Reverse charge on payments to Government and other statutory bodies – Confusion Prevails

Reverse charge on payments to Government and other statutory bodies – Confusion Prevails

 

Under GST, normally the liability to pay GST remains with the supplier unless the said supply is covered by the reverse charge mechanism.

Section 9(3) of the CGST Act provides that GST would be payable on reverse charge basis by the recipient of service on specified categories of supply of goods or services, as may be notified by the government.

Furthermore, Notification No. 13/2017 – Central Tax (Rate) provides the list of services in respect of which CGST is payable on reverse charge basis.

Sr. No. 5 of Notification No. 13/2017 provides that any business entity located in the taxable territory would be liable to pay GST on reverse charge basis on all the services provided by the government or local authority except for the services of renting of immovable property, services by the department of post, etc.

The relevant entry in consideration is:

 

Sl. No.	Category of Supply of Services	Supplier of service	Recipient        of services
5	Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, - (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii)  transport of goods or passengers.	Central Government, State Government, Union territory or local authority	Any business entity located in the           taxable territory.

 

A taxpayer makes various kinds of payments to statutory authorities such as factory licence fees, ROC fees, royalty charges, spectrum charges, pollution control fees, external development and infrastructure, development charges, licence fees, registration fees, payments made to drug controllers, BIS etc

 

In authors, views, in order to examine whether a payment made by the taxpayer will attract GST on reverse charge, the following steps have to be taken:

Step 1

The first step would be to determine whether the authority/body to whom the payment

is being made qualifies as a ‘government’ or ‘local authority’

 

Step 2

If yes, then the second step would be to determine whether the payment is a consideration for any supply made to the tax payer.

 

Step 3

If Yes, whether the same is exempted under GST Law.

 

 

 

STEP 1

 

Under GST Law, the legislature has used following terms:

 

a.      Government

b.      Local Authority

c.       Governmental Authority

d.     Government Entity

Thus, it is pertinent to analyse the meaning of the above terms so as to determine the person liable to pay GST on such supply. The provisions of reverse charge is applicable only in case of supply of services by Government and local authority. In case, services are provided Governmental Authority, then the liability to pay GST shall rest with such Governmental Authority. The statutory definition of such terms are as under:

 

 

Government (Section 2(53) of the CGST Act)	Local Authority (Section 2(69) of the CGST Act)	Governmental Authority (Para 2(zf) of the Notification No. 11/2017- CT(R)	Government Entity
“Government” to mean the Central Government. Similarly, respective State       GST       Acts defines “Government”       to mean       the       State Government.	“local      authority” means as below- (a)                a Panchayat (b)              a Municipality (c)               a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central	“Governmental Authority” as 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 any Government,	“	Government Entity”
			means an authority or a board or any other body including a society,                 trust, corporation, (i) set up by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90 per     cent     or   more participation  by  way

Government or any State Government with the control or management of a municipal or local fund; (d)                                       a Cantonment Board as           defined       in section    3    of    the Cantonments    Act, 2006; (e)                                        a       Regional Council        or        a District Council constituted under the Sixth Schedule to the Constitution; (f)                                        a Development Board    constituted under article 371 of the Constitution; or (g)                                       a Regional Council constituted under article 371A of the Constitution;

with 90 per cent or more participation by way of equity or control, to carry out any                  function entrusted to a Municipality under Article 243 W of the Constitution or to a Panchayat under Article 243 G of the Constitution.

of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

Meaning of Government

Let us to refer to the General Clauses Act, 1897 in order to understand the meaning of the term Government. Section 2(23) of the said Act defines the term Government which states that Government shall include both the Central Government and any state Government. Further, section 2(8) of the aforesaid Act defines Central Government to mean the President in relation to Union affairs (and includes State Government and Administrator of a U.T for specified purpose as defined in the aforesaid section) and State Government is defined in section 2(60) of the said Act interalia to mean the Governor, (and in a Union territory, the Central Government).

Article 53 of the Constitution of India provides that executive power of the Union shall be vested in the President, article 74 provides that a Council of Ministers with the Prime Minister at the head to aid and advise the President who shall, in the exercise of his functions, act in accordance with such advice and article 77 provides that all executive action of Government of India shall be expressed to be taken in the name of the President of India and the President may make Rules

for convenient transaction of the business of the Government of India, and for allocation among Ministers of the said business.

Rule 2 of The Government of India (Allocation of Business) Rules, 1961 which has been issued by President of India in exercise of power conferred by Article 77(3) of the Constitution provides that the business of the Government of India shall be transacted in the Ministries, Departments, Secretaries and offices specified in the first schedule of these Rules.

Similarly, article 154 of the Constitution provides that executive power of a state shall be vested in the Governor, article 163 provides that Council of Ministers with the Chief Minister at the head shall aid and advise the Governor in the exercise of his functions and article 166 provides that all executive action of the Government of a State shall be expressed to be taken in the name of the Governor and Governor may make rule for convenient transaction of the business of the Government of the State.

