CONSTITUTIONAL VALIDITY OF SERVICE TAX - PART I

[Dr. Sanjiv Agarwal]

The Service Tax gains its authority from Entry No. 97 in the Union List of Seventh Schedule to the Constitution of India. Sections 64 to 96-I (Chapters V and VA of the Finance Act, 1994) of the Finance Act, 1994, as amended from time to time provide the legal basis for the levy and collection of Service Tax. The Service Tax was first introduced by Chapter V of the Finance Act 1994.

Whether Service Tax can be levied or not has been a topic for debate and dispute amongst service providers. Article 265 of the Constitution says that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories —

(a)   Union list (only Central Government has power)

(b)   State list (only State Government has power)

(c)   Concurrent list (both Central and State Governments have power).

Entry 60 of State list mentions that tax on trade, profession, callings and employment can be levied only by State Governments. The Central Government cannot pass any law for entries in the State list. State Government can levy tax either as an ad hoc sum or as a percentage of turnover. Since State Governments are also empowered to levy such taxes, they may be in need for more revenue, levy tax on transfer or purchase or sale of shares as in some States, share is considered a commodity under Sales Tax Act. States are empowered to levy and collect taxes on some services such as consumption of electricity (entry 53); taxes on entertainment, assessment, betting and gambling (entry 62); taxes on goods and passengers carried by road or inland waterways (entry 56); taxes on advertisements other than newspaper advertisements (entry 55) etc.

Although there was no entry in the Union list or State list which authorise levy of Service Tax till 2003 constitutional amendment, the Central Government had imposed such taxes through its powers under residuary entry in the Union list.

While powers to levy tax on certain services (for example advertising, entertainment, transporters etc.) are State subject, Centre has levied Service Tax on selected services by invoking its residuary powers under the Constitution.

When the Indian Constitution was framed, perhaps the emphasis was on taxation of goods and commodities only. At that time, taxing the services were not practiced anywhere in the world. Therefore, the Constitution does not specifically refer to taxation of services.

It is well settled that even in the absence of a specific entry, unless the subject of taxation is covered under the State list, or there is a prohibition against such levy under any of the entries of List-I, the Parliament, is by virtue of residuary Entry No. 97 of List I in the seventh schedule to the Constitution empowered to impose any fiscal levy. On the similar grounds, the levy of tax on expenditure under the Expenditure Tax Act, 1987 was upheld by the Supreme Court with reference to Entry No. 97 of List-I.

Constitution (95th Amendment) Act, 2003

In 2003, the Government has moved a Constitutional amendment which will provide for formal levy of tax on services by the centre and enable the states to collect and appropriate the proceeds of the levy. The amendment shall seek to place service tax under the Union List. A bill constitution (ninety fifth amendment) Bill 2003 seeking to amend the constitution to provide tax on services as specific entry in the union list and evolve principles for determining the modalities of levying service tax by the Union Government and collection of the proceeds by the Central and the State Governments was introduced on 7th March, 2003.

The amendment would augment revenues of the states in accordance with the proposed VAT law and eventually include services within the purview of state level VAT.

The Constitution (95th Amendment) Bill has since been passed by both the Houses of Parliament but has not been notified so far for enforcement. The constitutional amendment would empower the centre to levy tax on service as specific items of taxation by virtue of a new entry in the union list of the seventh schedule of Indian constitution. It enables collection and appropriation of the proceeds of the service tax by the Union Government as well as the State Government. This would be done without the revenue from tax on services becoming a part of divisible pool under Article 270, sharing of which is governed by the Finance Commission recommendations. A separate service tax legislation will be enacted which will also pave the way for inclusion of services within the preview of VAT.

The Empowered Committee of State Finance Ministers is also of the view that the right to taxation of services should be given to states and that they should also be allowed to collect and appropriate service tax on major services. The principles on which the states and the centre would collect and appropriate taxes on services would have to be prescribed by law. A new tax called goods and services tax (GST) is likely to replace service tax and excise duty by April, 2010. The empowered committee of State Finance Ministers has been assigned the task providing a road map for the proposed goods and service tax.

Constitutional Amendments to Levy Service Tax

Constitution (95th Amendment) Act has made the following amendments -

(i)    In the VII Schedule in the Constitution, in List I - Union List, entry "92C - Taxes on Services" has been inserted.

(ii)   A new Article 268A has been inserted. It reads as follows:

"268A     (1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the States in the manner provided in clause (2).

(2) The proceeds in any financial year of any such tax levied in accordance with the provisions of clause (1) shall be -

(a) Collected by the Government of India and the States;

(b) Appropriated by the Government of India and the States,

in accordance with such principles of collection and appropriation as may be formulated by the Parliament by law."

(iii) A consequential amendment to Article 270 of the Constitution has been made to enable parliament to formulate by law principles for determining the modalities of levying the service tax by the Central Government and collection of the proceeds thereof by the Central Government and the State Governments.

In the next part of this subject, we shall discuss the judicial support in favour of constitutional validity of levy of service tax in India

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