Recent news reports indicated that the service tax department has issued a notice to the Securities and Exchange Board of India (Sebi) stating that the activities carried out by Sebi, such as processing of IPOs, debt issues, mutual fund NFOs and other activities, including informal guidance to companies, are liable to service tax. At a micro-level, the incident appears to be one of ineffective communication and contradictory positions being adopted by two government departments/institutions reporting to the same ministry, the ministry of finance. Thus, at best, the issue could have been resolved at the departmental level itself without turning to the adjudication machinery under the provisions of the service tax law. However, at a macro-level, this brings to the fore a number of issues in the context of applicability of service tax on government activity which require clarity.

It is pertinent to point out that earlier, the service tax department had clarified that sovereign activities and statutory functions are not taxable services. On this count, a number of rulings were also issued setting aside the service tax demands and penalties on activities such as preparation and issuance of electoral photo identity cards, inspection and certification of electrical installations, etc. However, these clarifications and decisions have been in the context of service tax law as applicable prior to the introduction of the ‘negative list regime’. Since July 2012, “any activity carried out by a person for another for consideration” which does not figure in the ‘negative list’ (i.e., the list of activities which Parliament has kept beyond the coverage of service tax) or is exempted otherwise is liable to service tax.

Hitherto, it was colloquially understood that all services provided by all government institutions, other than those specifically excluded (i.e. postal services, services at port or airport, transportation services and support services), were covered under the negative list and thus excluded from service tax. However, an amendment has been proposed in the recent Budget purporting to “clarify” that the expression “government” would only cover departments of the central government and would not include an entity created by statute. Thus, it is crucial that a clarification be issued whether all the activities of government institutions are taxable or whether the statutory activities, etc, continue to remain non-taxable.

Further, while the notice specifically relates to activities undertaken by Sebi, the issue needs to be addressed summarily with decisiveness as Sebi is not the only government entity that potentially faces such taxation demands. Other regulatory entities, such as the Insurance Regulatory and Development Authority (IRDA), the Telecom Regulatory Authority of India (Trai), etc, act more or less on a similar footing as Sebi, when interacting with private parties. It is noteworthy to point out that the service tax department has successfully pursued service tax demands from governmental institutions in respect of the revenue realized by them by renting out properties. It is also common knowledge that despite the initial resistance, the Railways has started levying and collecting service tax.

Effective from March 1, 2015, it is now incumbent on the service receiver (i.e. the private party in this case) to ascertain whether tax is applicable on the services it receives from a government entity and discharge the service tax liability thereon. Accordingly, it is imperative that it is appropriately clarified whether the activities undertaken by such entities are at all liable to service tax. Even if it is made clear that the activities are indeed liable to service tax, it will at least help the parties in complying with the tax law such that the fallouts of failure to discharge the liability and protracted litigation on this ground can be avoided at a later stage.

With inputs from Tarun Jain, managing associate, BMR Legal

The author is Leader (indirect tax), BMR & Associates LLP.

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