M J Antony: Expanding the frontiers of service tax

OUT OF COURT

The Supreme Court has left little scope for further challenges to this tax of the future.

Service tax is a comparatively new concept and is said to be the tax of the future. For this reason, several service sectors seem to be experiencing future shock. A number of traders and professionals are uneasy with this new head to extract revenue introduced in the nineties by the present Prime Minister when he was finance minister. Transporters, clearing agents and even marriage hall owners and caterers have unsuccessfully challenged the new levy up to the Supreme Court. The latest of the assault was made by the tax practitioners themselves in the Supreme Court and they have failed to make any dent in the forward march of the service tax, which is encompassing new sectors with each annual Budget.

In the case, All India Federation of Tax Practitioners vs Union of India, the main issue raised by chartered accountants and architects was the constitutional status of the service tax and the legislative competence of Parliament to impose the tax under Article 246(1) read with Entry 97 of List I of the Seventh Schedule of the Constitution. The question was not entirely new as it had been partly argued in the case of Tamil Nadu Kalyana Mandapam Association vs Union of India three years ago. When the Finance Act 1997 brought in marriage mandap keepers and caterers in the net of service tax, they had raised almost the same objection. The Supreme Court ruled that services rendered by mandap keepers is a tax on services and not a tax on the sale of goods. The provision was held to be within the domain of the Union. "The manner of service provided assumes predominance over the providing of food which is a definite indicator of the supremacy of the service aspect," the judgement said. It is definitely not in the nature of sale/hire/ purchase of goods.

The court further clarified that "incidental encroachments do not invalidate a statute on the ground that it is beyond the competence of the legislature. So long as the legislation is in substance on a matter assigned to a legislature, it must be held valid in its entirety even though it may trench upon matters beyond its competence."

Later in Gujarat Ambuja Cements Ltd vs Union of India, the Supreme Court upheld the imposition of service tax on clients of goods transport operators and forwarding and clearing agents. The court thus dismissed the writ petitions of Gujarat Ambuja Cements Ltd and other industries challenging certain provisions of the Finance Acts of 2000 and 2003.

The maintenance, repair or servicing of all computer software would be subject to service tax, according to the opinion of the Supreme Court in the Tata Consultancy Services case. All the tests required to satisfy the definition of goods are possible in the case of software, and in computer software the intellectual property has been incorporated on media for the purpose of transfer.

Following these judgements, various explanations have been issued by the government, and in 2003 the Constitution itself was amended to introduce Article 268A. It provided that taxes on services shall be charged by the Union and shall be appropriated by the Union and the states. A new Entry 92C was also introduced in the Union List for the levy of taxes on services. In this context, the challenge to the service tax by CAs, cost accountants and others appears to have come a bit late.

The Supreme Court noted that the service sector contributed about 64 per cent to the GDP. "The service sector today occupies the centre-stage of the Indian economy. It has become an industry by itself. In the contemporary world, the development of the service sector has become synonymous with the advancement of the economy," the judgement emphasised and added that there was no distinction between the consumption of goods and that of services as both satisfied human needs.

The list of services included in the tax net has been growing steadily in the last decade. Starting from telephone, stockbrokers and general insurance, it now covers more than 80 services, a recent one being the collection of mailing lists. On the waiting list are educational institutes which provide campus recruitment. They would fall within the definition of "manpower recruitment or supply agency."

The 50-page judgement in the tax practitioner's case has left no scope for further challenge to the imposition of service tax as it has discussed all constitutional, economic and fiscal aspects of the issue. One can only wait for the next official entry in the expanding list.