CONSTITUTIONAL VALIDITY OF TAXATION OF SERVICES BASED ON NEGATIVE LIST

[Dr. Sanjiv Agarwal]

The Finance Act, 2012 has introduced the concept of negative list in Service Tax as a consequence of which all services which are not listed in the negative list as per newly inserted section 66D of the Finance Act, 1994 become taxable services.

According to the new scheme of Service Tax, Service Tax shall be levied on all services as defined in section 65B (44) including declared services as defined in newly inserted section 65B(22) and section 66E. While the constitutional validity of levy of Service Tax on taxable services has been held to be valid in various judicial pronouncements, it becomes necessary for the Union Government to ensure that constitutional propriety is not breached in taxing any service which is in the state list (list 3) of Seventh Schedule of the Constitution under the residual entry No. 97 of the list 1 (state list). Till the time goods and services tax is introduced inIndia, such services should be listed in the negative list of services as they continue to be in the state domain. The services which fall within the exclusive domain of states, if included in Service Tax net would only infringe the constitutional property and such services could be exempt from Service Tax fill GST is introduced.

According to Mr. Sushil Kumar Modi, Chariman of the Empowered Committee of State Finance Ministers on GST, the three lists appended to the Seventh Schedule clearly demarcate the legislative space available to the Union and the states and, in terms of settled law, no level of government is to trench upon the legislative territory exclusively earmarked for the other level. Accordingly, activities or objects that have been enumerated in the State List of the Seventh Schedule should form part of the negative list, at least till the advent of GST, whereby and where under the states, too, would be empowered to tax services.

The definition of "service" provided in the Act also includes something that has been called a "declared service" which has been specified in the proposed Section 66E. But for the inclusion of "declared services" in the definition of "service" itself, the activities mentioned in Section 66E would not be construed as service in the normal course. In other words, if the definition of "service", as proposed in Section 65B(44), were not to provide for the inclusion of "declared services", such activities like renting of immovable property or construction of complexes, hire purchase or sales on installments or supply of food or drinks by way of services would not be considered as services and hence not liable to service tax at all.

The new provision inserted by the Finance Act, 2012 reveal that the following activities (or so called declared services) are not in the negative list and are sought to be taxed under residuary power contained in Entry No. 97 of List I –

(a) Transportation of goods by a goods transportation or courier agency (subject matter of Entry 56 of List II)

(b) Renting of immovable property or construction of complexes (subject matter of Entry 49 of List 11)

(c) Sales through hire purchase or installment payment basis (deemed to be a sale of goods vide Article 366(29A) (c))

(d) Supply of food or drink as part of service (deemed to be a sale of goods vide Article 366(29A)

(e) Provision of entertainment through cable network or DTH or by means of downloadable entertainments like games, videos, audios, etc. (subject matter of Entry 62 of List II)

(f) Provision of accommodation in hotels or guest houses (subject matter of Entry 62 of List II).

Taxing the same under an entry conferring residuary jurisdiction further compounds the problem since such taxation despite specific entries relating to the same activities conferring jurisdiction to another Legislature does not find judicial sanction.

Taxation of activities or objects enumerated in the state list is not merely a matter of the rights of the states. It is as much, if not more, a matter of constitutional propriety and legality. If a particular activity or object happens to fall within the exclusive domain of the state legislature, then legislation by the Unionon the same subject is not only tantamount to encroachment in the territory reserved for the states, it is also without constitutional sanction and runs the grave risk of failing to meet judicial sanction. Such a threat exists till the advent of GST. Under GST, the Centre and the states would have concurrent jurisdiction to tax goods and services and the dispute on competence to tax is set to be resolved. Hence, the appropriate and safe way to overcome the problem of conflicting jurisdictions would have been to define "services" in such a way as to exclude the activities or objects that have been assigned to the states vide List II. (Source: Crossing the Lakshman Rekha on Service Tax – Sushil Kumar Modi, The Economic Times dated 2.4.2012).

 

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Discussions to this article

[Pramod Rai]

That declared services would not have qualified as services had they not been declared as such does not seem to be fully correct. The Bombay High Court and the Delhi High Court (Larger Bench) have held that renting are per se a service. Further, the SC in ASSOCIATION OF LEASING & FINANCIAL SERVICE COMPANIES have held that hire purchase is a service.

Therefore, it seems that the TRU team has decided to include these in the declared list in order to avoid disputes. However, a question still remains that when hotel is considered to be luxury and therefore chargeable to luxury tax, can for the purposes of taxation, it be covered under the residuary entry and charged to service tax.