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Companies will have to pay service tax on services availed from government from next fiscal year
March, 09th 2016

Indian companies will have to pay service tax on any service they avail from the government or local authority from the next fiscal year, broadening the scope of the levy to include not just spectrum but all auctions, right of way, licence fees and development rights. These will all attract service tax, now applied at 15%, inclusive of two cesses. The government has notified a provision of the last Budget that will kick in on April 1. Companies will have to pay service tax on services availed from government from next fiscal year

This will bring almost every service provided by it to companies under the tax net. "This is in line with (proposed) goods and services tax ( GST) wherein everything is taxed," a senior government official said, putting the move in context. "Some business support services provided by the government were already under the tax net and this now completes the whole package. Globally, similar regimes are followed as it enables seamless flow of credit."

According to the Budget "all services provided by the government or local authority to a business entity, except the services that are specifically exempted, or covered by any other entry in the negative list, shall be liable to service tax".

Services provided by the government or local authorities, excluding certain specified ones, are currently in the negative list, implying that no service tax can be levied on them.

Under the negative list system, all services are taxed unless specifically mentioned in the list.

The Finance Act, 2015, has made an enabling provision to exclude all services provided by the government or local authorities to a business entity from the negative list. The provision, however, does not cover government services provided to individuals.

"Thus, all services provided by the government or local authority to a business entity, except the services that are specifically exempted, or covered by any other entry in the negative list, shall be liable to service tax," said the Budget.

That means if a telecom company wants to lay cables, it will need permission from the local authority and there will be a service tax levied on this right of way. Mine auctions and development rights for land in the nature of government providing a service by allowing exploitation of a resource becomes taxable.

A large number of government obligations and functions are regarded as services provided by it, pointed out EY partner Bipin Sapra, calling for greater explanation.

"There is an urgent need for clarification as the government and local authority provide a number of services/obligations on which reverse charge will get potentially attracted," he said.

"Since a number of these recipients are not current service taxpayers, this has a potential for huge litigation."

The tax payable will be eligible for input tax credit if the service so availed goes into producing other goods and services. The business will be able to set off this tax against its excise or service tax liability.

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