As per section 66D (a) of Finance Act, 1994, all services, other than followings provided by Government or Local Authority, shall not be subject to service tax. In other words, following services (if not covered by any other entry of negative list or not specifically exempt by a notification) provided by Government or Local Authority shall be subject to service tax:
| Service Tax Payable Under Reverse Charge Mechanism (Column-1) | Service Tax Payable By Service Provider (Column-2) |
| (i) Services covered by the definition of “Support Services” to a business entity, but not covered by Column-2. | (i) Services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provide to a person other than Government. [Section 65D(a)(i)] (ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport. [Section 65D(a)(ii)] (iii) Transport of goods or passengers. [Section 65D(a)(ii)] (iv) Renting of Immovable property Services. [specifically excluded from reverse charge mechanism) |
Prior to 01.04.2016, in addition to services specified under sub-clauses (i), (ii) & (iii) of section 65D(a) of Finance Act, 1994, services covered by the definition of ‘ (as defined under Section 65B(49) of Finance Act, 1944) provided by Government or Local Authority to a ‘business entity’ are subject to service tax.
However, w. e. f. 01.04.2016, all services provided by Government or Local Authority to a business entity shall be subject to service tax. However, corresponding changes in Reverse Charge Mechanism provisions have not been made applicable yet. Therefore as per the provisions notified and made applicable w. e. f. 01.04.2016, additional services which have been made taxable w. e. f. 01.04.2016, shall remain outside the preview of Reverse Charge Mechanism.
3. Position as applicable w. e. f. 01.04.2016 (as per the provisions effective as on date)
Accordingly, following services (if not covered by any other entry of negative list or not specifically exempt by a notification) provided by Government or Local Authority shall be subject to service tax:
| Service Tax Payable Under Reverse Charge Mechanism (Column-1) | Service Tax Payable By Service Provider (Column-2) |
| (i) Services covered by the definition of “Support Services” to a business entity, but not covered by point no. (i),(ii),(iii) & (iv) of Column-2. | (i) Services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provide to a person other than Government. [Section 65D(a)(i)] (ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport. [Section 65D(a)(ii)] (iii) Transport of goods or passengers. [Section 65D(a)(ii)] (iv) Renting of Immovable property Services. [specifically excluded from reverse charge mechanism) (v) Any Service, not covered by definition of ‘Support Services’ provided to a business entity. |
4. Exemption under Notification No. 7/2016-ServiceTax dated 18.02.2016
In other words, services received by a business entity (having turnover not exceeding rupees ten lakh in the preceding financial year) from Government or Local Authority shall not be subject to service tax.
5. Comment on Practical implementation of Provisions: A Good and A Bad
- Since all the services provided by government or local authority to business entity have been made taxable, there may be confusion and litigation with respect to taxability of certain services and activities undertaken by government.
As mentioned hereinabove, additional services which have been made taxable w. e.f. 01.04.2016, have been kept outside the scope of reverse charge mechanism, therefore litigation would be limited to Government Departments which are engaged in providing those services.
If these additional taxable services were covered by reverse charge mechanism, confusion and litigation would spread among the thousands of service receipts.
- It may be noted that Notification No. 07/2016 exempts all the services provided by Government or Local Authority to a business entity with a turnover up to rupees ten lakh in the preceding financial year.”
It is no difficulty in implementing this notification where service tax is payable under reverse charge mechanism as service recipient would have to examine its turnover for the eligibility for exemption. However, when service tax is to be charged by Government of Local Authority, it would be impractical to implement this exemption notification.
Implication can be visualized by imaging a situation where a proprietor of a small business (with a turnover up to rupees ten lakh in the preceding financial year) is standing in post office and asking not to charge service tax on speed post services received by it.
Source CA. Vikas Khandelwal