Introduction:
As per the provisions of the GST law[1], services supplied by Central Government, State Governments, Union territories or local authorities to a business entity are liable to be taxed in the hands of recipient of such services under Reverse Charge Mechanism (RCM). However, as per rate notifications[2] issued under GST Law, functions as mentioned in the Article 243W and 243G of Constitution of India, are exempt. It is an ongoing debate since Service tax days that which functions of the Government are taxable and which are exempt. Recently Bangalore bench of the Tribunal[3] has analysed this complex issue and here are the three major takeaways from the landmark decision on this issue…
Decision of Bangalore Tribunal in brief:
As per facts of the case, Karnataka Area Development Board (KIADB) i.e. Appellant was established by an enactment of the Legislature of Karnataka, i.e. Karnataka Industrial Areas Development Act, 1966 (KIAD Act) for the purpose of establishing industrial areas and for promoting the rapid and orderly development of industries in the State of Karnataka.
Accordingly, appellant was performing activities such as renting of immovable property, construction of commercial and residential complexes, etc. Department contested, inter alia, that the activities carried out by Appellant were exigible to Service tax. While quantifying demand, figures adopted by Department were cumulative figures of each year appearing in Financial Statements, including carried forward balances of various previous years!
Now, the crucial question before the Tribunal was whether activities performed by Appellant can be treated as ‘service’ as defined in Service tax legislation? If yes, on which grounds and on which activities?
Key takeaways From the Tribunal decision:
1. Is tax payable under reverse charge on the services received from the Government?
In routine manner, businessmen are required to make various kinds of Government payments such as ROC fees, late fees for delay in filing returns, Shop and Establishment licence fees, licence renewal fees, etc. Therefore, it becomes very tricky for an assessee to determine whether GST needs to be discharged under RCM or not. The question of taxability gets thornier in cases where ITC is not available.
The primary question one needs to test is whether the activity is a ‘supply of services’ so as to attract GST? A similar issue was raised before Bangalore Bench of Tribunal attacking primary question whether activities performed by Governmental Bodies by exercising powers of eminent domain can be treated as ‘services’?
A very important question raised by the arguing counsel was, whether a State undertaking which is creature of Statute and exercising the powers of ‘eminent domain’ be said to be rendering any services? The concept of ‘eminent domain’ was discussed thoroughly to stress that a function which can only be performed by the Government, cannot be said to be a ‘service’ at all which can be subjected to Service tax.
The tribunal admitted these arguments and observed that exclusive powers of ‘eminent domain’ are entrusted to Government. Therefore, Appellant was merely carrying out mandatory and statutory obligations for carrying out objectives of KIAD Act. Thus, there is no service provider and client relationship so as to warrant the levy of service tax. Therefore, liability to pay service tax does not arise.
Though the decision pertains to Service tax Law, the concept enunciated by Tribunal may also be borrowed in GST regime. Just like Service tax law, even GST law is a consumption-based tax. Therefore, existence of service supplier and service recipient relationship is inevitable to levy GST. At this juncture, it is pertinent to note that clause (b) of sub-section 2 of Section 7 of CGST Act, 2017 provides that notified activities or transaction undertaken by Central Government, State Government or any local authority as public authorities would not be treated as supply. However, on reading the abovementioned Tribunal judgement, it appears that not only notified activities but any activity undertaken by Government within its eminent domain may not be treated as supply for the purpose of GST law.
2. Is Government entitled to collect tax to be on a safer side?
Many Governmental Authorities try to play safe by opting for conservative view as they are able to pass the tax burden on recipient. Even if recipient is of the view that the payment made to authorities is merely statutory requirement and not taxable activity, he might have no choice but to pay tax. For example, in case a Town planning and Development authority collects a huge amount as long term lease premium and also collects GST on it! Developer may not be able to avail ITC[4] of the same in many cases.
From the Tribunal judgement one can infer that Governmental authorities cannot simply take a conservative stand as they have option to pass on the burden of taxes.
3. Is person drawing SCN sound in accounts and mathematics?
Show cause notice issuing officer may adopt fancy accounts and mathematical principles. In the given case, the SCN issuing officer has not only taken figures of the relevant period but also has taken the opening balance figures from the balance sheet which resulted in Demand of Service tax for many years even more than 5 years i.e. even beyond the maximum period for which demand can be raised under Service tax law.
Therefore, the important takeaway is even if one agrees to the legal points raised by any officer, one should always check the calculations of the tax demand!
Conclusion:
The key takeaways flowing from such bold judgement by Bangalore Tribunal strives to be eye-opener for tax-payers. Though the judgement is passed under Service tax regime, the perspective drawn by Tribunal may very well be borrowed under GST law. Substantial activities performed by Government may get out of tax net, however, each activity must be examined carefully before concluding taxability.
[1] Notification no. 13/2017 CT(R) dated 28.06.2017
[2] Notification no. 12/2017 CT(R) dated 28.06.2017 and 14/2017 CT(R) dated 28.06.2017
[3] Karnataka Industrial Areas Development Board (KIADB) Vs. Commissioner of Central Tax, Bangalore North (2020 117 taxmann.com 69)
[4] By virtue of notification no. 3/2019 CT(R) dated 29.03.2019
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