Is a service a good as well? On the face of it, the answer is an obvious no: how can something which is a service also be a good? That’s why, for instance, while you pay a service tax on your insurance premium, you don’t pay a sales tax on it; you pay a service tax on your hotel bill, but don’t pay a sales tax on it; the list goes on. However, life’s not so simple, and you have several instances of levying sales tax on what, to most people, including those in the finance ministry in New Delhi, would appear to be a service. Worse, the top court in the country has ratified this practice.
A good example of this practice is one that is coming up for review before a three-member bench of the Supreme Court tomorrow, that pertaining to the levying of sales tax in various states on telecom. In 1995, the Uttar Pradesh government said that the department of telecom (the telecom services of the DoT have now been separated into Bharat Sanchar Nigam Ltd) would have to pay sales tax on the revenues it got since, under the powers of the UP Sales Tax Act, this was also taxable. This was challenged by the DoT/BSNL on the grounds, largely, that since a service tax was being levied, the transaction was not liable to sales tax. While the Allahabad High Court agreed with DoT/BSNL, the state in turn challenged this in the Supreme Court, which ruled in its favour in February 2003.
Justice Quadri, who is now the president of the Advance Ruling Authority on taxes, ruled that “the activity of a transfer of the right to use any goods for any service” (such as allowing users access to their telephone lines) “for cash, deferred payment or other valuable consideration, fell within the meaning of ‘sale’”. Indeed, while doing so, Justice Quadri also cited other judgements, such as that of a Constitution Bench of the Supreme Court, which ruled that electricity supply falls under the purview of ‘goods’ under the sales tax law (so why shouldn’t telecom?); a judgement of the court of Wisconsin, USA, was also cited as ruling that provision of telecom services was the same as selling a good.
Indeed, Justice Quadri ruled that “it is possible, an activity may be service for purposes of one Act and sale for purposes of (another) Act”. Again, a ruling of another Constitution Bench of the Supreme Court was cited in this context, one concerning the levy of sales tax on meals in a restaurant. In this case, the judgement was that if the dominant transaction was just selling the food and the services were incidental, “the transaction would undoubtedly be eligible to sales tax”. So, while giving his ruling, Justice Quadri also struck down two other judgements, by the High Courts of Andhra Pradesh and Punjab & Haryana, which held that sales taxes could not be levied on telecom services.
Since each state can now levy sales taxes on telecom services, the telecom industry would have to shell out upwards of Rs 10,000 crore in terms of back taxes, since the matter pertains to a period beginning 1995-96. Apart from the lump sum of Rs 10,000 crore that consumers will have to pay if the Supreme Court review agrees with the single judge’s view, their annual phone bills could go up by as much as 12.5 per cent (the highest VAT rate) on account of sales tax alone. That’s on top of an effective tax of around 18-20 per cent already—according to the telecom regulator, Trai, the total levies paid by the sector this year will be around Rs 18,000 crore.
But the issue is not just that of the telecom sector, as an adverse judgement will affect a host of other services as well, ranging from your humble restaurant bill to even the premium paid by you on your insurance policy each year. Indeed, various states are already levying fairly bizarre sales taxes. If an exporter gets an export benefit such as an advance licence and sells it, states like Delhi levy a sales tax on it. Recently, software major TCS was asked to pay sales tax on the value of its transaction because it was giving the software in a CD—it argued that, at best, the tax could be applicable to the cost of the CD because the software was intellectual property, but the court ruled that even intellectual property was subject to sales tax. While there is no proposal as yet to levy sales tax on radio and TV programmes, there was talk some time ago in the Delhi sales tax department on the possibility of levying sales tax on time slots in television programmes since these are “sold” to bidders.
Now it is always possible that the eminent lawyers the telecom companies have assembled will be able to convince the Supreme Court to overrule the earlier judgement, but the history of previous rulings including those by Constitution Benches will make it very difficult. In which case, it is up to the central government to begin reviewing the impact of both central and state taxes on different “goods”, since it is abundantly clear that if anything is taxed too heavily, it dies a natural death.