In the Service Tax Mega Exemption Notification municipality is exempted from service tax with regard to
• 25. Services provided to Government, a local authority or a governmental authority by way of –
(a) carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or
• 39. Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution.
Whereas per section 2 (s) “governmental authority’’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution;
Now the question is whether municipality is exempted from service tax in totality. There are various cases which suggest otherwise.
In the case of Tiruppattur Municipality v. Commissioner of Service Tax , Madras High Court held that ‘Daily Market’ charges and ‘Shop Rent’ collected by municipalities are liable to service tax under ‘renting of immovable property services’, even if lease agreement were entered into prior to introduction of service tax itself on said services.
Further in the case of Kothamangalam Municipality v.Additional Commissioner of Central Excise, Customs & Service Tax it was held that since amounts collected by municipality in name of bus fee or advertisements, etc. do not go in government Treasury, but go to funds of Municipality, prima facie, they cannot be regarded as statutory activity.
High Court of Kerala in the case of Kishore K.S. v. Cherthala Municipality considered the question whether the charging of service tax from municipality is the violation of article 289 of the Constitution. Court in its decision upheld as follow:
Undoubtedly, Article 289 constitutes a fetter on the power of the Union to levy tax on the property of the State or on its income. The State is an expression which is not defined in Article 366 as such. In Article 12, no doubt, State is defined as including authorities. But it is relevant to note that the said definition is limited to the provision of Part III of the Constitution dealing with fundamental rights. On the other hand, in Part IXA of the Constitution, ‘Municipality’ is defined in Article 243P(c ).
The constitution of municipalities, duration of municipalities, reservation of seats and various other matters are dealt with in Part IXA. In other words, by no stretch of imagination, the word ‘State’ in article 289 embraces within its scope the municipalities which are specifically dealt with in Part IXA of the Constitution. Therefore, it cannot be accepted that when service tax is levied on the municipality, there is violation of article 289. In fact, the Municipality has not approached the court with such a plea. There is no contention raised by the Municipality that it is in violation of article 289.
In the case of Pimpri Chinchwad Municipal Corporation v. Commissioner of Central Excise Municipal Corporation was engaged in : (a) collection of statutory taxes, levies and charges on advertisement, licensing fees and other charges such as late fee, penalty, non-payment of administrative charges towards collection of such taxes; (b) collection of rent for providing for erection of structures to various advertising agencies; and (c) providing space to various persons for displaying advertisement on street light pole owned by Corporation. Corporation did not pay service tax thereon on ground that said activities amounted to statutory function and not liable to service tax . The court held that Taxable service means any service provided to any person by any other person in relation to sale of space or time for advertisement in any manner, but does not include “sale of space for advertisement in print media” and “sale of time slot by a broadcasting agency or organization.” Para 9 of the judgement states that:
In this case the demand is confirmed on the ground that the applicants are providing space for advertisement. As per the provisions of Section 65(105) of the Finance Act, 1994, “taxable service means any service provided to any person by any other person in relation to sale of space or time for advertisement in any manner, but does not include “sale of space for advertisement in print media” and “sale of time slot by a broadcasting agency or organization.” In the present case, where the applicants are collecting taxes or license fee in respect of the permission granted for putting up advertisement boards on the private properties, we find that the applicants have prima facie a strong case. In respect of advertising boards which were on the street light poles and in respect of the rent which is given to the advertising agency to set up advertising board, we find the applicants have not made out a case for total waiver of service tax.
Hence from the above cases it can be said that municipality cannot dodge the levy of service tax under the pretext of being a statutory authority.