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Government Authority: The Disjunctive Effect

Published on Fri, Feb 28,2014 | 16:20, Updated at Fri, Feb 28 at 16:20Source : Moneycontrol.com 

By: Anjlika Chopra - Director and Ankur Bansal - Manager, Deloitte Touche Tohmatsu India

The Disjunctive Effect - Amended definition of ‘Governmental Authority’ under the Service tax laws

Under the negative list regime of service tax, certain services provided to or received from inter alia a ‘governmental authority’ are exempt from the levy of service tax. For determining the scope and applicability of these exemptions, the definition of the term ‘governmental authority’, as provided in the mega exemption notification 25/2012-ST, dated June 20, 2012, assumes relevance.

Prior to the amendment, effected on January 30, 2014, the mega exemption notification defined ‘governmental authority’ as any board, authority or other body, which fulfills the following conditions:

  1. It is established with 90% or more participation by way of equity or control by Government

 AND

  1. It is 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 -The functions mainly include the functions performed by the municipality in relation to matters specified in Schedule XII of the Constitution, such as economic and social development, urban planning including town planning, roads and bridges etc.

Therefore, only the entities that were established by way of a special enactment passed by the Central or State Legislatures were eligible to be brought within the purview of the expression ‘governmental authority’, provided the Government held 90% or more of equity or control over such entities; and such entities carried out any function entrusted to a municipality under Article 243W of the Constitution.

As a result, various entities such as corporations, government companies, government institutes etc. that were wholly owned and controlled by the Government, were excluded from the definition of ‘governmental authority’, as such entities were ‘formed/ registered/ established’, not under a special enactment.

However, with effect from January 30, 2014, the definition of ‘governmental authority’ has been amended. As per the new definition, ‘governmental authority’ means:

  1. an authority or a board or any other body set up by an Act of Parliament or a State Legislature,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;

 OR  

  1. an authority or a board or any other body established by Government,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.

The use of the disjunctive expression ‘or’ has expanded the scope of the definition and has accordingly, paved the way for government companies, corporations, autonomous government institutes etc., that were not previously established under a special enactment, to enjoy the benefit of service tax exemption. Now, any other form of Government body, whether a government company, society, corporation, public sector undertaking etc., would come within the ambit of the term ‘governmental authority’, provided the following conditions are fulfilled:

  1. the Government has established such authority/ board/ body with 90% or more participation by way of equity or control;

 AND 

  1. the organization is established to carry out any function entrusted to a municipality under Article 243W of the Constitution.

On a detailed observation, the insertion of the phase ‘established by the Government’ may lead to certain interpretation issues. In India, there are various entities ‘established’ by the Government by way of 90% or more participation in equity or control; however, after the ‘establishment’ of such entities, the Government participation by way of equity or control is usually diluted to less than 90%. The new definition of ‘governmental authority’ merely contemplates that an entity is required to be ‘established’ by the Government by way of 90% or more equity or control. The definition does not contemplate continuous fulfillment of such requirement post ‘establishment’ of the entity. Thus, if the criterion is fulfilled, at the time of ‘establishment’ by way of 90% or more Government participation in the equity or by way of control, the entity would still be considered as ‘governmental authority’, within the new meaning assigned under the service tax notification.

 

 

 
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