Universal tax utopian, marred by serious conceptual flaws

THE KELKAR REPORT - II/ THE FINE PRINT

Sukumar Mukhopadhyay
Former member,
Central Board of Excise & Customs

The initial euphoria over the Report of the Task Force on Implementation of Fiscal Responsibility and Budget Act, 2003 (FRBM Act) will fade considerably when one goes through the fine print. The indirect tax proposals suffer from some fundamental conceptual flaws.

Let us first examine what the report says. The report heavily relies on the 88th Amendment to the Constitution on service tax, which has inserted an item, 92C, in the Union List. It has also inserted Article 268A, which empowers the Union to levy, collect and appropriate service tax, whereas the states can only collect and appropriate the proceeds. The report also concludes at 5.3.4, "the central government now has the power to levy tax on a tax base comprehensively extending over all goods and services and going up to the final consumer".

The expressions "now" and "going up to the final consumer" are conceptually wrong. There are many other conceptual flaws, which are discussed below.

First, regarding the expression "now", the power to levy service tax was always there in entry 97 of the Union List, under which service tax was imposed in 1994 after consulting all legal experts, a battery of economists, and at a time when the finance minister was none other than Manmohan Singh.

Even the Supreme Court has repeatedly confirmed in many cases, particularly in the cases of Empire Industries, 1985 (20) ELT 179 (SC) and Ujagar Prints, 1988 (38) ELT 535 (SC) that entry 97 of List 1, being the residual entry, is the enabling authorisation for levy if not covered under entry 84.

This also applies to service tax under which all service taxes were being levied all along. Power of collection and appropriation by states were also there earlier, as in the case of Central Sales Tax, which has now been explicitly placed in Article 268A.

There is nothing new that has come now due to this 88th Amendment. But the Report has claimed (page 6) "the 88th Amendment has carried these powers forward to extend to all services". It is wrong to say that the 88th Amendment has carried forward the power of taxation. It has only made explicit the power of taxing services, which was there in the residuary power enshrined in entry 97.

Secondly, the claim that the 88th Amendment has given the power to tax services "including the services of trading and retailing the goods" is without any basis. The amendment only gives the power to tax services. It does not give any power to tax any service such as trading or retailing specifically.

Thirdly, the activities of trading or retailing can be charged to service tax only if they are a service at all. The Report has only assumed that trading is a service. It has never proved it. It probably assumed that it is axiomatic. It has gone only so far as to say (page 58) "...the post manufacturing value addition, hitherto exempt from Union excise duties can now be subject to service tax".

The fact is that dealing in goods and adding value is not a service at all. Herein lies the fundamental error in the whole argument. Nothing can be charged to service tax unless it is service. That it is not a service is proved by the following:

(a)The taxable event in the case of a dealer's activity is the act of sale. It creates value by sale. So the taxable event being the act of sale, it is only sales tax, which is applicable.

In a landmark judgment reported in 1963 AIR SC 1760, which has been supported by scores of other judgments over the last four decades, the Supreme Court held that the taxable event in the case of sales tax is the act of sale of goods. So it is clear that it cannot be service tax. The expression "services of trading and retailing of goods" occurring in the second para of page 6 is wholly incorrect and conceptually wrong. Trading activity can be covered by sales tax and value-added tax (VAT), surely not service tax.

(b) In the CSO National Accounts Statistics, trade is classified under the tertiary sector since it cannot be classified under the primary or secondary sectors. But merely being in the tertiary sector does not make it a service. When the CSO gives the list of potentially taxable services, it does not talk of trade.

(c) If trade can be charged with service tax, then why do we need VAT? It becomes redundant. The Report wants to keep VAT also (page 55). It is inexplicable.

Fourthly, the Report comes to the most astounding conclusion that "the central government now has the power to tax sale of both goods and services" (5.3.4). This statement that the Centre can levy sales tax completely ignores that the power to levy sale tax is in entry 54 of List "�II, the State List. It cannot be usurped.

Fifthly, the Report says (page 6): "The States will have the power to tax all services concurrently with the Centre." This is wholly unconstitutional. In the new 88th Amendment, the power to levy service tax is only with the Centre. There is no concurrent power.

My sincere suggestion to the authors of the Report is to send it to the Attorney-General.