Levy of Service Tax on Professionals

Supreme Court of India

All India Federation of Tax Practitioners

v.

Union of India

Levy of Service Tax on Professionals

Article 246, read with article 274, of the Constitution of India - Relations between Union and States - Subject-matter of laws made by Parliament and by Legislatures of States - Whether taxes on services is a different subject as compared to taxes on professions, trades, callings, etc., and, therefore, Entry 60 of List II of Seventh Schedule which refers to taxes on professions as such and Entry 92C/97 of List I of Seventh Schedule levying tax on services operate in different spheres - Held, yes - Whether service tax is a tax on each activity undertaken by a chartered accountant/cost accountant or an architect and Entry 60 of List II, which is a taxing entry, cannot be read to include every activity undertaken by such professionals for a consideration - Held, yes - Whether therefore, Parliament has legislative competence to levy service tax by way of Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered accountants, cost accountants and architects - Held, yes [Paras 29, 33 and 41]

>> Facts

The instant appeal was filed by the appellant before the Supreme Court challenging the legislative competence of the Parliament to levy service tax on practising chartered accountants, cost accountants and architects under article 246(1), read with Entry 97 of List I of the Seventh Schedule to the Constitution on the ground that the word ‘profession’ in Entry 60 of List II is nothing but service and, therefore, levy of service tax came within the competence of State Legislature alone.

>> Held

(i) Meaning of ‘Service Tax’

The source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of service industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of the Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003, which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. As an economic concept, there is no distinction between the ‘consumption of goods’ and ‘consumption of services’ as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide the Constitution (Eighty-eighth Amendment) Act, 2003. Further, ‘service tax’ is a value added tax which in turn, is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client. [Para 17]

Thus, service tax is VAT which, in turn, is both a general tax as well as destination based consumption tax leviable on services provided within the country. [Para 20]

(ii) Object of enacting the Finance Act

The Finance Act is passed every year to fix the rate of tax. This is the primary object for enacting the Finance Act. But it does not mean that a new distinct charge cannot be introduced by the Finance Act. For example, what is not ‘income’ under the Income-tax Act can be made income by the Finance Act. This is, however, subject to the Finance Act complying with the constitutional limitations. Additional tax revenue can be collected either by increasing the rate or by levy of a fresh charge. All levies through the medium of the Finance Act may either enhance the rate or levy a fresh charge. The Finance Act can also make an extensive modification in an Act. [Para 21]

(iii) Interpretation of Taxing Entries in the Seventh Schedule to the Constitution

Constitutional law, like taxing law, essentially concerns concepts and principles. [Para 24]

Legislative entries in the Seventh Schedule are legislative heads/fields and, therefore, they should be given widest interpretation. However, there are two groups of entries in each of the three Lists in the Seventh Schedule. In List I, Entries 1 to 81 refer to several matters over which the Parliament has authority to legislate. But Entries 82 to 92 of List I enumerate the taxes which could be imposed by a law of the Parliament. An examination of these two groups of entries shows that while the main subject of legislation finds place in the first group, a tax in relation thereto is separately mentioned in the second group. For example, Entry 22 in List I refers to ‘railways’ whereas Entry 89 in List I refers to “Terminal taxes on goods or passengers, carried by railway.” If Entry 22 of List I is construed as involving taxes to be imposed, then Entry 89 of List I would be superfluous. Similarly, Entry 41 of List I refers to Trade and Commerce with foreign countries; and import and export across custom frontiers”, however, Entry 83 of List I refers to “Duties of customs including export duties”. If Entry 41 of List I, which refers to trade and commerce with foreign countries and which refers to import and export, is to be interpreted as including duties of customs under that entry, then Entry 83 would be rendered superfluous. Similarly, entries 43 and 44 of List I relate to incorporation, regulation and winding up of corporations, whereas Entry 85 of List I provides for ‘Corporation tax’. If Entries 43 and 44 of List I are to cover taxes, then Entry 85 of List I would be rendered superfluous. [Para 25]

In List II, Entries 1 to 44 form one group mentioning the ‘subjects’ on which States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. At the relevant time, Entry 18 of List II referred to ‘lands’ whereas Entry 45 of List II referred to ‘land revenue’. If land revenue was to fall under Entry 18, then Entry 45 of List II would be rendered superfluous. The analysis is not exhaustive. However, the analysis shows that taxation is not intended to be compromised in the main subject in which an extended construction can be given as that test cannot be applied to taxation. Taxing entries are distinct entries. [Para 26]

