With the arrival of a comprehensive service tax regime, there have been comprehensive changes. One issue that has arisen is about the fees collected by the CAG for audit of corporations,authorities and bodies.
These are known as consent audit which are entrusted to CAG under the CAG (Duties, Powers and Conditions of Service) Act,1971, at the request of President or governor . The issue now is whether these fees would attract service tax.
There was controversy even when the positive list of service tax was there till the end of June, 2012. Some commissioners charged the fees under ‘Practising Chartered Accounts’ while others charged under ‘Business Support Services’. At this stage the CBEC intervened and clarified by a circular no 159 /10/2012 - service tax, dated June 19, 2012, that the CAG’s services for which the fees are collected would not fall under any of the above two headings for service tax. The circular apparently implied that the fees are chargeable to service tax but since there was no heading under which they fall, they could not be charged to tax.
Now, after the comprehensive tax regime having come to effect from July 1, the first impression is that such fees are for the services offered by the CAG and they should pay the service tax. The list of exemptions does not include these fees. So we have to see if the negative list includes them or not. The negative list in 66 D (a) contains “services by Government”. The definition of Government is not in the Finance Act. The Government has issued a guidance paper (which is not a binding circular) which clarifies at para 2.4.7 that since Government has not been defined in the Act, the definition of Government in the General Clauses Act has to be relied upon. In section 2 (23) of this Act it has been given that Government includes both central government and state government. Central Government, the guidance paper says, means, the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President. Similar is the position with state government.
According to this disposition, the CAG does not fall in the category of Government as it does not function under the President. So the fees collected by CAG have to pay the service tax.
This position taken by the guidance paper is not acceptable because it has made the fundamental error of mistaking the inclusive definition of Government in the General Clauses Act as an exhaustive definition.
In the definition in the General Clauses Act the expression used is “includes” which means that there are other institutions which are Government. But the guidance paper says, the central Government “means” President and officers subordinate to him. Thus it is a flawed way of interpreting the definition of Government in the General Clauses Act. If we take the definition as inclusive we come to the correct conclusion that there are certain institutions such as CAG, UPSC, Parliament, legislature, high court and Supreme Court which are constitutional bodies and they are surely Government but are not working under the President or governor. The revenue earned by the CAG go to the Consolidated Fund of India under the Article 266 of the Constitution. So also the fees earned by the UPSC go to the Consolidated Fund of India. And high court and Supreme Court also are Government , they being part of the system of maintaining law and order which is a basic (sovereign ) function of the State. One cannot imagine how institutions created by the Constitution can be considered as not Government. The definition of the guidance paper completely cuts out the legislature and judiciary from the scope of Government which is absurd. So this position taken by the guidance paper is basically incorrect and needs modification. And in this view, CAG is Government and its fees are covered under the Negative List. So they do not have to pay tax.
The conclusion is that a definition of Government should be incorporated in the Act. In the meantime, the guidance paper should be immediately modified. Otherwise it will create innumerable problems.