Introduction
What is overlapping?
Overlapping can be said to take place when service tax and sales tax are both levied on the same amount.
The issue of overlapping arises because the divisions of taxation power in the Constitution are not watertight compartments. A transaction may have many aspects wherein some aspects fall within the domain of the Central list and other aspects fall in the State list. Taking clue of respective aspects involved in a transaction, the Central/State authority try to levy tax on gross/ higher amount of the transaction, which results in levy of both the taxes – Central and State (i.e., service tax and sales tax) on the same amount. Whether, overlapping is permissible or not is a debatable issue. And the issue can be said to be confusing. There are judgments saying service tax and VAT cannot be levied on the same amount. Reference can be made to the judgment of the Supreme Court in the case of Bharat Sanchar Nigam Ltd. (145 STC 91) (SC) in which the Supreme Court has observed as under:
“88. This does not however allow State to entrench upon the Union list and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of India, (1993) 1 SCC 365;
“The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of materials involved in the execution of the works contract only can be included in the value of the goods.”
89. For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. v. Union of India, (2005) 4 SCC 214, 228:
“This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the Court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field.”
From the above observations of the Supreme Court of India, it appears that though both service tax and VAT can be levied on the same transaction, there should not be overlapping and amount subjected to respective taxes should not exceed more than the total amount of the transaction.
However reference can also be made to the following observations of the Supreme Court in case of Tamil Nadu Kalyana Mandapam Assn. v. Union of India and Others, (135 STC 480) (SC).
“43. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied, does not mean that a service tax cannot be levied on the service aspect of catering. Mr. Mohan Parasaran, learned Senior Counsel for the appellant, submitted that the High Court before applying the aspect theory laid down by this Court in the case of Federation of Hotel & Restaurant Association of India v. Union of India ought to have appreciated that in that matter Article 366(29A)(f) of the Constitution was not considered which is of vital importance to the present matter and that the High Court ought to have differentiated the two matters. In reply, our attention was invited to paragraphs 31 and 32 of the judgment of the High Court in which the service aspect was distinguished from the supply aspect. In our view, reliance placed by the High Court on Federation of Hotel & Restaurant Association of India and, in particular, on the aspect theory is, therefore, apposite and should be upheld by this Court. In view of this, the contention of the appellant on this aspect is not well-founded.
44. It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that service tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter.”
From the above it appears that the respective authorities can levy taxes on gross amount and it will not be a violation of Constitutional provisions. In fact recently the Karnataka High Court has also dealt with the issue of overlapping in the case of M/s. Sasken Communication Technologies Ltd. v. The Deputy Commissioner of Sales Taxes (Aud-52), DVO-5 (W.A. Nos. 90-101/2011, dated 15-4-2011) and fairly observed that the issue is very vexed and should be resolved by the Court on particular facts of the case. The relevant observations are as under:
“30. Wherever legislature powers are distributed between the Union and the States, situations may arise where the two legislative fields might apparently overlap. It is the duty of the Courts, however difficult it may be, to ascertain to what degree and to what extent, the authority can deal with matters falling within these classes of subjects exists in each Legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and, where necessary modified by that of the other.”
From the above observations, it seems that the issue about overlapping will continue to exist till these taxes are merged (like GST) or the Constitution provisions are made absolutely clear.
Whether overlapping affects validity of legislation?
Though overlapping has become an order of day, legislations are held to be valid in spite of overlapping. Reference can be made to the judgment of the Supreme Court in the case of Govind Saran Ganga Saran v. Commissioner of Sales Tax and Others, (60 STC 1) (SC), wherein it is observed that the law to be valid, must fulfil the criteria discussed in the following para of the judgment:
“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”
Therefore when measure of tax is not clear, it can be said that there is bad taxation and it can be challenged as invalid. In relation to levy of service tax and sales tax there are so many transactions in day-to-day practice where the measure of tax is not clearly ascertainable. Examples can be about levy of tax on hotels and restaurants, construction activity, repair and maintenance, works contracts, softwares and many others.
Whether overlapping justified
In light of the above judicial pronouncements a mixed picture emerges. Howsoever, avoiding the overlapping is very much necessary. Due to confusion of overlapping it is seen that the concerned dealers/persons charge both service tax and sales tax on full amount. This not only results in unjustified and undue enrichment to respective Governments, but also increases cost to consumers and ultimately leads to inflation. Though we are hopeful that the implementation of GST will resolve the issue, but such a hope is dimming day by day as the implementation itself is under cloud, getting postponed again and again.
Whatever may be the necessities of collecting taxes, the Government at Centre as well as at State level must ensure that consumers should not suffer. It is bounded duty of respective Governments to avoid menace of double taxation and, therefore, to come out with clear guidelines about taxation position for themselves so the tax is not levied on more than total amount of a transaction. In the circumstances, pending implementation of GST, it is desirable that the issue should be resolved by other legal/administrative measures.
May we expect an early resolution of this overlapping position?
