? ? ?
DDT Question - What is Constitutional Authority for levy of Service Tax?
WHAT is the authority to levy Service Tax? How is the Central Government competent to collect Service Tax?
I am grateful to the readers who responded to the DDT question. Several Departmental officers, advocates and Industry leaders sent in their answers.
What prompted me to ask this question was the inadvertent remark of a leading consultant in a GST speech (there are too many people speaking on GST these days) recently that Service Tax is levied by virtue of the powers from Entry 92C in List 1 of the Seventh Schedule to the Constitution.
Sharad Misra, a Superintendent of Central Excise wrote in:
The authority to levy Service Tax is derived from List 1 entry 92C of Schedule VII of the Constitution of India.
Further as per Article 268A the Constitution also provides that 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 State in the manner provided.
The problem is that entry 92C was inserted by Constitution eighty eighth amendment Act, 2003, s.4 which is yet not in force, date to be notified later.
That is exactly the problem; many officers, lawyers and judges believe that Entry 92C gives the Central Government the power to levy service tax, little realizing that entry 92C was to come into force from a date to be notified and the government never notified the date. So, 92C is out.
In an article for us in June 2009, the eminent senior advocate Arvind P Datar wrote, "Interestingly, Entry 92C and Article 268A were inserted by the 88th Amendment to the Constitution. But both these have not been notified till date."
In the Madras Hire Purchase Association case - , argued by Mr.Datar, the Madras High Court observed, "Service tax is made by Parliament under Entry 92C of List I and Article 268-A… "
I asked Mr.Datar on this immediately after the High Court judgement was delivered. He told me, "I had specifically argued that 92C and 268A had not been notified; we are moving the Supreme Court against this order." He did and the Supreme Court in observed, "this Court has on three different occasions upheld the levy of service with reference to Entry 97 of List I in the face of challenges to the competence of the Parliament based on the entries in List II and on all the three occasions, this Court has held that the levy of service tax falls within Entry 97 of List I."
So, Service Tax is levied under the residual entry 97 of the Seventh Schedule to the Constitution, and not under entry 92C as strongly believed by many.
Now the Constitution Amendment Bill to bring in GST specifically provides for omitting Entry 92C in the Seventh Schedule and Article 268A in the Constitution. Remember these provisions were never notified.
Why to omit the entries which were never notified?
The Select Committee of the Rajya Sabha answered that question:
The Committee is of the view that Entry 92C was inserted by the Constitution (Eighty-Eighth Amendment) Act, 2003 to empower the Union to impose service tax on certain services read with article 268A of the Constitution.
Notwithstanding, the service tax levied under the Finance Act, 1994 were continuing as such. The amendment was carried out in the Constitution but the provision was never brought into force. Since Parliament has enacted the said constitutional provision and as such the provision stands as the part of Constitution; unless it is omitted by a Constitution Amendment Act by Parliament, it will continue to sit in the Constitution. Therefore, it is necessary to omit the said provision to ward of any future doubts about GST.
Entry 92C was brought in only in 2004, but there was service tax much before that - obviously under entry 97. If services could be taxed under entry 97, why bring in another entry 92C?
The Statement of Objects and Reasons for the 88th Amendment Act states:
At present, the item relating to "taxes on services" is not specifically mentioned in any entry either in the Union List or in the State List of the Seventh Schedule of the Constitution. Parliament has the exclusive power to make laws with respect to entry 97 of the Union List for any other matters not enumerated in List II or List III including any tax not mentioned in either of those Lists. In exercise of this power, the Central Government has periodically taxed certain services at the rate of five per cent. ad valorem.
The proposed amendment would help in significant augmentation of revenues of the States in accordance with the proposed law, and pave the way for eventual inclusion of services within the purview of State level VAT.
The then Finance Minister Jaswant Singh told the Parliament,
In most developed countries goods and services are traded and taxed together. Taxation of services in India was started through the Union Budget of 1994-95 when it was levied with effect from July 1, 1994 on stockbrokers, general insurance and telephone services.
The power to levy tax on service is, however, not specifically mentioned either in the Union List or in the State List or in the Seventh Schedule of the Constitution. Entry 97 of the Union List gives power to the Centre for levy and collection of any tax not mentioned in either List II or List III. At present, therefore, the Parliament has the power to levy and collect tax on services only as a residual taxation matter. In exercise of this power, the Central Government had periodically taxed selected services.
This is a provision to include a tax measure in the Union List so that both the Centre and the States can collect it. The duty and the responsibility of levying the tax remains of the Union Government.
But after all these efforts, why was the amendment not notified? Waiting for GST?
Actually I had answered this question in detail in and 2649.
Once again DDT thanks the netizens who enthusiastically answered the question - it was a sheer pleasure to go through the replies.