Government departments and agencies, including railways, security service at airports and others, will also have to pay service tax now. The revenue department has issued a clarification that rendering services by the government would be taxed.

So, while railways leasing out space for ads, Central Industrial Security Force (CISF) providing security service to airports and other such establishments, Directorate General of Supplies & Disposals doing procurement, would now be have to pay up service tax. Several of these services provided by Railways, Rites, CISF earn huge revenues by rendering taxable services.

However, if one Central government department renders service to another Central government department, there will be no liability of service tax as these would not be treated as two separate entities, a CBEC spokesperson told ET. The same would be the case if one state government department provides service to another department in the same state. But, if one Central department provides a taxable service to a PSU, it would be treated as that of one entity providing service to another, and thus would attract service tax.

With this clarification, it becomes amply clear that if the government renders certain taxable services, it will also be liable to pay service tax. But, in case there is a specific exemption granted to the government or if government bodies are excluded from the definition of taxable service, there would be no liability, Anita Rastogi, principal consultant, PricewaterhouseCoopers said. The issue whether services rendered by government entities are taxable or not was raised by the field formations after the Budget 06-07 replaced the words commercial concern with any person.

CBEC, which received several representations from field formations, has now issued an instruction saying, in this years Budget, in a number of services, the phrase commercial concern has been substituted by any person. Wherever the service provider is mentioned as any person, the term person ordinarily includes government unless, in the context, government is excluded by applying rules of statutory inter-pretation. But the board has also asked field formations to examine individual cases carefully. Also, in case of any doubt in individual cases having all-India implication, they will have to refer the case to the board, before taking any decision.

Taxable services are defined individually under section 65(105) of the Finance Act, 1994. The definitions, apart from specifying the nature of the service, also indicate the status of the service provider.