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Constitutional validity of Service Tax remains questionable

MONISH BHALLA 
on 21 August 2010

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The Constitutional Validity of Service Tax has been challenged time and again. Recently, The Maharashtra Chamber of Housing Industry (MCHI) through their Writ Petition challenged the constitutional validity of the Finance Act 2010 seeking to amend the Finance Act 1994 introducing and explanation to Section 65 (105) (zzq) and 65 (105) (zzzh) governing the Service Tax on Construction activities. The Hon’ble Bombay High Court came to the rescue of the Builders and Developers and held that, "No coercive steps shall be taken against the petitioner for the recovery of Service Tax in relation to the provisions in question, but it is clarified that assessment may proceed in accordance with law."

Service Tax was introduced in the parliament almost 16 years ago vide The Finance Act, 1994. This Act introduced the concept of Service Tax in India for the first time. The term service generally means service of any description which is made available to potential user and includes the provision of facilities. Such term has variety of meanings. It may mean any benefit or any act resulting in promoting or serving interest of the recipient. How it should be understood and what it means depends in the context in which it has been used in an enactment. Surprisingly, the term Service is not defined in the said Act. According to Article 246 of the Constitution, Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution referred to as the "Union List". In terms of Article 268A, Taxes on services became leviable by the Government of India. With the enactment of Finance Act, 1994 the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services.

History of Service Tax shows that whenever the Constitutional validity has been challenged, the Courts have come to the rescue of the Revenue rather than the service providers. The Mandap Keepers Association in Tamilnadu challenged the Constitutional Validity however; the Hon’ble Madras High Court had different views favouring the Service Tax Department. The Tour Operators also challenged the Constitutional validity, however the entire exercise and efforts went in vain and finally the Tour Operators had to shell out Service Tax.

The Courts looks into the pith and substance of the legislation. Different entries appear in three different lists of Seventh Schedule to the Constitution. Levy of Service tax which was imposed by Parliament in terms Article 246 under its residuary powers under Entry 97 of List I of Seventh Schedule was more clearly brought under Entry 92C of the said List under that Schedule by constitution (Eighty-eight) Amendment Act, 2003 in accordance with Article 268A of the Constitution incorporated by the said Amendment Act. The Chartered Accountants, Cost Accountant and Architect challenged the same, however the Hon’ble Supreme Court held that Tax on services is a different subject as compared to taxes on professions, trades, callings, etc. as covered by state list.

The Constitutional validity of levy of Service Tax was the subject matter of litigation in a number of cases in India. The bone of contention has been whether the said service is a part of List I (Union), List II (State) or Concurrent List III of the Seventh Schedule to the Constitution. Introduction of Article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 and incorporation a new Entry 92C in the Union List for the levy of service tax in the year 2003 is indicative of the fact that during the period from 1994 when Service Tax was first introduced in India in the Union Budget for the year 1994-95 till the year 2003 when the Constitution was amended to levy tax on services. Does it mean that during this period Service tax was levied and collected without any constitutional powers by the departments of Government of India? If the government derived its residuary powers under Entry 97 of List I (Union List) of Seventh Schedule for levying tax on services, why the need was felt after a gap of nearly 9 years to amend the Constitution by incorporating a new Entry 92C in the Union List (List I) of the Seventh Schedule in the year 2003 for the levy of Service Tax? This belated act of the government cast serious aspirations on the constitutional validity of Service Tax levied and collected during the period from 1994 to 2003. Such issues have to be addressed in toto before the introduction of Goods and Service Tax. It is felt that the issue needs to be properly analysed by the Supreme Court of India for proper disclosure of the true intent of the amendment to the Constitution.




Category Service Tax
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MONISH BHALLA 

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