Sukumar Mukhopadhyay: Sovereign functions of state liable to service tax or not

Now the government has made it public that there is going to be a negative list with a comprehensive service tax. Designing such a list is under its consideration. Naturally some services which were earlier exempted will be now in the negative list. But at this time care should be taken to see that some activities of which are not service at all should not be in the list of exempted services, that is, the negative list.
Amongst the services which are somewhat doubtful about their exigibility, is the services provided by the State in discharge of   its sovereign functions. An easy solution that has been found by some writers is to exempt them . But If something is not taxable at all , one cannot exempt it. This conceptual error is visible in the exemption list suggested in the Report of the Task Force of the 13th Finance Commission . 
The list of services proposed to be exempted includes all public services of government including civil administration, Defence, 
Para-military, Police, Intelligence and Government Departments (excluding Railways, Post and Telegraph, and other commercial departments, public sector enterprises, banks and insurance,health and education services).


These services are those rendered by the government in discharge of the sovereign functions of the state . Sovereign functions are maintenance of law and order (which includes judiciary), collection of taxes, maintenance of military, and international relations. They are not taxable at all and so there is no question of exempting them. There is no invoice and no payment. The question of taxing does not arise and so the question of exemption does not arise.
There is no specific provision in the Constitution about the sovereign power. However, Article 265 of the Constitution says that no tax shall be levied or collected except by the authority of law. The law is given in the Schedule VII, List 1, Union List, at serial No. 92C which authorizes ‘tax on services’ but the Constitution does not say anything about taxing the services provided by the sovereign. The expression sovereign denotes that the state has the power to legislate on any subject in conformity with constitutional limitations (Synthetics & Chemicals Ltd vs State of Uttar Pradesh).
Some recent judgments at the tribunal level have thrown light on the use of sovereign power in regard to tax collection. They are discussed below. The Settlement Commission has referred In re. Rivaa Exports to a judgment by division bench of the Andhra Pradesh High Court (Delta Paper vs CCE) which has held that interest is levied only under sovereign power in fiscal statutes and that the power of exemption and levy of interest under notification issued under the Duty Entitlement and Exemption Certificate scheme is under sovereign power.
The real 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 sovereign function, 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. But to exempt sovereign functions which are not taxable at all is conceptually not a valid proposition. The Report of Task Force should have said that these functions are not taxable. The latest Circular issued on 23.8.2007 on Service Tax No.96/7/2007-ST is wrong in regard to the concept of sovereign power. The circular at page No.9 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 (even if you call it a bill or a voucher). This view given in the circular is based on the misunderstanding of what a sovereign function is. This is a fundamental question, which I shall explain below.
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. There is no invoice for these services. 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 Dy. 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 wrong. Digging the earth or surveying the sea are activities which are certainly not sovereign activities. So if the Department of Geology charges money and issues an invoice (bill or voucher) it is chargeable to service tax.
The same argument is also applicable for goods manufactured and sold by the Government department which are chargeable to excise duty. For example like Chittaranjan Locomotives manufactures locomotives and pays 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. 
Conclusion-- The solution to the controversy is not to talk of sovereign functions at all. Whatever service is supplied for financial consideration,that is sold , whether on regular payment or as fee, is chargeable to tax, whether supplied by the State or by commercial firms.


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