Service Tax on the Support Services provided by GoI

Government of India charges a certain % of amount borrowed as Guarantee fees for the Guarantee provided to the ECB Lender. Usually Service Tax is applicable on the Guarantee fee charged by Banks and other institutions but whether it is applicable in the case where GoI is providing guarantee in respect of an ECB?
If yes, then who will pay the Service Tax (as the service provider is GoI itself) ?

Guarantee Fee in respect of Guarantee provided by GoI :
Article 292 of the Constitution of India extends the executive power of the Union for giving of guarantees on the security of the Consolidated Fund of India, within such limits, if any, as may be fixed by Parliament.
The Fiscal Responsibility and Budget Management Act, 2003 and the Rules made there under prescribe a limit of 0.5% of GDP for guarantees to be given in any financial year beginning with the financial year 2004-05.
Amount of Guarantee fee in respect of External borrowings were determined on a case­to-case basis by the ECB Division, in consultation with the Budget Division till June 1993 when a uniform guarantee fee of 1.2% per annum on the outstanding amount of principal + interest was prescribed by the Government

(Government Guarantee Policy issued by Ministry of Finance) Service Tax on the Support Services provided by GoI :
Service Tax is not applicable on the services provided by the Government subject to certain exceptions as mentioned in clause (a) of section 66D of the Finance Act, 1994.

As per Section 66D of Finance Act, 1994 , Negative list includes :
a) Services by Government or a local authority EXCLUDING
i. Services by the department of Post by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government ;
ii. Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or airport ;
iii. Transport of goods or passengers ; or
iv. Support services , other than covered under clauses i to iii above, provided to business entities ;
Hence Support Services provided to a business entity by the Government or a local authority will be taxable as it is specifically excluded from the Negative list. Further, under the Reverse Charge mechanism as per the Notification No. 30/2012-ST dated 20.06.2012, Service Receiver will be liable to pay Service Tax for the Services provided or to be provided by “Government or local authority by way of support services excluding, –

1. Renting of immovable property, and
2. Services specified in sub-clauses (i) to (iii) of clause (a) of Section 66D , to any business entity located in the taxable territory”

As per clause 49 of Section 65B of Finance Act, 1994 , Support Services 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 other reason whatsoever and shall include advertisement and Promotion, Construction or Works contract, renting of Immovable property, Security, Testing and analysis.”

Thus services which are provided by government in terms of their sovereign rights to business entities, and which are not substitutable in any manner by any private entity , are not Support Services and hence not taxable.

As per the Master Circular on Guarantees & Co-acceptances dated 01.07.2014 issued by RBI, Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not permitted.

ECB means an external commercial borrowing is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings). ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

Thus in case of ECBs, Guarantees can only be provided by GoI and there is no substitute available. In case of PSUs, normally the ECB agreement specifically contains a clause that the Republic of India will provide the guarantee for the loan. In such cases guarantees provided by GoI is not a support service and hence not subject to Service Tax.

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