Service tax is not a value-added tax

Service tax is not a value added tax. It is just a tax on the act of providing service. VAT is just a mechanism or design for imposing an indirect tax in a particular manner. Service tax can be a value-added tax and it can as well be a turnover tax. Similarly, excise is also not a value added tax by itself. It can be designed as a value-added tax or as a turnover tax. It depends on whether the credit for the input duty is allowed or not.

The issue has now come to the fore because of the latest landmark judgement by the Delhi High Court in the case of Home Solution Retail India Ltd vs UOI. This has held that the service of renting of immovable property for commercial use is not service under Section 65(105)(zzzz) of the Finance Act 2007 though any service connected with such immovable property is service.

This judgement has heavily depended on the proposition that service tax is a value added tax and if there is no value addition, then there is no service. The High Court has relied upon the judgement of the Supreme Court in the case of the All India Federation of Tax Practitioners vs UOI, which held that “………………. service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of service.” Really this portion is not a part of the Supreme Court judgement but only a statement of economic background of indirect taxes. Judgement is only that profession tax is not service tax and it is not ased on service tax is VAT or not. So we cannot say that the Supreme Court has held that service tax is a VAT.

Legally, it all depends on what is written in the Constitution. The Constitution in the List 1— Union List Entry 84 is “duty of excise on goods manufactured or produced”. Similarly at Entry 92C is “taxes on services”. In the List II — state list entry 54 is “taxes on the sale or purchase of goods”. So they are not duties on the value addition but on manufacture, service, sale, etc., They become value added tax only when by a design (which is a matter of policy), the mechanism of VAT is introduced by allowing the credit of the duty paid on the inputs in respect of manufacture, providing service, or sale, etc., This was precisely what was held by a full bench of the Supreme Court on a reference made by the President of India to the Supreme Court (Special Reference No.1 of 1962) in Re: Sea Customs Act, 1878 reported in 1964(3) SCR 787. The judgement held that “……… taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. Wemay in this connection contrast sales tax which is also imposed with reference to goods sold where the taxable event is the act of sale.”

The principle enunciated by the Full Bench of the Supreme Court is binding even now. I may also point out that before 1986 there was excise duty which was not VAT. Even now all items which pay excise don’t follow the VAT design. And State Excise is not VAT at all.

The conclusion is that only when input duty credit is allowed that Service Tax or

Excise or Sales Tax becomes a value added tax. If it is not allowed, it is a turnover tax.

By themselves, they are just tax on the act of manufacture, act of providing service or the act of sale.

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