by C Akshaya Ramesh
The Government of India operates on the principle of being “of the people, for the people, and by the people.” In this case one might wonder why it would collect Goods and Services Tax (GST) on services provided to its own citizens. Well, the taxation of services provided by the government to its own citizens under the Goods and Services Tax (GST) framework is guided by a well-defined structure.
Under GST, services offered by the government to businesses and individuals are categorized into taxable and exempt services based on their nature, purpose, and role in governance and public welfare. While many essential government functions remain exempt to ensure seamless public administration and governance, certain services provided to business entities attract GST. Understanding the taxation of government services under GST helps in distinguishing between revenue-generating activities and fundamental public functions.
Most of the services provided by the government are subject to reverse charge except for a few specifically charged under forward charge as mentioned in Entry No 5 of Notification 13/2017.
What constitutes a government?
The term Government includes the Central Government, State Governments, and local authorities such as Municipalities, Panchayats, Municipal Committees, Zilla Parishads, and District Boards entrusted with the management of municipal or local funds by the Central or State Government. However, government companies, statutory bodies, corporations, and regulatory authorities, even if owned or established by the government, do not qualify as Government under GST. These entities function independently, often engaging in commercial, regulatory, or public welfare activities.
No Quid Pro Quo for Sovereign activities
As per Notification 12/2017 – Pure Services provided to the government or local authority in relation to any function entrusted to a Municipality (Article 243W) and a Panchayat (Article 243G) is exempted under GST.
This exemption entry sets a tripartite test
- Nature of Service.
The services must be purely of services provided with an exception specified in entry 3A. that in case of composite supply of goods and services, where the value of goods must not exceed 25% of the whole supply. This specification was inserted with view that where the principal supply is supply of services, wherein if the supplier is required to purchase any goods for providing such services for maintenance or for replacement in such case this supply of goods would not constitute works contract.
- The Recipient of Service
The immediate recipient of Service must be the Central government or State government or local authority or governmental authority or government entity.
A careful understanding of governmental authority and government entity should be considered. The term Governmental Authority is not in GST Act, and hence it is inferred from the erst while Service tax regime, as per Notification No. 2/2014-ST dated 30.01.2014 the definition of governmental authority as defined in clause 2(s)
• Any authority, board, or body,
Established by an Act of Parliament or State Legislature, or
Set up by the Government,
With 90% or more participation by way of equity or control,
Performing functions assigned to a Municipality under Article 243W or a Panchayat under Article 243G of the Constitution
The thin line of differentiation lies on whether they perform functions assigned to a Municipality under Article 243W or a Panchayat under Article 243G.
For example, State Electricity Boards, State Urban Development Authorities and Water Supply and Sewerage Board directly fall under the government authorities that carry out the functions assigned to a municipality or panchayat.
However, the Reserve Bank of India or SEBI or NHAI, are also government entities, but they do not perform the functions assigned to a municipality or panchayat rather they perform the Regulatory and Infrastructure Services
- Purpose of Service rendered
The ultimate purpose of the service should be in relation to the functions entrusted to the Panchayat/ Municipality.
Complexity of the term “In relation to”
In the context of GST exemptions for services related to functions of Panchayats (Article 243G) and Municipalities (Article 243W), the term “in relation to” allows for varied interpretations, often leading to litigation
The term “in relation to” is an expression of expansion but limited to the function’s panchayat and municipalities.
For example: A software system is designed for digitally tracking and managing birth and death registrations is given to a municipality by a private IT company. From the business point of view, the maintenance of birth and death registration is a crucial public health function under the 12th Schedule (Article 243W) of the Constitution, thus it aims for claiming GST exemption under pure services. However, whether IT software services can be regarded as “in relation to” public health functions carried out by a municipality determines eligibility for exemption.
Why it may be eligible for GST Exemption?
Municipalities are responsible for public health, sanitation, and hospitals, as outlined in the 12th Schedule of the Constitution. Keeping track of births and deaths is a crucial part of this because it helps in health planning, disease tracking, and policy decisions.
Instead of relying on manual records, a digital system makes it faster, more accurate, and easily accessible. It also helps Municipalities monitor mortality rates, demographics, and health trends, which is essential for better public health management.
Whether on paper or digitally, registering births and deaths remains a government function? The IT software just makes it more efficient and reliable it doesn’t change the function itself. If the software is custom-built specifically for government-mandated registration (rather than a general commercial product), it strengthens the case for exemption.
If a Municipality gets a tailor-made software system designed only for birth and death registration, it could be seen as an extension (satisfying “In relation to”) of a core government function, making it eligible for GST exemption as a pure service.
Why it may not be eligible for GST Exemption?
However, IT Software is itself a Commercial Service and not a Core Government Function since public health services primarily involve direct delivery, such as operating hospitals, conducting sanitation drives, or implementing vaccination programs. Providing software, on the other hand, does not directly enhance public health; it merely serves as a support tool for municipalities to manage records. Even when the government utilizes IT services, these are generally considered commercial transactions rather than essential government functions.
Further, if the company provides software licenses or hardware, such as servers or computers, along with its services, the transaction qualifies as a composite supply combination of goods (more than 25% of the total supply) and services. In such cases, it does not fall under GST exemption.
While birth and death registration are a public function, the role of IT services in this process is questionable like – are they truly essential or just a supporting tool? The Municipality is responsible for handling registrations, but outsourcing software services to a private company is a separate business transaction. Unlike core public health functions such as sanitation or hospital management, IT services do not directly impact public health.
Therefore, exemption shall only be available if the pure services are ‘by way of any activity in relation to any function entrusted to a Panchayat/ Municipality’.
Thus, when the service provided to a government entity a caution must be taken carefully to determine the nature of the supply of services so as to determine the taxability of the services.
Similarly, when the services provided by theCentral government or State government or local authorities to a business entity are taxable under reverse charge mechanismexcept sovereign servicesthat are entrusted to a Panchayat (Article 243G) or a Municipality (Article 243W).
Conclusion
The taxation of government services under GST is determined by whether the service constitutes a revenue-generating activity or a core public function. While services rendered by the government to business entities are generally subject to GST under the reverse charge mechanism (RCM), sovereign functions remain exempt. Additionally, pure services provided to the government, local authorities, or governmental entities in relation to functions entrusted to Municipalities (Article 243W) or Panchayats (Article 243G) qualify for exemption. However, determining taxability requires a thorough assessment of the service’s nature, recipient, and purpose. Given the interpretational complexities surrounding the phrase “in relation to,” a cautious approach is essential to mitigate potential litigation risks.
This article is a part of Article Writing Competition 2025.
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