[2013] 34 taxmann.com 47 (Article)
Services provided by Government and Government entities - Concept and valuation aspects
T.N. PANDEY
Ex-Chairman, CBDT
Introduction
1. Levy of tax on services in India has to be seen in two phases i.e. Pre-Finance Act 2012 and Post such Act w.e.f. 1-7-2012. This tax was, for the first time, introduced by the Finance Act, 1994 in view of the expanding contribution of service sector in the GDP growth of the country which constituted nearly 50 per cent of GDP at the relevant time. Shri Manmohan Singh, the then Finance Minister, in the budget speech for the year 1994-95 observed that there was no sound reason for exempting services from taxation.
First phase
2. The tax started by bringing within its fold services in a selective way through various years' Finance Acts. This scheme continued till the Finance Act, 2011.
Second Phase
3. The Finance Act, 2012 brought a fundamental change in taxation of services. This Act switched to comprehensive scheme of taxation by which all services have become taxable barring those placed in the 'Negative List' (section 66D) or are specifically exempted from tax by Government's notifications issued in exercise of power under section 93 of the Act.
Taxation of services by Government/Government entities
4. Taxation aspects concerning Government provided services thus also need consideration in two phases - Part-I and Part-II.
Part-I : Law upto Finance Act, 2011 (upto 30th June, 2011)
5. There was no specific provision concerning such services in the first phase. Exemptions were given to certain categories of services but Government services were not included under such exemptions because such services were not declared taxable by any Finance Acts since 1994. However, CBEC vide its Circular No. 87/7/2006-ST, dated 18-12-2006 clarified that no service tax on fee collected by public authorities while performing statutory functions/duties be collected. In this circular, it has been clarified that the activities performed by the sovereign/public authorities under the provision of law are in the nature of statutory obligations which are to be fulfilled in accordance with law. The fee collected by them for performing such activities is in the nature of compulsory levy as per the provisions of the relevant statute, and it is deposited into the Government treasury. Such activity is purely in public interest and it is undertaken as mandatory and statutory function. These are not in the nature of service to any particular individual for any consideration. Therefore, such an activity performed by a sovereign/public autho-rity under the provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such activities. This circular was superseded by the CBEC's Master Circular No. 96/7/2007ST, dated 23-8-2007, in which the CBEC has expressed an identical view.
Part-II
6. In the second phase from 1-7-2012, all services are taxable. It, therefore, became necessary to consider about the taxability of Government provided services and whether these have been included in the Negative List or in Mega Government Exemption Notification. Section 66D(a) provides that all services provided by Government or Local bodies shall be non-taxable except a few services as under -
| "(a) | services by Government or a local authority excluding the following services to the extent they are not covered elsewhere- |
| (i) | 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; | |
| (ii) | services in relation to an aircraft or a vessel, inside or outside the precincts of a part or an airport; | |
| (iii) | transport of goods or passengers; or | |
| (iv) | support services, other than services covered under clauses (i) to (iii) above, provided to business entities. |
| (b) | services by the Reserve Bank of India." |
It may be mentioned here that some of the services like transport of passengers is also specified in clause (o) and transport of goods is specified in clause (p) of section 66D. All the clauses viz. (a), (o) and (p) should be read harmoniously in order to determine taxability of service of transport of passengers or goods provided by Government or local authorities.
Why some Government services are taxable?
7. The object is to provide a level playing field. Certain services which are provided by non-governmental bodies (such as by private entrepreneurs) are also provided by Government bodies. Exempting such services rendered by Government bodies would have given an unfair advantage to them and weaken the position of private establishments in the same fields. The other reason is to avoid break in Cenvat chain as the support services provided by Government are normally in the nature of intermediary services.
Meaning of Government
8. There is no definition of Government in the Finance Act, 1994 (Act). However, as per section 2(23) of the General Clauses Act, 1897 the term "Government" has been defined to include both the Central Government and any State Government. The same explanation has been used even in section 21(12)(a) of Indian Penal Code, 1860.
The negative list provides for exemption of services of local authorities too. This term has, however, been defined in the Act to mean-
| (a) | a Panchayat as referred to in clause (d) of article 243 of the Constitution; | |
| (b) | a Municipality as referred to in clause (e) of article 243P of the Constitution; | |
| (c) | 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; | |
| (d) | a Cantonment Board as defined in section 3 of the Cantonments Act, 2006. | |
| (e) | a regional council or a district council constituted under the Sixth Schedule to the Constitution; | |
| (f) | a development board constituted under article 371 of the Constitution; or | |
| (g) | a regional council constituted under article 371A of the Constitution. |
The term has been very widely defined not only to include body formed by the elected representatives at Panchayat or Municipality level but also include Cantonment Board and Regional Council formed for the local development of the area.
