CA Arpit Gupta

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Effects Of Changes In Negative List On Services Provided By Government To Business Entity (Amendment Made By Finance Act 2015 Applicable From 01.04.2016)

1. Amendment in Negative list:

As per Sec. 66D(a), services provided by government or a Local Authority are covered in negative list excluding 4 services, one of them was “Support services provided to business entities”. Finance Act 2015, has substituted the word “”support” with word “ANY”. The aforesaid amendment if effective notified on 01.04.20 16. Therefore with effect from 01.04.20 16 if government or local authority provides any services to business entities then on all such services, service tax would be leviable, except the services that are specifically exempted, or covered by any another entry in the Negative List.

2. Amendment in Service Tax Rule:

As per section 68(2) person liable to pay service tax shall be the person notified under rule 2(1)(d) of Service Tax Rules 1994. Rule 2(1)(d) specifies the cases where the service tax is required to be paid by service receiver under the reverse charge mechanism(either under full reverse charge or under partial reverse charge).

With respect to the cases mentioned in section 66D(a), business entities are required to pay 100% service tax under full reverse charge. Rule 2(1)(d) says that in

respect of services provided or agreed to be provided by Government or local authority “by way of support services” excluding, –

(1) renting of immovable property, and

(2) services specified in sub-clauses (i), (ii) and (iii) of section 66D(a)

Owing to amendment in section 66D(a) words “by way of support service” has been omitted with effect from 01.04.2016. Therefore from 01.04.2016 business entities are required to pay service tax on all the services provided by government or local authority, except the services that are specifically exempted, or covered by any another entry in the Negative List.

3. Amendment in Point of Taxation Rule:

Rule 7 of determines point of taxation in case of where the service tax is payable by service recipient i.e. the case of reverse charge. Till now as per Rule 7, where the government / local authority provides service to business entities, service tax shall be payable by business entities at the time of making payment to government or local authority.

With effect from 13.04.2016 government has inserted a proviso to Rule 7, through notification no. 24/2016, which add provides as follow –

Provided also that in case of services provided BY the Government or local authority TO any business entity, the point of taxation shall be the EARLIER of the dates on which –

(a) any payment, part or full, in respect of such service becomes due, as specified in the invoice, bill, challan or any other document issued by the Government or local authority demanding such payment; or

(b) payment for such services is made.

Therefore after amendment, with effect from 13.04.20 16 point of taxation in respect of ANY services provided by government or local authority to business entities, shall be earlier of –

– date on which full or part payment becomes due or

– actual date of payment.

4. Amendment in Service Tax Valuation Rule:

As per rule 6(2), taxable value of service shall not include Interest on delayed payment of any consideration for the provision of services or sale of property, whether movable or immovable, which simply means service tax shall not be charged on interest part when the payment of consideration is delayed due to any reason.

There are certain cases where government defers the payment of consideration and charges interest or other amount on such deferred payment as a part of service scheme or agreement. Due to Rule 6(2), even in those cases government will not be able to charge service tax on such interest since it is to be excluded from taxable value of service.

In order to include such payment in the value of taxable service notification no. 23/2016 has been issued with effect from 13.04.2016. Therefore from 13.04.2016 even interest part shall be included in taxable value of service, where any service provided BY Government or a local authority TO a business entity and where payment for such service is allowed to be deferred on payment of interest or any other consideration.

5. Amendment in Mega Exemption:

New Entry no. 48 with effect from 01.04.2016, has been inserted in mega exemption notification no. 25/2012 providing that services provided by Government or a local authority to a business entity with a turnover up to rupees 10 lakh in the preceding financial year. Thus effectively only those business entities will be required to pay service tax whose turnover of previous financial year exceeds Rs. 10 Lakhs.

There were doubts that the sovereign functions of the Government such as mines allotment, spectrum auction, licensing, registration etc. may also come under the service tax net on account of the said amendment. However, this is not the intention of the legislature. Therefore in order to clarify, further amendments has been made in mega exemption Notification No. 25/2012 by inserting entries no. 54 to 63, through notification no. 22/2016 with effect from 13.04.2016 which are as follow –

54. 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;

55. Services provided by Government or a local authority by way of issuance of passport, visa, driving licence, birth certificate or death certificate;

56. Services provided by Government or a local authority where the gross amount charged for such services does not exceed Rs. 5000/-

Provided that nothing contained in this entry shall apply to services specified in sub-clauses (i), (ii) and (iii) of section 66D(a).

Provided further that in case where continuous supply of service, as defined in clause (c) of rule 2 of the Point of Taxation Rules, 2011, is provided by the Government or a local authority, the exemption shall apply only where the gross amount charged for such service does not exceed Rs. 5000/- in a financial year;

57. Services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract.

58. Services provided by Government or a local authority by way of-

(a) registration required under any law for the time being in force;

(b) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under any law for the time being in force.

59. Services provided by Government or a local authority by way of assignment of right to use natural resources to an individual farmer for the purposes of agriculture.

60. Services by Government, a local authority or a governmental authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution.

61. Services provided by Government or a local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Government or the local authority before the 1st April, 2016:

Provided that the exemption shall apply only to service tax payable on one time charge payable, in full upfront or in installments, for assignment of right to use such natural resource.

62. Services provided by Government or a local authority by way of allowing a business entity to operate as a telecom service provider or use radio frequency spectrum during the financial year 2015-16 on payment of licence fee or spectrum user charges, as the case may

63. 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).

(Entry No. 54 to 63 inserted w.e.f. 13.04.2016)

Considering the importance of issue CBEC has issued a circular no. 192/02/2016 dated 13th April 2016 describing 15 different cases with illustration for clarifying the doubts raised by stakeholders. Click here to go through the entire text of circular.

(Author can be reached at  caarpitgupta11@gmail.com)

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