No sales tax on telecom: SC

Court added that states could impose tax on handsets sold by operators.

The Supreme Court today ruled that states could not impose sales tax on any facilities offered by telecommunication service providers.

A three-judge Bench headed by Justice Ruma Pal stated that a contract between a telecom service provider and a subscriber is merely to receive, transmit and deliver messages of the subscriber through a complex system of fibre optics, satellite and cables.

The court clarified that licences granted under the Indian Telegraph Act clearly manifest that they were for providing telecommunication services and not for supplying any goods or transfer of right to use any goods. The court, however added that states could impose sales tax on handsets, if sold by operators, as mobile phones were considered goods.

Telecom operators heaved a sigh of relief as it was estimated that they would have had to pay up to Rs 10,000 crore in sales tax as the case pertained to the period from 1995-96 till now.

Additionally, the levy of sales tax would have resulted in phone bills going up by as much as 12.5 per cent.

"Besides, the sector would also not be able to continue at the current growth rates as the total levies in telecom would cross the 33 per cent mark if sales tax was added to existing levies," telecom industry sources told Business Standard.

The judgment was passed on a number of appeals against various high court orders which took different views on this question.

The Allahabad High Court, for instance, held that the Uttar Pradesh government was right in imposing sales tax and the service had an element of transfer of goods. The present judgment of the Supreme Court clarifies the legal position for the whole country.

One of the two concurring judgments explained that traditionally, a contract for carriage of goods or passengers is by roadways, railways, airways and waterways.

This is associated with carriage of tangible goods. Such a carrier has no right over the goods of a customer and does not effect transfer of right to use any goods used by the carrier for goods.