Service tax is constitutional

EXPERT EYE

In a recent judgment, the Supreme Court focused attention on the constitutionality of the service tax. Constitutionality of the service tax has been challenged in two ways.

The first is on the fundamental point about the lack of legislative competence of the Supreme Court. There was no specific entry in the Constitution except the general residual Entry 97 in the Union List.

Under this entry the tax was levied in 1994. When the challenge came, the Supreme Court in the Laghu Udyog Bharati vs Union of India case, 1999 (112) ELT 365, found no lack of legislative competence.

The apex court in the Tamil Nadu Kalyan Mandapam vs Union of India case, 2004 (167) ELT 3 (SC), stated "the power to levy such tax can be traced to Entry 97 of the Union List".

In January 2004, by the 88th amendment to the Constitution, specific Entry 92C has been included to provide for "tax on services". So the basic constitutionality issue is now put at rest.

The second way is the constitutionality of individual taxes. One such was when clearing and forwarding agents challenged the rules on the ground that the clients and (not they) should have been asked to pay the service tax.

The Supreme Court rejected the claim and held that the taxable event was providing service and the provider had to pay the tax. This was in the case of Laghu Udyog Bharati (supra).

Next was the case of an advertising agency. In the Addition Advertising vs Union of India case, 1998 (98) ELT 14 (Gujarat), the high court said the service tax on advertising agency was constitutional and not violative of Articles 14 and 19(1) of the Constitution. This view was supported by the Kerala High Court in the Zodiac Advertisers vs Union of India case, 2004 (166) ELT 25 (Kerala).

The next service tax for which the matter went up to the Supreme Court is one on "mandap-keeper", who has been defined as a person who allows temporary occupation of a mandap (immovable property as understood in the Transfer of Property Act) for consideration for organising any functions. The taxable service has been defined as a service provided to a client by a "mandap-keeper" in relation to his mandap.

The mandap-keepers challenged the service tax as violative of the Articles 14 and 19 (g) of the Constitution on the grounds that it is in fact a tax on goods and land, which means they are liable to sales tax which is the domain of States and are in the State List under Entries 18,49 and 54; and the other part of it is for sale of food, which is also liable to sales tax.

The Supreme Court held that the service tax on "mandap-keeper" was a tax on the consideration received for allowing temporary occupation of the mandap for organizing official, social and business functions and it was not a tax on the land or good.

Using of the property in a particular manner is a service and not the good or land itself. Tax on land has got to be a tax directly on land. Similarly a tax on catering services is not a tax on sale and purchase of goods but on the service part of it.

While sales tax was leviable on sale of goods, the service tax was leviable on the service aspect in it. Supply aspect and service aspect are distinguishable entities. Thus various constitutional challenges to the service tax have not survived.

smukher2000@yahoo.com