Services taxable
9. The Government services made taxable need to be examined in regard to sub-categories of such services. These are considered as under:
| (a) | Services by Postal Department - The services rendered by this department which are taxable are: |
| (i) | Speed post | |
| (ii) | Express parcel post | |
| (iii) | Life insurance | |
| (iv) | Agency services provided to person other than Government |
| All other services provided by department of posts will not be liable to be taxed. | ||
| (b) | Aircraft or vessel services - The services provided in relation to aircraft or a vessel, inside or outside the precincts or a port or an airport by Government or local authority are taxable services. For understanding the meaning of these words, reference to other enactments mentioned in section 65B of the Act is necessary. This shows: |
| (i) | Aircraft is defined in section 65B(7) to have the meaning assigned to it under the Air Craft Act, 1934. | |
| (ii) | Vessel: It is defined in section 65B(53) as per the meaning assigned to it in clause (z) of section 2 of the Major Port Trusts Act, 1963. | |
| (iii) | Airport : It is defined in section 65B(8) as per the meaning assigned to it in clause(b) of section 2 of the Airports Authority of India Act, 1994. | |
| (iv) | Port: It is defined in section 65B(38) as having the meaning assigned to it in clause (q) of section 2 of the Major Port Trusts Act, 1963 or in clause (4) of section 3 of the Indian Ports Act, 1908. |
Services of Airports and Ports of varied type taxable as such are:
| (a) | Airport Services : Some of such services are : |
| (i) | Transportation and Logistic Services | |
| (ii) | Passenger and cargo traffic control service | |
| (iii) | Baggage handling | |
| (iv) | Maintenance service | |
| (v) | Cleaning of aircraft | |
| (vi) | Amenities to passenger and visitor | |
| (vii) | Hostel restaurant and rest room service | |
| (viii) | Security service | |
| (ix) | Air traffic service | |
| (x) | Air safety service | |
| (xi) | Warehousing service | |
| (xii) | Ground safety service | |
| (xiii) | Search and rescue facility service | |
| (xiv) | Aeronautical communication service | |
| (xv) | Meteorological service | |
| (xvi) | Others (postal facility, catering service, money exchange, parking facility, telephone facility, ATM facility, pre-paid taxi service) |
Service tax is payable in respect of such services.
9.1 Port services -Section 45 of the Major Port Trust Act, 1963 provides for levy of various charges towards following services :
| ♦ | Trans-shipping of passengers or goods between vessels in the port or port approaches; | |
| ♦ | Landing and shipping of passengers or goods from or to such vessels, to or from any wharf, quay, jetty, pier, dock, berth, mooring stage or erection, land or building in the possession or occupation of the Board or at any place within the limits of the port or port approaches; | |
| ♦ | Carnage or porterage of goods or any such place; | |
| ♦ | Wharfage, storage or demurrage of goods or any such place. |
9.2 Vessel services - These include:
| ♦ | Stevedoring service: bringing the vessel to the dock or wharf. | |
| ♦ | Repairing, pilotage, towage, anchorage, hauling, berthing, morring, remorring, hooking, measuring services to the vessel | |
| ♦ | Railway haulage service | |
| ♦ | Labour charges |
Transport of Goods services
10. Clauses (o) and (p) of section 66D specifically deal with services of transport of passengers and transport of goods respectively. The services specified in clauses (o) and (p) in this respect are only taxable. Therefore, the taxability of services provided by Government or local authority will have to be seen in the light of the provisions contained in clauses (o) and (p) of section 66D.
Support services to business entities (other than those discussed earlier)
11. The last category of Government services liable to tax are support services to business entities. The meaning of these terms are elucidated in later discussion.
| (a) | Business entity - The 'business entity' is defined in section 65B(17) as follows: | |
| '(17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession' | ||
| Business entity is a person who ordinarily carries out activity for profit. However, if any person carries out any activity as a hobby or pleasure or pastime, the person cannot be considered as 'business entity'. | ||
| (b) | Support service - The word 'support service' is defined in section 65B(49) as follows: | |
| '(49) "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carryout in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.' |
This definition encompasses following categories of service namely:
| (i) | Infrastructural | |
| (ii) | Operational, administrative, logistic, marketing or other support functions | |
| (iii) | Advertisement & Promotion, Construction or Works Contract, renting of immovable property, security, testing and analysis. |
11.1 Payment of tax in respect of support services - Entity No. 6 in Notification No. 30/2012-ST, dated 20-6-2012 is in respect of services provided by way of support services by Government or Local authorities to business entity.
