Service Tax on Government Services under Reverse Charge Mechanism (RCM)

Background:-

The chargeability of service tax on the services provided by the Government is as per the negative list under Section 66D, which is reproduced as below:

Services by Government or a local authority are not chargeable to services tax except the following:

1. 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;
2. services in relation to an aircraft or an vessel, inside or outside the precincts of a port or an airport;
3. transport of goods or passengers; or
4.  “support services”, other than services covered under clauses (i) to (iii) above, provided to business entities;

For the clause (IV) above, the concern business entity receiving is responsible for discharge of service tax under Reverse Charge Mechanism (RCM) vide Notification No. 30/2012 – Service Tax dated 20th June 2012.

W.e.f from 01st April 2013, the word “support services” is replaced with “any services”, thereby “all services” provided by the Government or a local authority under clause (IV) above is subject to service tax under Reverse Charge Mechanism.

Relevant definitions for understanding:-

Government:

As per section 65B(26A), “Government” means the Departments of the Central Government, a State Government and its Departments and a union territory and its departments but shall not be include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made there under.

Examples of some entities as to whether Government or Not:

Local Authority:

“Local Authority” means-

1. a Panchayat as referred to in clause (d) of article 243 of the Constitution;
2. a Municipality as referred to in clause (e) of article 243P of the Constitution;
3. a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund;
4. a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);
5. a regional council or a district council constituted under the Sixth Schedule to the Constitution;
6. a development board constituted under article 371 of the Constitution; or
7. a regional council constituted under article 371A of the Constitution;

Comment:-

Since any service provided by Government or a local authority to a business entity is made taxable, representations were made by several quarters including business and industry associations for clarifications. Accordingly Circular No. 192/02/2016 – Service Tax is released for providing clarifications and Mega Exemption Notification No. 25/2012 is amended vide Notification No. 22/2016 to exempt certain services provided by Government or a local authority.

Relevant extracts from Circular No. 192/02/2016-Service Tax – dated 13th April 2016:-

Clarification on issues regarding levy of Service Tax on the services provided by Government or a local authority to business entities:

Relevant extracts of Amendment in the Mega Exemption Notification No. 25/2012 vide Notification No. 22/2016 to exempt certain services provided by Government or a local authority to a Business entity:-

• Services provided by Government or a local authority to another Government or local authority, Provided that nothing contained in this entry shall apply to services specified in sub-clauses (i),(ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994.
• Services provided by Government or a local authority by way of issuance of passport, visa, driving license, birth certificate or death certificate.
• 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).

Availment of CENVAT Credit:-

Cenvat will be allowed if such payment falls under the definition of “Input Service” and is not covered under exclusions as provided in definition of input service. CENVAT Credit can be availed on the basis of challan evidencing payment of Service Tax by the Service recipient.

Determination of POT (Point of Taxation):-

Rule 7 is applicable for determination of POT. As per Notification No. 24/2016-Service Tax, Rule 7 is amended by adding a proviso for determination of POT for the services provided by the Government or a local authority.

Accordingly, POT is earlier of the following:

• Due date of payment (as per the invoice, bill, challan or any other document) or
• Actual date of payment for such services.

Few practical instances:-

Disclaimer:-

The analysis aims to provide the reader a general understanding of the proposed amendments and should not be construed as a legal opinion.

The author can also be reached at bhaveshjain2673@gmail.com.