Challenging Imposition of Service Tax – Not a Wise Business Policy?
GETTING a stay against a new imposition does not seem to make good business sense. When the Government introduces a new levy, they study the legal implications and are usually ready to counter any legal attack. In the unlikely event of Government failing in the court, they always have the weapon of retrospective amendment, which they will use liberally. Not a single service, so far had been effectively set aside and the Government's success rate is almost hundred per cent. Ultimately the service provider will have to pay the tax and with interest and sometimes with penalty too and at that time they will not be able to collect the tax from their customers. Apart from the huge expenses in the High Court and the Supreme Court, the petitioners will end up paying the tax with interest.
Let us have a look at some of the cases where the imposition of Service Tax was challenged.
In Laghu Udyog Bharati v UOI – , the Supreme Court set aside the tax payable by recipients holding ‘that the provisions of Rule 2(d)(xii) and (xvii), insofar as it makes persons other than the clearing and forwarding agents or the persons other than the goods transport operator as being responsible for collecting the service tax, are ultra vires the Act itself. The said sub-rules are accordingly quashed .' This was the only decision where the levy was quashed, but the Government brought in retrospective legislation and undid the Supreme Court judgement and in Gujarat Ambuja Cement v UOI - , the Supreme Court upheld the retrospective amendment.
In TN Kalayana Mandapam Association v UOI, – , the Supreme Court held that a tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire purchase activities.
In All India Federation of Tax Practitioners v UOI – , the Supreme Court held that Parliament has legislative competence to levy service tax on chartered accountants, cost accountants and architects.
In Association of Leasing and Financial Service Companies v UOI - --LB , the challenge was to the imposition of Service Tax on financial leasing services including equipment leasing and hire purchase. The Supreme Court held that Service Tax, insofar as it relates to financial leasing services including equipment leasing and hire-purchase is within the legislative competence of the Parliament under Entry 97, List I of the Seventh Schedule to the Constitution.
In Addition Advertising v UOI - , the Gujarat High Court upheld the constitutional validity of Service Tax on advertising services.
In Retailers Association of India v UOI - , the Bombay High Court upheld the constitutional validity and retrospective amendment in respect of Service Tax on renting of immovable property. So did the Delhi High Court in Home Solutions Retails (India) Ltd. v. Union of India -
Hundreds of lawyers have appeared in these cases and Crores of rupees must have been spent on the futile litigation – the only community, which benefits from this type of litigation, is the one of lawyers and all the others including the Government (which is the ultimate winner) do lose precious money and time.
It is a mystery that leading businessmen who are otherwise very clever do not understand this simple fact or maybe the lawyers are superlatively bright (in getting cases, if not in winning them) and convince the businessmen that it is better to fight in courts than pay the taxes. Ultimately it makes good sense for the Government – they get the taxes and a whopping 18 percent interest and perhaps some more amounts by way of penalties. No business these days brings in such good returns. Look before you leap into litigation.