What happens to Circular No. 116 dated 15.09.2009 (both legitimate and illegitimate ones)?
Hitherto Circular 116 dated 15.09.2009 (both the original and amended version) sought to clarify the issue of leviability of service tax on construction of canals by government agencies. Paragraph 2 of the said circular (amended version as well as original version) reads as follows:
“2. Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.”
On this aspect, in DDT 1212 09.10.2009 we said “……… It is common knowledge that all irrigation projects of Government are though undertaken by the Irrigation/Agriculture Department of the respective Governments (State or Centre), they are actually executed by private agencies only under the actual supervision of the said department. In effect, all activities related to construction of irrigation projects and canal systems are undertaken by private agencies only…...”
This actually explains the futility of clarification issued at paragraph 2 of the said circular. Further, we also questioned the wisdom of the Board in mentioning construction of canals as a ‘revenue generating measure' by private agencies and requested the Board to explain what they actually meant by this phrase ‘revenue generating measure'. Does it mean the profits earned by the private agencies undertaking the construction of canals or does it mean revenue earned from supply of water through such canals which is akin to infrastructure projects like national highways and corridors built on BOOT basis by private agencies?
The circular further explained that government taking up construction activity of dams, buildings or infrastructure construction etc through EPC (Engineering Procurement & Construction) mode is exempt from levy of service tax for works contracts undertaken for such construction activity since sub-clause ( zzzza ) of Section 65(105) of the said Act itself excluded such activities from the purview of definition of taxable service.
This aspect is now sought to be covered by the new notification which exempts construction of canals undertaken by works contracts from levy of service tax.
Fortunately, there is no specification in the new notification that the activities would be exempt from levy of service tax only if it is undertaken by the government or government agencies, because the wise babus who drafted this notification understood by now that it is the private agencies who actually undertake such work for the relevant government departments. But they are still stuck with usage of phrases like “used for purposes of commerce or industry” without explaining or illustrating as to what this could be.
Last but not the least, is this notification clarificatory in nature and thereby applicable retrospectively because it seeks to address a long pending issue or is it only to be read prospectively? Now that there is an exemption from 23 rd October, the auditors will have field day and keep the consultants busy by raising demands for the period prior to 23 rd October 2009 because there was no exemption.
NOTIFICATION NO , Dated: October 23, 2009