7. Service Provided by Government or local authority
Services covered :- Any service other than
Service of renting of immovable property (covered separately under entry no 5A)
Services by Department of post and Indian railways
Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport
Transport of goods or passengers
Earlier in B above, Service by department of post by way of peed post, express parcel post, life insurance and agency services provided to a person other than Central Government, State Government or Union territory or local authority was covered. However, through notification no 02/2022-CTR dated 13th July 2022 this entry was amended and all services provided by Department of Post are covered in to B above. Further, through notification no 14/2023-CTR dated 19th October 2023, in addtion to department of post, Indian railways has been added in "B" above.
Supplier :- Central Government, state government, union territory or local authority.
Recipient :- Any business entity located in a taxable territory.
One of the most important and widely applicable RCM entries in GST law relates to services provided by the Central Government, State Government, Union territory, or a local authority to any business entity located in the taxable territory. This is notified under Entry No. 5 of Notification No. 13/2017-Central Tax (Rate), issued under Section 9(3) of the CGST Act, 2017.
The recipient of the service, i.e., the business entity, is liable to pay GST under reverse charge, provided that the supplier is the Government or a local authority, and the service supplied is not specifically excluded by the entry.
1.Definition of 'Business Entity'
As per Section 2(17) of the CGST Act, "business" includes any trade, commerce, profession, or similar activity, whether for profit or not. The term "business entity" is not separately defined but understood to mean any person or organization engaged in business.
Hence, even charitable institutions, educational institutions, hospitals, housing societies, and NGOs can be treated as business entities if they undertake activities that qualify as "business" under GST.
2. Meaning of "Local Authority"
The term "local authority" is defined under Section 2(69) of the CGST Act, 2017. Understanding this definition is crucial because several provisions under GST - including reverse charge entries and exemptions - specifically refer to services provided by a "local authority", which may be taxable or exempt depending on the nature of service and the status of the recipient.
As per the definition in section 2(69), the term "local authority" includes the following:-
Panchayat as defined in clause (d) of Article 243 of the Constitution;
Municipality as defined in clause (e) of Article 243P of the Constitution;
Municipal Committee, Zilla Parishad, District Board, and any other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund;
Cantonment Board as defined under the Cantonments Act, 2006;
Regional Council or District Council constituted under the Sixth Schedule to the Constitution;
Development Board constituted under Article 371 and Article 371J of the Constitution; or
Regional Council constituted under Article 371A of the Constitution.
Thus, only such entities which fall within the above definition will be considered a "local authority" under GST, and only their services will be considered under RCM Entry No. 5 or for exemption under Notification No. 12/2017-CTR, wherever specifically mentioned.
3. CBIC Clarifications
CBIC has clarified through various FAQs and circulars that the following are covered under this RCM entry :-
Municipal taxes, cesses, and fees (e.g., license fees, building approval fees),
Mining lease charges,
State Industrial Development Corporations' land allotment or development charges,
Fee for fire safety clearance, pollution NOC, etc.
Even penalties or fines paid for non-compliance (e.g., delay charges) may be subject to GST, depending on the contractual nature of the fee. However, pure penalties imposed under statutory provisions (e.g., pollution fines) are not liable to GST, as per CBIC clarifications.
An important exemption exists via Notification No. 12/2017-Central Tax (Rate):-
If the aggregate value of all services received by a registered person from government/local authority does not exceed Rs/ 5,000 then such services are exempt.
It is also provided in the exemption notification that in case where continuous supply of service, as defined in sub-section (33) of section 2 of the Central Goods and Services Tax Act, 2017, is provided by the Central Government, State Government, Union territory or a local authority, the exemption shall apply only where the consideration charged for such service does not exceed five thousand rupees in a financial year.
4. Services by Government and local authorities- Service vs Sovereign Functions- Author's opinion
Under the GST regime, services provided by the Central Government, State Governments, Union Territories, and local authorities are liable to tax only when such services qualify as "supply" under section 7 of the CGST Act and are not specifically exempted or excluded by notification. One of the most nuanced areas in this context is the differentiation between services provided by the government in its commercial or regulatory capacity versus those performed as part of its sovereign functions.
The GST law does not explicitly define "sovereign function". However, it is understood in jurisprudence and administrative practice to refer to those functions that only the State can perform, and which are exercised by virtue of the government's authority under the Constitution or statutory law - such as law and order, taxation, issuance of passports, conduct of elections, land revenue collection, policing, or judicial functions.
On the other hand, where the government or local authority provides a service that is available in the open market or in competition with the private sector, such as granting licenses, allotting land, renting immovable property, development approvals, consulting services, or leasing commercial properties, such services are generally considered taxable, even if they are performed by a public authority.
This distinction was also explained in the CBEC Education Guide (pre- GST), which continues to be relevant in principle under GST, and has been relied upon by courts even under the new regime. As per this guidance, services like policing, defence, issuance of birth certificates, or court orders are considered sovereign, whereas services such as advertisement rights, leasing, and sanitation contracts are taxable commercial services.
As per author's opinion, under Section 2(102) of the CGST Act, "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion for which a separate consideration is charged. However, the Explanation appended to Section 2(102) clarifies that "services include facilitation or arrangement of transactions in securities." The inclusive nature of the definition does not override the requirement of commercial character or economic activity inherent in the term "service." It is a settled principle that "services" implies some commercial or business-oriented activity, and not sovereign or regulatory acts performed by the State in public interest.