One of the recent trends has been enquiries and letters by the service tax department to all restaurants/bars/wine shops demanding payment of service tax on the liquor license fee paid to the state government. Department is also backing this vide circular 192/02/2016-Service Tax dated 13.04.2016 (Sl. No. 5) clarifying that service tax is leviable on the license/permit fees paid. In this background, an attempt was made to articulate the service tax applicability on the liquor license fee along with available course of action.
Payment of Liquor license fee to state government - factual & legal background:
i. Article 47 of Constitution of India, the state shall endeavour to bring about prohibition of the consumption of intoxicating drinks and of drugs (except for medicinal purposes).
ii. This is one of the reasons that mandated each state government to have specific legislature regulating the sale/purchase of liquor, issuance of licenses/permits and payment of license fee etc.,
iii. For instance, A.P Excise Act, 1968 inter alia provides that
- Sale or buying of liquor without license is prohibited (Section 15);
- License/permit shall be granted on payment of license fee (Sec. 28);
- License/permit can be cancelled/suspended in case license fee is not duly paid (Sec. 31);
iv. Further license is specific to each locality and specified area and sale of liquor shall be made from the premises for which license is granted and sale from other premises is prohibited.
v. From the above it is clear that license fee is pre-requisite for liquor sale and paid solely for granting the permission to sell/trade the liquor.
vi. The price for supply of liquor and the state excise duties thereon are separate transactions which would be charged w.r.t each quantum of sale and nothing to do with license fee payment.
Relevant Service tax provisions - background:
i. Upto 01.04.2016, except few selected services, all other services provided by Government are kept out of service tax levy (by placing in Negative list qua Section 66D of Finance Act, 1994). The ‘support services’ are one among the selected services that are being taxed under reverse charge in the hands of business entities.
ii. However w.e.f 01.04.2016, instead of taxing selected Government services (support services), law was amended to tax all the services of Government with few exemptions. Further service tax was required to be paid by the recipient of the service and not the Government, being a service provider.
iii. Among various exemption given for the service provided by the Government, there is an exemption of the service provided by Government by way of granting registration under any law, the exemption entry reads as under (Entry No. 58 of Notification No. 25/2012-ST dated 20.06.2012 as amended):
“Services provided by Government or a local authority by way of -
(a) registration required under any law for the time being in force;”
iv. From the above, it is clear that exemption is available to all types of registration once the same is required under any law.
v. What constitutes the word ‘registration’ is not defined in which case, the Natural and ordinary meaning (known as common parlance theory) shall be adopted to construe the ambit of exemption. The natural meaning of ‘registration’ is that act of enrolling or specifically recognized etc.,
Conclusion on applicability of service tax on liquor license fee:
From the said exemption entry in the view of the paper writers, it can be concluded that license fee is nothing but the amount paid for registering as permitted vendor to sell/buy the liquor under the State Excise laws. Accordingly, said service of the Government of granting a license and collection of license fee thereof is covered under the exemption and thereby service tax liability does not arise.
Further also it can be recalled that under the erstwhile Central Excise provisions the registration was referred to as license.
With respect to the CBEC circular dated 13.04.2012 (referred above) it is to be noted that the clarification was given in general without the context of the present liquor license issue. Further the clarification states that there has to be quid pro quo further it also clarify that registration services are exempted. Therefore, the clarification of circular cannot be inferred to construe all types of license fees are liable for service tax and in any case circulars cannot override the statutory provisions and does not bind on the assessee/courts.
Course of action available:
- Taking stand that service tax is not applicable and facing the litigation till its logical end;
- Paying taxes under protest (to save future interest cost) and facing the litigation till its logical end;
- Make representation to CBEC for necessary clarification in this behalf;
- Filing Writ petition before High court seeking to quash the enquiry letters & further proceedings from department;