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Service tax on restaurants & accommodation struck down

12th July, 2013

The Kerala High Court has, on 3-7-2013, struck down the levy of service tax on restaurants and on service of providing short term accommodation. It was held that the levy is beyond the legislative competence of the Indian Parliament, as the sub-clauses (zzzzv) and (zzzzw) to Clause 105 of Section 65 of the Finance Act, 1994 as amended by the Finance Act 2011 are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule of the Constitution which are within the exclusive competence of the State Legislature.

State alone empowered to tax service involved in deemed sale

In respect of services provided by restaurants, the court held that when food or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale. It was noted that the transfer is during the course of a service and when the deeming provision in Article 366(29-A) permits State Governments to impose a tax on such transfer, there cannot be a different component of service which could be imposed with service tax using the residuary power vested with the Central Government under Entry 97 of List I of the Constitution of India.

According the court, State Government alone will have the legislative competence to enact law imposing tax on the service element forming part of sale of goods as well.

Short-term accommodation is luxury

On the validity of service tax levy on short-term accommodation, the court while relying on the definition of luxury as explained by the Supreme Court in Godfrey Philips, held that service tax levy trenches upon the legislative function of the State under Entry 62 of List II. It was noted that the State Legislature had enacted the Kerala Tax on Luxuries Act by exercising its legislative power under Entry 62 of List II.

Applicability of order post-negative list

The effect of this judgment rendered in the case of Kerala Classified Hotels and Resorts Association, on such services provided in the post negative list regime (after 1st July, 2012), remains to be seen.
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