Para 2.4.10 of Education Guide issued by CBEC wherein it has been clarified that even regulatory or other body having separate existence would not qualify as Government.

Would various entities like a statutory body, corporation or an authority constituted under an Act passed by the Parliament or any of the State Legislatures be ‘Government’ or “local authority”?

 

A statutory body, corporation or an authority created by the Parliament or a State Legislature is neither ‘Government’ nor a ‘local authority’ as would be evident from the meaning of these terms explained in point nos. 2.4.7 and 2.4.8 above respectively. Such statutory body, corporation or an authority are normally created by the Parliament or a State Legislature in exercise of the powers conferred under article 53(3)(b) and article 154(2)(b) of the Constitution respectively. It is a settled position of law Government (Agarwal Vs. Hindustan Steel AIR 1970 Supreme Court 1150) that the manpower of such statutory authorities or bodies do not become officers subordinate to the President under article 53(1) of the Constitution and similarly to the Governer under article 154(1). Such a statutory body, corporation or an authority as a juristic entity is separate from the state and cannot be regarded as Central or State Government and also do not fall in the definition of ‘local authority’. Thus regulatory bodies and other autonomous entities which attain their entity under an act would not comprise either government or local authority.”

 

Meaning of Local Authority

On perusal of the above definition of Local Authority under the GST it may be seen that it has been defined exhaustively, containing only the authorities enlisted above. While the scope of the all other sub-clauses is clear as authorities are named as such, sub-clause (c), in its ambit covers any other authority legally entitled to or entrusted by the Central Government or any State Government with the control or management of a municipal fund or local fund.

In order to appreciate the meaning of the said sub-clause (c), reference can be made to the judgement of Hon’ble Supreme Court in the case of Union Of India & Ors Vs. R. C. Jain & Ors., [1981 (AIR) 1951] wherein, the question for consideration was to determine the test to examine if the Delhi Development Authority qualifies to be a Local Authority for the purpose of Payment of Bonus Act, 1965.

The term Local Authority was not defined under the Payment of Bonus Act, 1965 and therefore, reference was made to the definition given under the General Clauses Act, which defined the term as meaning a municipal committee or other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund. In the said judgment, the Supreme Court laid down certain attributes and characteristics of a Local Authority. The same is reproduced as under-

It must have separate legal existence as a corporate body

It must not be a mere governmental agency but a legally independent entity;

It must function in a defined area and must ordinarily be elected wholly or partly, directly or indirectly by the inhabitants of the area;

It must             enjoy a certain degree of autonomy, which, though not complete, must be appreciable;

the statute must entrust the authority with such governmental functions and duties as are usually entrusted to a municipal body for providing such amenities, as health and education services, water and sewerage, town planning and development, roads, markets, transportation etc. to the inhabitants;

The control and management of the fund must vest in the authority

In our view, the above-mentioned tests can also be used under the GST to determine if a particular authority qualifies as Local authority or not.

Meaning of Governmental Authority

It can be seen that the definition of Governmental Authority provides two possible ways for a body/board/authority to qualify as governmental authority, i.e., setup by an act or established by the government. However, whether the condition "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" applies to both the limbs is not clear from the definition.

The applicability of this condition defines the scope of the definition of governmental authority. The issue pertaining to interpretation of this definition under erstwhile service tax regime came before the Hon'ble Patna High Court in the case of Shapoorji Paloonji & Co. Pvt. Ltd. Vs CCE, [2016 TIOL 556 HC Patna-ST] where it made following observations-

"The provisions contained in sub-clause (i) and sub-clause (ii) of clause 2(s) are independent dis- conjunctive provisions and the expression "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" is related to sub- clause (ii) of clause 2(s) alone. The clause (i) is followed by ";" and the word "or". Therefore, each of the sub-clauses is independent provision. The condition of 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 is relatable to only sub-clause (ii) of clause 2(s).

It means that an authority established by the Government should have 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 to be eligible for exemption. The Authority set-up by an Act of Parliament or the State Legislature is not and cannot be made subject to the condition of 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 emerges from the above cited decision that definition of "governmental authority" includes even authority/board/any other body, set-up by an Act of the Parliament or a State Legislature without the condition of "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" being applicable to them. Accordingly, many bodies/institutions would qualify as governmental authorities merely because they are set-up by an Act. However, it is yet to see how the decision finds its way with Supreme Court where it has been challenged by the government.

Thus, the taxpayers as a first step are required to determine whether the authority/body to whom

the payment is being made qualifies as a ‘government’ or ‘local authority’.

STEP 2

The second step is to determine whether the amount paid is for receipt of a supply?