Entry 60 of List II, mentions “Taxes on professions, trades, callings and employments.” Entry 60 of List II is a taxing entry. It is not a general entry. Therefore, tax on professions, etc., has to be read as a levy on professions, trades, callings, etc., as such. Therefore, Entry 60 of List II which refers to professions cannot be extended to include services. This is what is called as an Aspect Theory. If the argument of the appellants was accepted, then there would be no difference between interpretation of a general entry and interpretation of a taxing entry in List I and List II of the Seventh Schedule to the Constitution. Therefore, ‘professions’ will not include services under Entry 60 of List II. Therefore, the Parliament has absolute jurisdiction and legislative competence to levy tax on services. While interpreting the legislative heads under List II, one has to go by schematic interpretation of the three Lists in the Seventh Schedule to the Constitution and not by dictionary meaning of the words ‘profession’ or ‘professional’ as was sought to be argued by the appellants, otherwise the distinction between general entries and taxing entries under the three Lists would stand obliterated. The words ‘in relation to’ and the words ‘with respect to’ are no doubt words of wide amplitude, but one has to keep in mind the context in which they are used. [Para 28]

(iv) Meaning of the words taxes ‘on’ professions

Entry 60, List II refers to taxes on professions, etc. It is tax on the individual person/firm or company. It is the tax on the status. A chartered accountant or a cost accountant obtains a licence or a privilege from the competent body to practise. On that privilege as such the State is competent to levy a tax under Entry 60 of List II. However, Entry 60 of List II is not a general entry. It cannot be read to include every activity undertaken by a chartered accountant/cost accountant/architect for consideration. Service tax is a tax on each activity undertaken by a chartered accountant/cost accountant or an architect. The cost accountant/chartered accountant/architect charges his client for advice or for auditing of accounts. Similarly, a cost accountant charges his client for advice as well as doing the work of costing. For each transaction or contract, the chartered accountant/cost accountant renders professional based services. The activity undertaken by the chartered accountant or the cost accountant or an architect has two aspects. From the point of view of the chartered accountant/cost accountant, it is an activity undertaken by him based on his performance and skill. But from the point of view of his client, the chartered accountant/cost accountant is his service-provider. It is a tax on ‘services’. The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided, whereas a professional tax under Entry 60, of List II is a tax on his status. It is the tax on the status of a cost accountant or a chartered accountant. As long as a person/firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of Entry 60, List II is a taxing entry. Entry 60 of List II contemplates tax on professions, as such. Entry 60 List II refers to ‘Tax on employments’. There was no merit in the contention advanced by the appellant that the widest possible interpretation should be given to the word ‘profession’ in Entry 60, List II. One has to keep in mind while interpreting the entries in the three Lists, the distinction between the general entry and the taxing entry. [Para 29]

(v) Significance of article 276

A tax on profession can be imposed if a person carries out a profession whereas a tax on income can be imposed only if there is income. Therefore, a tax on profession is irrespective of the question of income. Article 276 enables the State Legislature to make laws for imposition of taxes on profession, for the benefit of the State, Municipality, District Board, etc., by stating that such law shall not be invalid on the ground that it relates to a tax on income. There is a distinction between a tax on professionals, trade, callings and employments and a tax on income arising out of such professions, trades, etc. In the former case, it will have to be paid by any person practising that trade, profession, etc., whether he derives any income from it or not. [Para 32]

The entries dealing with taxation are distinct entries vis-a-vis the general entries. It is for this reason that the doctrine of pith and substance has an important role to play while deciding the scope of each of the entries in the three Lists in the Seventh Schedule to the Constitution. This doctrine of pith and substance flows from the words in article 246(1), namely, “with respect to any of the matters enumerated in List I.” The bottom line of the said doctrine is to look at the legislation as a whole and if it has a substantial connection with the entry, the matter may be taken to be legislation on the topic. That is why due weightage should be given to the words ‘with respect to’ in article 246 as it brings in the doctrine of ‘pith and substance’ for understanding the scope of legislative powers. Competence to legislate flows from articles 245, 246 and the other articles in Part XI. A legislation like the Finance Act can be supported on the basis of a number of entries. In the instant case, the constitutional status of the levy, namely, service tax was to be looked into. The nomenclature of a levy is not conclusive for deciding its true character and nature. For deciding the true character and nature of a particular levy, with reference to the legislative competence, the Court has to look into the pith and substance of the legislation. The powers of the Parliament and the State Legislatures are subject to constitutional limitations. Tax laws are governed by Part XII and Part XIII. Article 265 takes in article 245 when it says that the tax shall be levied by the authority of law. Various entries in the Seventh Schedule show that the power to levy tax is treated as a distinct matter for the purpose of legislative competence. This is the underlying principle to differentiate between the two groups of entries, namely, general entries and taxing entries. Taxes on services is a different subject as compared to taxes on professions, trades, callings, etc. Therefore, Entry 60 of List II and Entry 92C/97 of List I operate in different spheres. [Para 33]

Conclusion :

Therefore, there was no merit in the instant appeal filed by the appellant. The Parliament has legislative competence to levy service tax by way of impugned Finance Acts of 1994 and 1998 under Entry 97 of List I on chartered accountants, cost accountants and architects. The said position would stand fortified by the Constitution (Eighty-eighth Amendment) Act, 2003 which has inserted article 268A and Entry 92C of List I which clearly indicates that Entry 60 of List II and Entry 92C of List I operate in different spheres. [Para 41]

Accordingly, the appeal was to be dismissed. [Para 42]