Central Board of Indirect Tax and Customs has issued a Circular 214/1/2023 -Service Tax dated 28th February 2023 on leviability of Service Tax on the declared service “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under clause (e) of section 66E of the Finance Act, 1994.
Concerns have been raised regarding the application of service tax to liquidated damages for contract violations, the loss of salary or payment of the bond amount in the event that an employee quits their job before the minimum stipulated period, and other matters related to clause (e) of section 66E of the Finance Act of 1994.
Referral has also been requested to Circular No. 178/10/2022-GST, dated August 3, 2022, covering the GST’s applicability to matters involving service tax as well as liquidated damages, compensation, and penalties for breaches of contract or other legal conditions.
As stated in clause (e) of section 66E of the Finance Act of 1994, “Agreeing to the requirement to refrain from an act, to tolerate an act or a circumstance, or to do an act” is a Declared Service. A “declared service” under section 66E(e) read with section 65B(44) and subject to service tax is one that is conceived in an agreement wherein one party accepts a responsibility to refrain from, tolerate, or perform an act.
Similar to GST, the declared service in question is described as agreeing to the obligation to perform an act, refrain from performing an act, or endure performing an act or a condition.
According to Schedule II, Paragraph 5(e) of the CGST Act of 2017, “agreeing to the requirement to refrain from an act, to tolerate an act or a circumstance, or to do an act” has been specifically determined to be an act of providing a service.
The same issue has been brought up in the CESTAT in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd, M/s South Eastern Coal Fields Ltd Vs. CCE Raipur.
The circular also advises the field formations that while taxability in each case will depend on the facts of the case, the principles discussed above and the jurisprudence that has developed over time may be applied to determine whether service tax needs to be levied on an activity or transaction by way of agreeing to the obligation to refrain from an act, tolerating an act or a situation, or performing an act.
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