A view has been expressed that the attempt to levy service tax on trading and retailing of goods by the Centre would be unconstitutional because these activities are in the nature of sale not service and are liable to sales tax under Entry 54 of List II by the state governments. This view is based on lack of appreciation of all the recommendations of the task force and the basic fact that among its recommendations is the proposal for total withdrawal of all cascading taxes including state level sales taxes.
Its true that upto now, the Centre has utilised Entry 97 of List I to justify the levy of service tax. The Supreme Court has recently upheld the exercise of this power for levy of service tax on mandapkeepers in the case of Tamilnadu Kalyan Mandapam Association (2004 (167) ELT3). But, the 88th Amendment not only confers specific power of levying taxes on services but it also empowers the central and state government to collect and appropriate these taxes in accordance with such principles of collection and appropriation as may be formulated by Parliament by law. Thus, the amendment has wider implications and envisages a new scheme for collection and appropriation of the service tax by the Centre and states.
According to the Statement of Objects and Reasons of the Constitution Amendment Bill which resulted in the 88th Amendment, the amendment was made following unanimous decision of the states to replace their existing sales tax system with the system of value added tax (VAT) from April 1, 2003 and, with a view to widening their tax base, the states suggested that they should be enabled to collect an appropriate tax on services. This would also bring in the responsibility for collection and appropriation of tax on services. This itself would, in a way, integrate sales tax with tax on services so that the states can both collect and appropriate them. This has been followed up with a Bill which the West Bengal government has recently sent to the President for approval. The question of compensation for the losses arising out of the introduction of VAT has also been discussed in the meeting of the Empowered Committee of state finance ministers.
Is levy of service tax on trading and retailing of goods unconstitutional
Theres a lack of appreciation for all the task force recommendations
Aspect Doctrine provides distinction between sale and service
The states would also have to simultaneously introduce corresponding legislation for goods and services which would subsume their existing state level cascading taxes. Thus, if these recommendations are accepted and necessary legislation made, the concept of sale under the existing sales tax laws of various states would be replaced by a comprehensive VAT which would take care of the central excise duties levied on manufacture of goods, taxes on services and central sales tax as well as the sales tax levied by the states.
The question whether the view of the task force that the 88th Amendment confers powers levying service tax on service of trading and retailing has to be considered in the light of the judgement of the Constitution Bench of the Supreme Court in the case of Federation of Hotel and Restaurant Association of India [(1989) 3 SCC 634], in which the Aspect Doctrine in the distribution of legislative power according to which subjects in one aspect and for one purpose fall within the power of a particular legislature may, in another aspect and for another purpose, fall within another legislative power has been accepted.
The Court has cited the example of levy of property tax under the state law in one aspect and liability of income tax on income from property in another aspect, both of which have been held to be constitutionally valid. In fact, the Kerala High Court upheld the levy of service tax on a SIM card sold by a telephone company to a customer while, at the same time, upholding the levy of state sales tax on the sale of the very same SIM card justifying it on the aspect doctrine.
This judgment is no doubt under appeal before the Supreme Court, but the principle followed by the high court was enunciated by the Supreme Court in the Federation case cited above. It may not, therefore, be correct to take the view that there is a constitutional flaw in the recommendations of the task force. Such a view has apparently been arrived at without taking into account the entire scheme of taxation recommended by it.
The author is a Supreme Court advocate and a former member of the customs & excise appellate tribunal