M J Antony: Luxury by any other name

OUT OF COURT

Philosophers, law-givers and judges have unsuccessfully strained to define luxury. Oxford dictionary gives five different meanings from which you can pick the one most convenient to you.

State governments have passed laws imposing "luxury tax" on goods like cigarettes. They maintain that those commodities are used for "enjoyment over and above the necessities of life".

This definition has not helped much as the West Bengal Luxury Tax Act imposes tax on textiles, footwear, T-shirts, jeans, watches and dot pens. Naturally, the industry was bound to move the courts. There are petitions before several high courts.

Last week, a Constitution bench of the Supreme Court attempted to define luxuries in the Constitutional context (Entry 62, List II of the Seventh Schedule).

It said: "We would hold that the word luxuries means the activity of enjoyment of or indulgence in that which is costly or which is generally recognised as being beyond the necessary elements of an average member of society and not articles of luxury." It might sound like begging the question but this is the unanimous view of the bench.

The judgement (Godfrey Phillips India Ltd vs State of UP) was delivered mainly in the context of tobacco and its products like cigarettes and gutka.

But since the cash-strapped state governments have taxed a number of other products, the Supreme Court judgement will now cover all of them.

Maharashtra started the trend in 1993 by passing the Bombay Luxury Tax Act. Soon, there was a "rash of legislation", as the court puts it.

Therefore, the ruling that states have no power to impose luxury tax on goods would benefit a number of other products also.

However, if they involve an element of service, the state governments can impose luxury tax on them. The word "luxuries" in Entry 62, says the judgement, refers to "activities of indulgence, enjoyment or pleasure". Since the state governments in these cases seek to tax only goods described as luxury goods, and not any activity, they are unconstitutional.

The Supreme Court has examined the issue in some earlier cases. Cigarettes themselves have been held to be articles of luxury in A B Abdul Kadir vs State of Kerala (1976) and the tobacco industry did not dispute that proposition. They contended that articles of luxury are not covered in Entry 62.

In Express Hotels vs State of Gujarat (1989), legislations in different states like Gujarat, Tamil Nadu, Karnataka and West Bengal, which imposed a tax on "luxuries" provided in hotels were challenged. They argued that luxuries meant jewellery, perfumes, liquor, tobacco and the like, and did not include services or activities. The court rejected these arguments.

In the case of tobacco, the industry has special Constitutional protection. Article 286(3) allows the Parliament to declare certain goods to be of "special importance" in inter-state trade or commerce. Tobacco is one of them. Parliament has been given overriding power to limit the rate of taxes on them, which are otherwise within the exclusive competence of the states.

Following certain recommendations, Parliament passed the Additional Duties of Excise (Goods of Special Importance) Act 1957 imposing additional excise duty on such goods. The revenue was to be shared between the Centre and the states.

Therefore the states cannot levy tax on items covered by this Act. States cannot have their share in the central pie and impose tax on the same goods too. This is another reason for displacing the state power in this field.

Though the tobacco industry is under severe attack from several quarters because of the health hazards, it has special constitutional protection.

In recent judgements, the Supreme Court has asserted that the right to freedom of commerce did not include the right to trade in noxious substances like alcohol, and it is allowed as a matter of privilege.

However, trade in tobacco is not in the fatal list. The new judgement has emphasised this Constitutional position and the industry has won a battle against all states. As a corollary, manufacturers of other "luxury products" (like fountain pens in West Bengal) can also heave a sigh of relief after this judgement.