 – ST dated 13.4.2016.
Installments due after 1.4.2016 in respect of spectrum are subject to service tax in view of rule 7 of Point of Taxation Rules, 2011 as amended by vide Notification No. 24/2016 – ST dated 13.4.2016. However, the same has 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.
The Circular further clarified the issue regarding When does the liability to pay Service Tax to arise upon assignment of a right to use natural resource where the payment of auction price is made in 10 (or any number of) yearly (or periodic) installments under deferred payment option for rights assigned after 1.4.2016. Rule 7 of the Point of Taxation Rules, 2011 has been amended vide Notification No. 24/2016 – ST dated 13.4.2016 to provide that in case of services provided by Government or a local authority to any business entity, the point of taxation shall be the earlier of the dates on which: (a) any payment, part or full, in respect of such service becomes due, as indicated in the invoice, bill, challan, or any other document issued by Government or a local authority demanding such payment; or (b) such payment is made. Thus, the point of taxation in case of the services of the assignment of a right to use natural resources by the Government to a business entity shall be the date on which any payment, including deferred payments, in respect of such assignment becomes due or when such payment is made, whichever is earlier. Therefore, if the assignee/allottee opts for full upfront payment then Service Tax would be payable on the full value upfront. However, if the assignee opts for part upfront and remainders under the deferred payment option, then Service Tax would be payable as and when the payments are due or made, whichever is earlier.
Service Tax is payable on such payments in view of rule 7 of Point of Taxation Rules, 2011 as amended by Notification No. 24/2016 – ST dated 13.4.2016. However, the same has 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.
Read the Clarification below.
