GST UPDATE ON RCM ON BAR LICENSE FEE

GST update /2026-27/0028

GST UPDATE ON RCM ON BAR LICENSE FEE
In today’s GST UPDATE we will discuss recent Madras High Court judgement in case of applicability of GST under the Reverse Charge Mechanism (RCM) on bar license fees collected by Tamil Nadu State Marketing Corporation (TASMAC).
The judgment assumes importance because several notices had been issued across Tamil Nadu demanding GST from bar license holders on the premise that the license fee paid to TASMAC constituted services supplied by the Government and therefore attracted GST under reverse charge. Further this judgement very much clarified the impact and taxability of services performed by Government as sovereign function vs services performed as commercial activities i.e for paid consideration.
This judgement assumes importance in the light of the fact that under GST whether state owned corporations like TASMAC falls within definition of state government or local authority or not which further clears the liability of GST on assessee.
Brief Facts of the case -
TASMAC is a government-owned corporation who enjoys monopoly rights in wholesale and retail vending of liquor in Tamil Nadu. Along with the liquor retail shops, TASMAC also permits private persons to operate bars shops through license mechanism. Under this arrangement license holders had to pay a prescribed license fee to TASMAC. Further TASMAC kept only 1% of such license fee and remit rest 99% of license fee to State government. Department had raised GST liability under RCM on 99% License fee paid by petitioners to TASMAC considering TASMAC as State government as per serial no. 5 of Notification No.13/2017-Central Tax (Rate) dated 28.06.2017.
Core Issue Before the Court –
Whether TASMAC could be regarded as “State Government” so as to attract GST under Reverse Charge Mechanism on bar license fees collected from private bar operators as per notification number 13/2017 -Central Tax (Rate) dated 28.06.2017?
Petitioners’ Argument –
The petitioners contend that TASMAC Could be considered as state as for Article 12 of the Constitution but it cannot be considered as State government for the purpose of GST act. Petitioner further emphasized on Section 2(84) of GST Act, 2017 which defines “person” under GST Act. As per petitioner the definition of person clearly distinguishes a company from state government. Certificate of Registration issued by ROC clearly gives status of company to TASMAC.
They further argued the GST notification for services supplied by the “Government” does not apply to a company like TASMAC making the RCM levy illegal. Petitioner contended that Serial No.5 to the above Notification No.13/2017-Central Tax (Rate), is attracted only where services are supplied by the “Central Government”, “State Government”, “Union Territory” or “Local Authority” to a “business entity”. They argued that as this TASMAC is just a body corporate therefore it does not fall under definition of State government.

Department’s Argument –
The Revenue department argues that TASMAC is not merely an agent of the State and the license fee is collected by them is consideration for right to sell liquor. This license fee related to a commercial activity. State government carried out itscommercial activity via TASMAC. TASMAC retains 1% of the amount of license fee. As these petitioners pay 99% of the amount directly to government therefore, they are liable to GST under RCM. It falls under entry number 5 the N.N. 13/2017 and RCM is correctly applied and these license holders are liable to pay Tax along with interest. Department further contended that Entry no 5 excludes only specific activities namely:
(a)Renting of immovable property;
(b)Services of the Department of posts and Railways;
(c)services in relation to an aircraft or vessel; and (d)transport of goods and passengers.
As the activity undertaken by TASMAC does not fall under any of these categories, therefore, petitioner are liable to pay GST under RCM.
In its further contention Revenue argued that exemption notification applies only when government performs its functions in sovereign capacity i.e. granting a liquor license whereas in present situation it performed a commercial activity through its agent TASMAC.

Court’s Observation and Decision
Court held that TASMAC cannot be equated with the “State Government” for the purpose of levy under Notification No. 13/2017-Central Tax (Rate), thereby quashing the GST demands raised on bar license fees under RCM. For this purpose, Court analyzed the Notification No.12/2017-Central Tax (Rate) and notification Number 13/2017-CT (Rate) thoroughly in light of the fact whether petitioners falls under any exemption as per N.N. 12/2017-CT(Rate) or does any GST liability under RCM falls on petitioner. As stated under the notification number 13/2017-CT(Rate), tax is payable by recipient (business entity) on RCM for the service provided by the Central Government, or the State Government, or the Union Territory or the Local Body, in a taxable territory. As the word Central government has not been defined anywhere in the GST Act, therefore, definition has been taken from General clauses Act,1897. The definition under General clause Act,1897 reads substantially as:
“Central Government shall,
(a) in relation to anything done before the commencement of the Constitution, mean the Governor-General in Council; and
(b) in relation to anything done or to be done after the commencement of the Constitution, mean the President.”
Interpreting the legal status and constitution of TASMAC in light of the above definition the Court noted that TASMAC was functioning in its own commercial capacity and not as the sovereign State Government. As clarified by judiciary TASMAC is neither a Central Government nor a State Government or a Union territory or a Local Authority within the meaning of Sl.No.7 to Notification No.12/2017-Central Tax (Rate) dated 28.06.2017 or SI. No. 5 to Notification No.13/2017-Central Tax (Rate) dated 28.06.2017. The license fees collected by TASMAC were contractual and commercial in nature rather than statutory levies imposed by the Government in exercise of sovereign authority. These two Notifications apply only to supply of services by the “Central Government” or by the “State Government” or by the “Union Territory” or by the “Local Authority” to a “Business Entity”.
The Court said that merely depositing 99% of the licence fee into the State Government account through SBI, as required by the tender conditions, does not automatically mean that the payment was made under any statutory power given by any act. Further there were no legal material that 99% of license fee was crediting in consolidated fund of Government. Thus, no tax is payable on said amount under the notification no 13/2017-CT (Rate).

A key aspect highlighted by the Court was whether TASMAC could be equated with the State Government merely because it is wholly owned and controlled by the Government of Tamil Nadu. Rejecting the Department’s contention, the Court held that TASMAC is a separate legal entity incorporated under the Companies Act with its own independent corporate existence. Court referred hon’ble Supreme Court judgement in case of Paschimanchal Vidyut Vitran Nigam Ltd., Vs. Raman Ispat (p) and clarified that “An entity can undoubtedly have government participation. However, that does not render it a government or a part of the “State Government”. Its functions can be replicated by other entities, both private and public. Private entities are entitled to hold licences. In this context, it has to be emphasized that private participation as distribution licensees is fairly widespread”.
Thus, merely because the Government exercises ownership and administrative control over TASMAC does not mean that every activity undertaken by the corporation acquires the character of governmental or sovereign activity.
Court further reiterated the settled principle that charging notifications under tax law must be construed strictly. Since Notification No. 13/2017-CT (Rate) specifically refers only to services supplied by the Central Government, State Government, Union Territory, or local authority, its scope cannot be enlarged to include Government companies or public sector corporations unless expressly provided. TASMAC, being a Government company and not the State Government itself, could not be brought within the ambit of the notification.
Accordingly, the Court quashed the GST demands raised under reverse charge on the bar license fees paid to TASMAC. The ruling provides substantial relief to license holders who had been facing GST liability under RCM on such payments.

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GST update /2026-27/0028

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