Section 7 of the CGST Act, 2017 which explains the scope of the term supply has been succeeded by the term ‘for consideration’. The term consideration has been defined under Section 2(31) of CGST Act as-

(a)Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that the deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply

From the above definition, it can be said that the concept of consideration embodies the concept of quid pro quo, which means that there must be a reciprocity and the person providing the consideration is expected to receive something in return. Therefore, it is clear that unless and until there is reciprocity for the amount paid, the same does not partake the character of consideration. In light of the same, it will be correct to infer that not every payment made to the government and authorities is leviable to GST

Further, it is imperative to keep in mind the distinction between the taxes, cesses and fees. The definition of fee has undergone a sea of change and a quid pro quo doesn’t necessarily need to be established. The Courts in India has segregated the fees into two categories:

a)  Compensatory fee

 

b)  Regulatory fee

 

The compensatory fee will be of a nature of quid pro quo whereas regulatory fee will be in the nature of license fee. Fee can also be said to be charged when it is for a specific purpose for a specific category of persons and that the benefit is given to only that specific category. Further, tax is of a compulsory nature which is imposed by a public authority for a public purpose.

CBEC Circular No. 192/02/2016-ST, dated 13.4.2016 which inter alia clarifies as under:

 

5.

Services provided in lieu of fee charged by Government or a local authority.

It is clarified that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As long as the payment is made (or fee charged) for getting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. It is also clarified that Service Tax is leviable on any payment, in lieu of any permission or license granted by the Government or a local authority.

 

Basis above discussion, so long as the payment is for a receiving service (i.e. in case where quid pro quo is established) GST will be payable.

 

STEP 3

 

If a taxpayer comes to a conclusion that the payments made are for the services provided by the Government or Local authority and there exist a quid pro quo, the next step is to determine whether the same is covered under any exemption Notification or not. Some of the exemptions which may be relevant in the present case are tabulated hereunder:

 

 

Sl. No.	Entry No. in Exemption Notification (Notification 12/2017 – CT(R)	Description
1.	Entry 5	Services provided by Governmental Authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution.
2	Entry 6	Services by the Central Government, State Government, Union territory or local authority excluding the following services-   a. services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services

		provided to a person other than the Central Government, State Government, Union territory;   b.             services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;   c.               transport of goods or passengers; or   d.            any service, other than services covered under entries (a) to (c) above, provided to business entities
3.	Entry 9	Services provided by Central Government, State Government, Union territory or a local authority where the consideration for such services does not exceed five thousand rupees: Provided that nothing contained in this entry shall apply to-   (i)  services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory; (ii)  services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii)            transport of goods or passengers:   Provided further that in case where continuous supply of service, as defined in sub-section (33) of section 2 of the Central Goods and Services Tax Act, 2017, is provided by the Central Government, State Government, Union territory or a local authority, the exemption shall apply only where the consideration charged for such service does not exceed five thousand rupees in a financial year.
4.	Entry 47	Services provided by the Central Government, State Government, Union Territory or a local authority by way of: (i)    registration required under any law for time being in force;   (ii)  testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for time being in force,
5.	Entry 61	Services provided by	the Central Government, State
		Government, Union territory or local authority by way of issuance of passport, visa, driving licence, birth certificate or death certificate

6.	Entry 62	Services provided by the Central Government, State Government, Union territory or 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 Central Government, State Government, Union territory or local authority under such contract.
7	Entry 63	Services provided by the Central Government, State Government, Union territory or local authority by way of assignment of right to use natural resources to an individual farmer for cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products.

In a nutshell, the first step would be to determine whether the authority/body to whom the payment is being made qualifies as a ‘government’ or ‘local authority’. If yes, then the second step would be to determine whether the payment is a consideration for any supply made to the tax payer. If Yes, whether the same is exempted under GST Law.

 

PRACTICAL CASE STUDIES

 

Case Study-I

 

Case Study-II

2.      Whether the royalty payable to the Government can qualify as a consideration for any service rendered by the Government and therefore leviable to GST?

3.      Whether royalty payable to the Government for extraction of mineral oils is towards grant of right arising out of land and thus, not leviable to GST?

Comments-

In authors view, the royalty payments made by the querist to the Government under the auction would be in the nature of consideration for the mining rights granted by the Government

 

However, it should be noted that Supreme Court in the case of Mineral Area Development Authority v. Union of India vide order dated 30.03.2011 referred the question as to whether royalty is in the nature of a tax to a Larger Bench of Nine judges of the Supreme Court. The relevant portion of the judgment is reproduced as under:

“Having heard the matter(s) for considerable length of time, we are of the view that the matter needs to be considered by the Bench of Nine Judges. The questions of law to be decided by the larger Bench are as follows:

 

1.  Whether `royalty' determined under Sections 9/15(3) of the Mines and Minerals (Regulation & Development) Act, 1957 (Act 67 of 1957, as amended) is in the nature of tax?

…

4. What is the true nature of royalty / dead rent payable on minerals produced

/ mined / extracted from mines?

…”

 

 

In case the Nine judge bench of the Supreme court decides that royalty is in the nature of tax, no service tax would be payable on the same.