The tax authorities have slapped a service tax demand of around Rs 7,300 crore on a social security body that provides healthcare benefits to employees by taking the view that it is running a general insurance business, prompting labour and employment minister Oscar Fernandes to seek an urgent intervention from Finance Minister P Chidambaram to resolve the tangle.

The Service Tax Commissionerate has asked the government-run Employees' State Insurance Corporation or ESIC to pay up nearly Rs 3400 crore in tax dues and interest for its activities between 2005-06 and 2009-10, in an order passed late last month. It has also imposed a penalty of around Rs 1950 crore on ESIC for "suppression of facts" and "intent to evade payment of service tax."

The taxmen have also raised a Rs 1900 crore demand on ESIC, separately, as service tax dues from the period between 2010-11 and June 2012. The finance ministry had, incidentally, granted an exemption from service tax for ESIC's operations in a decision notified on July 1, 2012, a senior government official pointed out.

The labour ministry had sought the exemption from the finance ministry in 2012 by stressing that ESIC is not a corporate body carrying on an insurance business, but an organisation constituted by an act of Parliament to discharge social security benefits to workers.

The finance ministry had accepted this argument, but the service tax authorities consider ESIC liable for paying dues for the period prior to the exemption.

The labour ministry's efforts to convince revenue authorities to close the demand notice has drawn a blank so far, so labour and highway minister Oscar Fernandes will take up the issue directly with Chidambaram, said an official aware of the development.

ESIC is filing an appeal with the concerned tribunal against the Service Tax authorities' December 2013 order that requires it to pay around Rs 5400 crore in service tax dues, including the Rs 1950 crore penalty.

Simultaneously, Fernandes will take up the matter with the finance minister for granting the corporation an exemption with 'retrospective effect' as has been done for the Indian Railways, the official said.

In an official missive sent to Chidambaram in October 2013, Fernandes' predecessor in charge of the labour ministry, the late Sis Ram Ola, had stressed that "the grounds for exempting ESIC from service tax from July 2012, existed even during the earlier period" Labour Secretary Gauri Kumar had also written to Finance Secretary Sumit Bose last month to issue "necessary directions" for closure of the demand-cum-show cause notices of Service Tax against ESIC.