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Service Tax on Support Services to Business Entities

by on March 9, 2013

There is a concept called tax is not paid by the crown. However, to give effect to this concept under service tax legislation, drafting authorities have taken enough pain to cover nature of activities performed by crown or exclude in few cases wherein service tax is directly paid by crown. This is the first time Central Government, State Government, Local Authorities, a governmental authority etc. are defined comprehensively under the service tax legislation.

This article is written to throw light on service tax implications on support services provided by Government or Local Authority.

The support services are excluded from Entry (a) of the negative list and to the extent they are not covered in any other entry of Negative List. Let us understand what are these support services? and then we will move forward to taxability of support services.

1. Support Services:

Clause 49 of Section 65B of the Finance Act, 1944 reads -
“support services” means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out 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.

The support services in simple sense are outsource services and not provided in terms of sovereign rights or as a part of federal/statutory duties of Government or Local authorities.

The education guide provided immediately after introduction of new regime provides further light on support services that services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services e.g. grant of mining or licensing rights or audit of government entities established by a special law, which are required to be audited by CAG under section 18 of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statue and cannot be performed by the business entity themselves and thus do not constitute support services.)

2. What are the other services excluded from support services?

Following services are excluded from support services:

a) services provided by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services carried out on payment of commission on non-government (private) business;
b) services in relation to a vessel or an aircraft inside or outside the precincts of a port or an airport;
c) transport of goods and/or passengers;

3. How is support services taxed?

Please consider following points in relation to taxability of support services:

- What is the rationale behind taxing support services?

The rationale to tax support services 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.

- The service tax is payable under reverse charge mechanism.

The Government or Local authority is not required to pay service tax as service provider but service receiver as a business entity is liable to pay full service tax on such support services received.

For example, Services provided by government security agencies are covered by the main portion of the definition of support service as similar services can be provided by private entities. However the tax will be actually payable on reverse charge by the recipient who is business entities.

- The service tax is payable by service receiver on payment basis like any other reverse charge service tax liability.

The support services are taxable to business entity only:

Therefore, the support services provided by Government or Local Authorities to general public are not taxable under reverse charge.

For example, for public parking, the local authority grants the land on lease to private public parking entities or business units and receives certain consideration from them. On payment of such consideration to Local Authority, these business entities are required to pay service tax on reverse charge.

- What are the business entities?

Section 65B of the Finance Act, 1994 - “any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.”

Thus it includes sole proprietors as well.

- Business entities are required to register under respective service to pay service tax under reverse charge.

With the restoration of all old accounting codes, the payment is required to be made as per service wise code. In addition to that, the ST-3 returns are still required to be filed showing service wise details. To pay service tax and file returns, service wise the business entities are required to take or amend register under respective support services received from Government or Local Authorities.

- In the case of services which are not support services, Government or Local authorities are required to get registered and pay service tax.

What are the control checks to identify support services?

It is not apparent to identify support services from the accounts of the business entities and therefore following control checks are required:

  • Identify whether service receiver is business entity?
  • Identify the payment made to Government and Local Authority.
  • What is the nature of transaction done?
  • Is it covered in the Negative List otherwise?

When more and more silent provisions are introduced in the service tax legislation, identifying service tax liability is becoming increasingly difficult for both layman and professionals. Looking to seriousness of such liability, ICAI is regularly putting forward a proposal of service tax audit (like that in Income Tax audit) since last few years; however, the same is not accepted yet. The annual service tax audit by an independent chartered accountant is certainly more reliable then service tax audit done after 3-5 years by departmental authorities.

It is in the hands of government to decide whether they want penalties on lose controls or better control through regular independent audits?

CA GAUTAM JOSHI

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