Taxability of Government Services Under Reverse Charge Mechanism

W.e.f. 01st April 2016 all the government services provided to the business entity are taxable in the hands of service receiver. Prior to 01st April 2016 only support services were taxable in the hands of service recipient. After introduction these provision much confusion & misinterpretations arrived. I hope following commentary will end the mystery about the provision      

1) Taxability of Government services:- As per Section 66B Service tax shall be levied at the rate of 14% [Plus 0.5% SBC and 0.5% KKC w.e.f. 01st June 2016] on all services except on those services specified in the negative list, provided or agreed to be provided in taxable territory by one person to another person. The service also defined under Section 65 B(44) of the Act as an ‘activity’ carried out by one person for another ‘person’ for a ‘consideration’ and includes ‘declared services’ but excludes certain activities. 

To make Indian taxation acquaint with global taxation negative list approach was accepted by government of India in service tax by inserting Section 66D to the Finance Act 1994. Negative list includes those services which are out of the ambit of service tax. Currently 17 services are covered under this list. Apart from 17 negative services, all other services are taxable subject to various exemptions. 

Government service is one of the service which is covered under Negative List. As per section 66D (a) services by government or a local authority are not subject to payment of service tax but excludes the following

1. services  by the Department of Posts by way of speed post, express parcel post, life insurance agency, and agency services provided to a person other than Government
2.  Services in relation to an aircraft or vessel, includes or outside the precinct of a port or an air port
3. Transport of goods and passenger;
4. support services, other than services covered under clauses (i) to (iii) above, provided to business entities;

In the budget of 2015-16 the word support service was substituted with the word any service. This makes all the government services taxable, if provided to business entity. Though the amendment was made in the budget 15-16 but was not made effective till 01st April 2016.  To reduce the burden of service tax on recipient of the service many government services are still exempted.  

2) What is government:- prior to finance act 2015 there was no definition for the term ‘Government’ and was inserted under clause 26A to the Section 65B w.e.f 14th May 2015. The definition reads as “Government” means the Department of the Central Government, a state government and its departments and a union territory and its department but shall not include an entity which is not required to maintain the accounts as per article 150 of the Constitution of India.

This exclusion category would include entities and body corporate such as –

• Banks / financial constitutions
• Housing Boards
• Central or State Public Sector Undertakings (PSUs)
• Autonomous bodies
• State Financial Corporations
• Development authorities
• Institutes such as ICAI, ICSI, ICMAI etc

3) Liability of payment of tax on Government services:- Normally service provider is liable for the payment of service tax in terms of section 68 (1). However government may collect service tax from service recipient (under reverse charge mechanism) under section 68(2). Government has notified a list of services covered under reverse charge mechanism vide notification no. 30/2012 dated on 20th June 2012. Service provided by government or local authority to body corporate is covered under section 68(2). Hence body corporate is responsible for the payment of Service tax under reverse charge mechanism.     

4) Value of Service on which service tax is payable:-  The value of service shall be determined in terms of provisions of Section 67 of an Act. According to section 67 value of service shall be the gross amount charged by the service provider. Therefore for all government services,  bill/challan value which is actually paid to the government shall be the value for the purpose of calculation and payment of service tax.

Time & rate at which service tax is payable:- Consequent to amendment of Section 67A the rate of duty is now decided as per the provision of Point of taxation rules 2011. Point of taxation is the point in terms of time when Service tax shall be payable to the government. As per Rule 7 of Point of taxation rules 2011 for the government service, tax shall be payable to the government at the rate prevailing  & earlier on the dates on which -

a. amount is payable  to the government (Due date of payment) or

b. date of actual payment   

c. Exemption on various Government Service:- Recipient of the service is exempted from the payment of service tax in following cases

1. General Exemption:- Services provided by Government or a local authority (other than specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D)  where the gross amount charged for such services does not exceed Rs. 5000/- is exempted from the payment of the service tax.

2. Specific Exemption:- Following specific exemption are given under Notification 25/2012 as amended by Notification No 22/2016 dated on 13th April 2016.  

Services by a government or a local authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution.  

Following activities are notified under article 243W of constitution of India

1. Urban planning including town planning.
2. Regulation of land-use and construction of buildings.
3. Planning for economic and social development.
4. Roads and bridges.
5. Water supply for domestic, industrial and commercial purposes.
6. Public health, sanitation conservancy and solid waste management.
7. Fire services.
8. Urban forestry, protection of the environment and promotion of ecological aspects.
9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.
10. Slum improvement and upgradation.
11. Urban poverty alleviation.
12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.
13. Promotion of cultural, educational and aesthetic aspects.
14. Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.
15. Cattle pounds; prevention of cruelty to animals.
16. Vital statistics including registration of births and deaths.
17. Public amenities including street lighting, parking lots, bus stops and public conveniences.
18. Regulation of slaughter houses and tanneries. 

3. Services provided by Government or a local authority by way of issuance of passport, visa, driving license, birth certificate or death certificate;

4. 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;

5. Services provided by Government or a local authority by way of-

1. registration required under any law for the time being in force;
2. 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;

6. 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;. Following activities are notified under article 243W of constitution of India

• Agriculture, including agricultural extension.
• Land improvement, implementation of land reforms, land consolidation and soil conservation.
• Minor irrigation, water management and watershed development.
• Animal husbandry, dairying and poultry.
• Fisheries.
• Social forestry and farm forestry.
• Minor forest produce.
• Small scale industries, including food processing industries.
• Khadi, village and cottage industries.
• Rural housing.
• Drinking water.
• Fuel and fodder.
• Roads, culverts, bridges, ferries, waterways and other means of communication.
• Rural electrification, including distribution of electricity.
• Non-conventional energy sources.
• Poverty alleviation programme.
• Education, including primary and secondary schools.
•  Technical training and vocational education.
• Adult and non-formal education.
• Libraries.
• Cultural activities.
• Markets and fairs.
• Health and sanitation, including hospitals, primary health centres and dispensaries.
• Family welfare.
• Women and child development.
• Social welfare, including welfare of the handicapped and mentally retarded.
•  Welfare of the weaker sections, and in particular, of the Scheduled Castes and the Scheduled Tribes.
• Public distribution system.
• Maintenance of community assets.

7) 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).

All services other than specified above are subject to payment of service tax under reverse charge mechanism.

Whether Cenvat Credit is available on payment of service tax on reverse charge mechanism? :- yes Cenvat credit is available on the basis of GAR 7 challan     

List of Government services received by the business entity and its taxability  

Disclaimer:- All the views  expressed in this article are based on the provisions of Finance Act 1994 and related notifications. Readers are advised to consult the professionals for understanding applicability of the newsletter. Due care has been taken while preparing this document, however existence of error or omission is not ruled out. No part of this document may be produced or reproduced in any manner without the permission of Author 

Author is practicing Cost Accountant in the area of Central Excise and Service tax and can also be reached at cmadipakjoshi@gmail.com