There were many audits conducted by the service tax authorities in and around Hyderabad during the last month on hotels, bars and restaurants. One of the common audit observation is the applicability of service tax on license fee paid to Government of Telangana to obtain license to sell alcohol in their hotels, bars and restaurants. The said applicability is pursued from the angle of reverse charge mechanism in light of the changes made to Finance Act, 1994 vide the Finance Act, 2015. We shall try to understand the changes brought in through Finance Act, 2015 and whether service tax has to be paid on such amounts paid to Government of Telangana.
Initially, when negative list of taxation has been introduced, all the services provided by Government or Local Authority except certain notified services were covered under the ambit of negative list. One of such exception is the support services provided to business entities. That is to say support services provided by Government or Local Authority to business entities is subjected to service tax. Further, the definition of support services was provided vide Section 65B(49) as ‘means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis’.
Hence, if any services are provided by Government or Local Authority which are in the nature of support services as defined above, then such service shall be out of negative list and accordingly service tax becomes payable. Then comes the question of who is obliged to pay such service tax. Notification No 30/2012-ST dated 20.06.2012 vide Entry 6 states that the person receiving such services from Government or Local Authority were obliged to pay service tax on such services. That is to say, such services are under the reverse charge mechanism thereby putting the service receiver as the service provider.
The phrase ‘support’ has been dropped from the entry in the negative list in light of Section 109 of the Finance Act, 2015 with effective from 01.04.2016 and the definition of ‘support services’ has been omitted with effective from the same date. The phrase ‘support’ in the negative list was omitted by substituting with the phrase ‘any service’. Hence, with effective from 01.04.2016, any service provided by Government and Local Authority has become taxable in the hands of the service receiver leading to widening the ambit of the entry.
Consequent to such amendment being made and bringing any service provided by Government or Local Authority into tax net, the Central Government in public interest has granted certain exemptions vide Notification No 25/2012-ST dated 20.06.2012. One of such exemption is Entry 58, which deals with exemption from payment of service tax for services provided by Government or Local Authority by way of –
- registration required under any law for the time being in force;
testing, calibration, safety check or certification relating to protection of workers, consumers or public at large, required under any law for the time being in force.
Hence, if the services provided by Government or Local Authority are in the nature of granting of registration required under any law, any amounts paid towards such services are exempted and does not require any obligation under service tax.
With this understanding of the law, we shall now try to understand, whether amounts paid to Government of Telangana as license fee to sell or buy alcohol is subjected to service tax under the reverse charge mechanism in the hands of service receiver. The department has taken a stand that since this is a service provided to the hotels/bars/restaurants, such entities has to pay service tax on such license fee under reverse charge. The above stand is not in accordance with the law as explained hereunder.
Sale of excisable article without a license is prohibited in terms of Section 15 of The Andhra Pradesh Excise Act, 1968.Section 28 deals with the License and permits and states that such licenses shall be granted only on payment of fee and adherence to conditions prescribed. The State Government is empowered to make rules to administer the Act vide Section 72.
In exercise of such powers, the State Government has issued The Andhra Pradesh Excise (Grant of License of Selling by Bar & Conditions of License) Rules, 2005(for brevity ‘Rules’) vide GO MS No 997 Revenue (Ex II) Dept dated 24.05.2005.
Rule 4 of the said rules deals with grant of license. A license in Form -2B may be granted to an establishment licensed by local authority to serve food such as Hotel or Restaurant, for the sale of Indian Made Foreign Liquor (IMFL)and Foreign Liquor (FL) in glasses or pegs for consumption within the licensed premises but not for sale of IMFL and FL for removing it out of the licensed premises.
Rule 48 of the said rules deal with suspension, withdrawal or cancellation of a license which states that the license can be suspended, cancelled or withdrawn in accordance with the provisions of Section 31 and 32 of The Andhra Pradesh Excise Act, 1968. One of the condition under Section 31 to cancel or suspend the license is failure to pay the duty or fee payable by the holder.
Therefore, on a plain perusal of Section 15 read with Section 28 read with Rule 4 and Rule 48 of the said Rules read with Section 31, it can be concluded that without payment of license fee to the Government of Telangana, no establishment is allowed to buy or sell any excisable article, in this case, alcohol. Hence, the license fee is nothing but sort of registration required under the Andhra Pradesh Excise Act, 1968 and without which it cannot render any sale as per the relevant provisions extracted above.
Since the license fee paid is a registration fee, the said amounts are exempted vide Entry 58 of Notification No 25/2012-ST dated 20.06.2012 and accordingly no service tax is payable by hotels/bar/restaurants in the opinion of paper writers. The service tax authorities might resort to a different interpretation by strictly observing the phrase ‘registration’ in Entry 58 of Notification 25/2012 and may deny the above stating that the license fee paid does not assume the colour of registration. Circular 192/02/2016-ST dated 13.04.2016 vide Entry 5 has clearly clarified that ‘service tax is leviable on any payment, in lieu of any permission or license granted by the Government or Local Authority’. The Circular shall be of great help to the authorities to raise demands on the tax payers and it is till the courts quash such circulars, the pain shall remain.
