New Scope of Governmental Authority under Service Tax

 Dr. Sanjiv Agarwal

In Service Tax, ‘Governmental Authority’ assumes significance as certain specified services provided by it and received by it are exempt or not liable to levy of Service Tax. Though the term ‘governmental authority’ comprises of two words – ‘governmental’ (derived from government) and ‘authority’ we have a specific definition of governmental authority as defined in clause 2(s) of Notification No. 25/2012-ST dated 20.06.2012. This is an exemption notification which contains 39 exemptions under Service Tax for various services / service providers / service receivers. There are few exemptions meant for governmental authorities.

Meaning of Governmental Authority

(W.e.f. 01.07.2012 upto 29.01.2014)

Clause(s) of definitions in Notification No. 25/2012-ST defines ‘governmental authority as under-

“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 243W of the Constitution.

Following conditions should be satisfied for a board, body or an authority to be eligible for exemptions as a governmental authority:

• set up by an act of the Parliament or a State Legislature;
• established with 90% or more participation by way of equity or control by Government; and
• carries out any of the functions entrusted to a municipality under article 243W of the Constitution.

(W.e.f. 30.01.2014)

Vide Notification No. 2/2014-ST dated 30.01.2014, Ministry of Finance has amended the definition of ‘governmental authority’ as defined in clause 2(s) of Notification No. 25/2012-ST dated 20.06.2012.

The amended definition reads as follows:

(s) “Governmental authority” means an authority or a board or any other body;

(i)  set up by an Act of Parliament or a State Legislature; or

(ii) established by Government, with 90 percent or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution.

Accordingly, as per amendment, ‘Governmental Authority’ means board / authority set up either by Act of Parliament / State Legislature or established by Government, with 90% equity control; Earlier, such authority was required to be set by Government and Act of Parliament / State Legislature.

The amended definition shall be effective from 30.01.2014 (and not earlier) and has widened the scope of the term ‘governmental authority’ implying that the exemption base gets expanded w.e.f. 30.01.2014.

Following conditions should be satisfied or met to qualify as a governmental authority –

• It should be an authority, board or any other body
• Such authority etc should be set up by an Act of Parliament or an Act of State Legislature
• Alternatively, such an authority should be –
  • established by Government
  • with 90 percent or more participation by way of equity or control
  • to carry out functions entrusted to Municipalities under Constitution of India (Article 243W)
  • under Constitution of India (Article 243W)

Thus, earlier where as both conditions of Government control  / equity and setting up under State / Union law were required, now either setting up under law is required or Government control / equity  for functions under article 243W of Constitution are required, so as to qualify as Government Authority. The scope ‘therefore’ gets extended with ‘and’ being substituted by ‘or’.

Impact of Amendment

The effect of this amendment will benefit many boards, authorities and other bodies which were not getting covered under the earlier definition and it shall provide exemption to certain services specifically meant for exemption of services to / by governmental authorities under Notification No. 25/2012-ST .