M J Antony: Taxing fiscal brains

OUT OF COURT

Three recent judgements of the Supreme Court have abridged the taxing powers of states.

It was, perhaps, a bad season for the financial planners of state governments. In three judgements in a row, the Supreme Court recently took away their revenue by interpreting the provisions of tax laws.

In the latest blow, a five-judge Constitution bench ruled in Sunrise Associates vs Government of National Capital Territory that the state governments could not impose sales tax on lottery tickets. It thus reversed the law laid down by a two-judge bench in 1986, that the state governments had the power to levy the tax. The unanimous judgement will be effective from last month. Petitions were originally filed by lottery agents. The judgement has come as relief to them, while severely affecting the revenue of the state governments.

According to the law prevailing for the past two decades, lottery tickets were "goods" as defined in the state laws. They were not actionable claims. Therefore, the levy was within the legislative competence of the states, falling within Entry 54 of List II of the Seventh Schedule of the Constitution. Tickets, to the extent they comprised the entitlement to participate in the draw, were considered to be goods. When the lottery tickets are sold, assigned or otherwise transferred for a price, the state could impose the levy. However, that judgement in the case of Tamil Nadu and West Bengal has now been overruled by the Constitution bench.

Earlier, another five-judge Constitution bench had handed down a judgement restricting the scope of entry tax, development tax and such other levies imposed by the states on goods coming from other states. The judgement, which reverses some of the court's own earlier decisions, will especially benefit industries that have national sales and distribution network.

The unanimous judgement ruled that a state can impose tax only if it provides certain facilities for the better conduct of business. Moreover, the rate of tax should be proportionate to the facilities provided. These levies, in general, are called "compensatory taxes". It is not mentioned in the Constitution that deals with inter-state trade in Article 301. The idea was developed by the Supreme Court in various judgements.

The earlier view of the Supreme Court was that reasonable restrictions could be imposed on inter-state trade in the form of taxes on carriage of goods. The taxes must be compensatory, in the sense that the state must provide certain facilities before imposing taxes.

But in later decisions, there was a deviation in the court's view. The facilities need not be specific but may be indirect or incidental. Some connection to the facilities provided by the state was enough to justify the compensatory tax. This view has now been reversed by the new judgement in a batch of cases led by Jindal Stainless Ltd against the Haryana government. Several other firms and states are also involved in the dispute and the present judgement settles the law for the whole country.

The judgement explained that any state passing compensatory law must indicate the benefits provided to the industry "which are quantifiable or measurable". It must broadly indicate proportionality to the quantifiable benefit. If the law is ambiguous, the burden is on the state as the service provider to place material before the court to show that the compensatory tax is actually reimbursement for the facilities provided by it.

Another judgement by which the states would stand to lose revenue was passed in the case of BSNL. The Supreme Court ruled that the states cannot impose sales tax on any facilities of the telecommunication services. A three-judge bench stated that the contract between the telecom service provider and the subscriber was merely to receive, transmit and deliver messages of the subscriber through a complex system of fibre optics, satellite and cables.

The judgement was passed in a number of appeals against various high court orders that took different views on this question. The Allahabad High Court, for instance, held that the UP government was right in imposing sales tax and the service has an element of transfer of goods. The present judgement of the Supreme Court clarifies the legal position for the whole country.

One of the two concurring judgements 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 the customer and does not effect transfer of right to use any goods used by the carrier for goods. On this analogy, the service providers are only carriers and have neither property in the message nor effects any transfer to the subscriber. The advancement of technology should be so absorbed in the interpretation of law that this method of carriage of message should not be understood as a transfer of a right to use goods, if any. In view of these judgements, it would require some effort on the part of the Budget makers to overcome the effect of these new pronouncements.