Valuation of services provided by Government/Local authorities
12. Valuation is an integral part for levy of service tax. Service is, generally payable, on the amounts billed at the prescribed rate. It is also required to be paid on reimbursements unless the reimbursement satisfies the specified conditions in the valuation Rules. Thus, valuation is an important aspect in determining the base on which service tax is to be levied. For considering valuation aspects, reference is necessary to section 67 and Service tax (Determination of Value) Rules, 2006 ('Valuation Rules' for short).
The valuation provisions also need consideration in two Parts namely, position (i) prior to April 18, 2006 and (ii) w.e.f. April 18, 2006. Prior to April 18, 2006, tax was levied on the 'gross amount' charged by the service provider. As a corollary, consideration received in money was the sole basis to determine the value of taxable service. In cases where the service provider received any part of the consideration in non-monetary form or by way of reimbursement, such items did not figure in the invoice raised, thereby depressing the real value of taxable service.
To correct the lacunae, a new section 67 was substituted for then existing section 67 by the Finance Act, 2006 to take care, inter alia, of the situations where any part of the consideration for services rendered or to be rendered was not received in money form. By this amendment, all previous circulars on valuations were withdrawn. Finance Act, 2012 has further increased the essence of the Valuation Rules. This is because the definition of 'service' has been introduced in section 66B(44) of the Act and this definition of 'service' lays emphasis on the term ' consideration'.
According to section 67 read with rule 3 of the Valuation Rules the value of taxable service in different situations shall be as under:
| S. No. | Situation | Value of taxable service |
| (i) | In a case where the provision of service is for a consideration in money | The gross amount charged by the service provider for such service provided or to be provided by them. |
| (ii) | In a case where the provision of service is for a consideration not wholly or partly consisting of money | The value shall be such amount in money with the addition of service tax charged, is equivalent to the consideration. |
| (iii) | In a case where the provision of service is for a consideration which is not ascertainable. | According to rule 3(a) of Valuation Rules, in this case the value of taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration. |
| According to rule 3(b) of Valuation Rules, the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service. |
12.1 Other provisions (new) in section 67 - These are:
| "(i) | Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. | |
| (ii) | The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after the provision of such service. | |
| (iii) | Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. | |
| Explanation - For the purposes of this section,— |
| (a) | "consideration" includes any amount that is payable for the taxable services provided or to be provided; |
| (b) | ** | ** | ** |
| (c) | "gross amount charged" includes payment by cheque, credit card deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called "suspense account" or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise". |
12.2 General aspects in the exercise for determination of value - The foregoing discussion shows that in the exercise relating to valuation, the following aspects will need consideration:
| (i) | Service tax is to be imposed on the value of services rendered i.e. on consideration which can be in money form or in kind. Tax is payable on only the value of taxable service and not on the entire value of any contract. | |
| (ii) | When consideration is not ascertainable, it has to be worked out on the basis of section 67(1)(iii) and Rules. | |
| (iii) | Amount charged which does not relate to services rendered has to be excluded. | |
| (iv) | The gross amount liable to service tax will be inclusive of service tax payable. To work out the taxable amount, the following formula can be used- |
| Gross value of the Bill × 100 | = Service tax payable | |
| 100 + Rate of service tax | ||
| (including 2 per cent and 1 per cent education cess) | ||
| (v) | Value includes amount received before, during or after the provision of service. Thus service tax will be payable on the advances received also. | |
| (vi) | Treatment of reimbursement received - With effect from 18-4-2006, comprehensive provisions regarding determination of value of taxable service has been introduced. Accordingly, rule 5(2) of the Valuation Rules provides that the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service. This rule is applicable only when the prescribed conditions are satisfied. | |
| (vii) | Valuation can be only with reference to Valuation Rules. |
12.3 Valuation regarding taxable services of Government/Local authority - Though detailed Valuation Rules have been prescribed, in the case of Government provided services, these will have no application as these services are mostly on the basis of bills and consideration generally is in money. Hence, the service tax will be leviable on the gross amount charged by the service provider for the service provided or to be provided. Hence, detailed Rules of valuation will not be applicable in their cases.
Regards
Prarthana Jalan
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