India: Scope Of Taxable Services To A Governmental Authority Widened

Ministry of Finance under Mega Exemption Notification no. 25/2012 – Service Tax issued on 20.06.2012 ('Mega Exemption Notification' for short) issued under the negative list regime of the Service Tax Laws exempted certain services from the services tax leviable thereon. Under the said notification inter alia the services rendered to or by a governmental authority in the nature detailed hereunder were exempted.

Under Para 12 of the said Mega Exemption Notification, services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

  • a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
  • a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
  • a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;
  • canal, dam or other irrigation works;
  • pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or
  • a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act; are exempted from the levy of Service Tax.

Under Para 25 of the Mega Exemption Notification, Services provided to Government, a local authority or a governmental authority by way of –

  • carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or
  • repair or maintenance of a vessel; are exempted from the levy of Service Tax.

Under Para 34 of the Mega Exemption Notification, Services received from a provider of service located in a non- taxable territory by Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession are exempted from levy of Service Tax.

Here, non-taxable Service territory means a territory other than the taxable territory, i.e, State of Jammu & Kashmir and other than India. It is pertinent to note that Taxable territory has been defined under sub-section 52 of section 65B and refers to the territory to which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India excluding the state of Jammu and Kashmir.

Under Para 39 of the Mega Exemption Notification, services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under Article 243W of the Constitution are exempted.

Under Clause 2 (s) of Mega Exemption Notification, "Governmental Authority" is defined as follows:

"governmental authority'' means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government

and

set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W1 of the Constitution.

In the light of the above stated definition of Governmental Authority, the bodies which were established by way of a special enactment passed by the Central or State Legislatures and with 90 percent or more participation by way of equity capital or control by the government were termed as the Governmental Authority. Such bodies carried out any function entrusted to a municipality under Article 243W of the Constitution of India. Accordingly, various entities such as corporations, government companies, government institutes etc. that were owned and controlled by the Government, were excluded from the definition of 'governmental authority' since the same were not established under the special enactment of the Parliament or the state legislature and there was a limited scope of the definition of the Governmental Authority.

However, Ministry of Finance vide its notification no. 02/2014 dated 30.01.2014 widened the scope of the definition of the Governmental Authority. The earlier definition as provided under the mega Exemption Notification dated 20.06.2012 was substituted with the following:

'(s) "governmental authority" means an authority or a board or any other body;

  1. set up by an Act of Parliament or a State Legislature; or
  2. established by Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;'

Now, according to the new definition of the Governmental Authority a body is governmental authority if such body is set up by an Act of Parliament or a State Legislature with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution

OR

if such body is established by Government with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution.

CONCLUSION

The new definition states the two criterion thereby including the number of entities established by Government with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution. It is seen generally that with time and in the interest of public there are certain entities which are generally incorporated by Government but the Government at a later stage dilutes its stake in such entities, the present definition may lead to certain interpretation issues as to the entitlement of certain entities qualifying as governmental authority even at the later stage when the stakes of the government in such entity are diluted. However, it can also be said that the same may widen the scope of the services exempted for the levy of Service Tax if such entities are merely promoted by the Government and may be at the time of determination of status for the purpose of levy of Service Tax are not owned and controlled by the government as per the recent amendment.

Footnote

1. 243W. Powers, authority and responsibilities of Municipalities, etc Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow

(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to

(i) the preparation of plans for economic development and social justice;

(ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;

(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule

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