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The levy caravan moves on

Mohan R. Lavi

Mohan R. Lavi on a recent apex court decision that has put to rest the question of validity of service tax on goods transport operators

"A legislature is competent to remove infirmities retrospectively and any imposition of tax declared invalid, valid."

"Because of the inherent complexity of fiscal adjustments of diverse elements in the field of tax, the legislature is permitted a large discretion in the matter of classification to determine not only what should be taxed but also the manner in which the tax may be imposed."

These quotes are from the decision of the Supreme Court of India in the Gujarat Ambuja Cements Ltd and Anr. vs Union of India and Anr. case. Readers may be aware of the mind-boggling changes in the levy of service tax on goods transport operators, culminating in the Government amending the law with retrospective effect and a flurry of writ petitions flooding the courts of India. Gujarat Ambuja and a host of others moved the apex court claiming:

"The basis of the decision rendered in the Laghu Udyog Bharati (1999 6 SCC 418) case had not been removed or displaced by the impugned Sections and could not, therefore, overrule, replace or override the Supreme Court's decision.

Parliament was legislatively incompetent to enact the law. The levy encroaches upon the State governments power as defined in Entry 56, List II of the Seventh Schedule to the Constitution which pertains to "taxes on goods and passengers covered by road or on inland waterways."

The levy is discriminatory by singling out only customers of goods transport operators and clearing and forwarding agents, even as recipients of other services went scot-free.

The Supreme Court observed that, at the time of Laghu Udyog, there was a patent conflict between Sections 65, 66, 68(1) and 71 of the Finance Act, 1994 as amended in 1997, on the one hand, and Rules 2(1)(d)(xii) and (xvii) of the Service Tax Rules 1994, on the other.

The Rules were held to be illegal only because the charging provisions of the Act provided otherwise. Since the charging Section itself has been amended, the tenets mentioned in Laghu Udyog Bharti were no longer good law.

The apex court distinguished between the object and incidence of a tax and the machinery for collection of the tax. Since service tax is not a levy on passengers and goods but on the event of service in connection with the carriage of goods, it is therefore not possible to hold that the Act in pith and substance is within the States' exclusive power under Entry 56 of List II.

With this decision, the controversy regarding the levy of service tax on goods transport operators has been laid to rest. It can be safely concluded that the Government has unfettered powers to retrospectively amend a law from any date that it may choose.

(The author is a Hyderabad-based chartered accountant.)

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