Are Government and local authorities liable to pay service tax?

Yes. However, most of the services provided by the Government or local authorities are in the negative list.

Rationale behind taxing certain activities of the Government or local authorities

Only those activities of Government or local authorities are taxed where they compete with private entities. The rationale is as follows-

  ♦  to provide a level playing field to private entities in these areas as exemption to Government in such activities would lead to competitive inequities; and

  ♦  to avoid break in Cenvat chain as the support services provided by Government are normally in the nature of intermediary services.

Would taxable services provided by Government or local authorities still be taxable if they are covered under any other head of the negative list or are otherwise exempted?

No. For example, transport services provided by Government to passengers by way of a stage carriage would not be taxable as transport of passengers by stage carriage has separately been specified in the negative list of services. The specified services provided by the Government or local authorities are taxable only to the extent they are not covered elsewhere i.e. either in the negative list or in the exemptions.