Circular on Sovereign Power and Service Tax incorrect
September, 03rd 2007
The latest circular issued on August 23 on Service Tax number 96/7/2007-ST is wrong in regard to the concept of sovereign power. The circular at page nine under reference code 999.01 clarifies that if a sovereign/public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of a taxable service as defined.
The circular has made a distinction between (a) sovereign functions, (b) statutory functions on a statutory fee & (c) statutory functions on commercial fee. The circular holds that (a) & (b) are not leviable to service tax. The mistake in the circular is that it holds that (b) above is not chargeable to service tax. The argument given in the circular is that any amount/fee collected in such cases are not to be treated as consideration for the purpose of levy of service tax. This is not the correct view. Whether it is a statutory fee or it is a commercial fee, it is on the basis of an invoice. This view given in the circular is based on the misunderstanding of what a sovereign function is.
The sovereign functions (i.e. the services given by the government in discharge of the sovereign functions of the state) are maintenance of law & order which includes judiciary, collection of taxes, maintenance of military and maintenance of international relations. These are not commercial services and have no invoices. If a government maintains hospitals, educational institutions, transportation services such as railways, telephone services, insurance services, etc they are certainly leviable to service tax just as goods manufactured by government departments, if sold, are liable to excise duty.
CESTAT in a recent judgment in the case of Deputy Director of Mines & Geological Department vs CCE & C, Belgaum 2007(7)STR 285 (Tri.-Bang.), has ruled that the activity of the Mining and Geology Department is a sovereign function and therefore it is not leviable to service tax. This judgment is also wrong. Digging the earth or surveying the sea are activities which are certainly not sovereign activities. Thus, thereal distinction is whether it is a service rendered in exercise of sovereign function or whether it is other than sovereign function. If it is a sovereign function no service tax is leviable. If it is not, service tax is leviable provided there is a sale of the service on the basis of an invoice or a bill or voucher. Even if it is a statutory function and only a fee is charged, it is still conceptually a commercial sale. And the tax is leviable.
The same argument is also applicable for goods manufactured and sold by the government department which are chargeable to excise duty.The distinction that this circular has made between statutory fees and commercial invoice is wholly invalid. Both are in effect consideration for sale. And both activities are leviable to service tax. So there are only two distinctions (a) services rendered in pursuance of sovereign functions and (b) all other services given by government undertakings or private concerns for statutory fees or plain financial consideration. And (b) is squarely chargeable to service tax.