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Validity Of Service Tax Under The Constitution Of India

Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories:

• Union list (Article 246(1) of the Constitution specifies that Parliament has exclusive powers to make laws with respect of any of the matters enumerated in List I in the Seventh Schedule to Constitution)
• State list (As per Article 246(3) State Government has exclusive powers to make laws with respect to matters enumerated in List II)
• Concurrent list (both Parliament and State Government can pass legislation with respect to items specified in this list).

The authority of the Parliament to levy service tax is derived from Entry 97 of List I (Union List) of Seventh Schedule to Constitution which reads as under: �Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists�. Time and again there have been attempts to challenge the constitutional validity of the levy of service Tax and the courts have more than once upheld the constitutional validity of such levy.

The Gujarat High Court in the case of Addition Advertising vs. Union of India [1998 (98) ELT 14] has held that levy of tax on advertising service is not unconstitutional. It was held that this is not a tax on any profession, trade, calling or employment, but in respect of service rendered. If there is no service, there is no tax. It was further held that 'the tax is not on advertisement' but on the services rendered with reference to the advertisement and there is a clear distinction between the advertisement service and advertisement.

In another case of M/s. Laghu Udyog Bharati v/s. UOI [1999 (89) ELT 247] the petitioners challenged the Government's decision to shift the burden of duty liability to the service receivers in case of Goods Transport Operators and Clearing & Forwarding Agents. In this case, the Hon'ble Supreme Court upheld the contention of petitioners and held that the relevant provisions of Service Tax Rules were ultra vires the Finance Act, 1994.

The Hon'ble Supreme Court while deciding the case, observed as follows: -

"The service tax levied by reason of services which are offered. The imposition is on the person rendering the service. Of course, it may be indirect tax, it may be possible that the same is passed on to the customer but as far as the levy and assessment is concerned, it is the person rendering the service who alone can be regarded as an assessee and not the customer. This is the only way in which the provision can be read harmoniously.

The Hon'ble Apex Court further opined that ''The charge of tax is on the value of services and it is only the person who is providing service can be regarded as an assessee. The rules, therefore, cannot be so framed which do not carry out the purpose of the Chapter (Statute) and cannot be in conflict with the same.''

The Supreme Court in Tamil Nadu Kalyana Mandapam Assn. V. Union of India [(2004) 267 ITR 9] held that a tax cannot be struck down on the ground lack of legislative competence by enquiring whether the definition accords what the layman�s view of service. It is well settled that in matters of taxation laws, the court permits greater latitude to pick and chose objects and rates for taxation and has a wide discretion with regard there to. Relying on Mafatlal Industries Ltd. and Ors. vs. Union of India and Ors. [(1997) 5 SCC 536] the court added that in the matter of taxation laws, the court permits great latitude to the discretion of the legislature. It held that the State is allowed to pick and chose districts, objects, persons, methods and even rates for taxation, if it does so reasonably. The courts view the laws relating to economic activities with greater latitude than other matters. Therefore, the court opined that a levy of service tax on a particular kind of service could not be struck down on the ground that it does not conform to a common understanding of the word service so long as it does not transgress any specific restriction contained in the Constitution.

From the above it may be surmised with a reasonable amount of certainty that the challenges to the constitutionality of the levy of service tax by the Central Government may be in vain, at least for the present.

At this point it may be pertinent to point out that the Constitution (95th Amendment) Bill seeking to include service tax as a specific entry in the Union List was introduced in March, 2003. At the time of writing, the said Constitution (95th Amendment) Bill had not become an act.