By Tushar Aggarwal
With the passage of time, different technologies and standards evolve.
Similarly, law cannot stand still; it must change with the changing social
concepts and values [see end note 1].
Tax laws though necessarily enacted in its own time, are nevertheless to be
construed as taking note of the advances in technology.
Entertainment tax in India is being levied for more than a century
now. Levying taxes on different forms of
entertainment was originally a British practice under which taxes were imposed
on disorderly houses using any building or room for public entertainment on
Sundays under a series of Sunday Observance Acts [see end note 2]. In India during
pre-independence era several laws were passed to impose huge taxes on events of
entertainment and amusement. Bengal at that time was the first state to levy a
tax of such kind under Bengal Amusement Act of 1922 following which the Bombay
Entertainment Duty Act was passed in 1923 and soon after many other similar
legislations were introduced in different States. Earlier entertainment tax was
levied on movie tickets, large commercial shows and large private festival
celebrations. In the late 1990s, States
started levying entertainment tax on cable service.
The dispute regarding determination of place of provision of
entertainment to find out the jurisdiction of state which has the power to levy
tax never cropped up as the provider as well the receiver or customer were in
the same State. With the advent and growth of Direct to Home or DTH services in
India, a new way of reaching the homes of consumers has emerged. DTH has
eliminated the role of cable operators who earlier acted as middlemen and took
satellite television to different households.
Most of the States are levying entertainment tax on entertainment through
DTH services. Time and again concerns have been raised pertaining to the
constitutional validity of entertainment tax on DTH services stating that it is
beyond the State’s competence to levy tax on such operations. However, it is a
settled principle now that none of the entries in the Lists in the Seventh
Schedule of the Indian Constitution is to be read in a narrow or restricted
sense and that each general word should be held to extend to all ancillary or
subsidiary matters which can fairly and reasonably be said to be included in
it. The courts have time and again upheld the constitutional validity of
entertainment tax on DTH services [see end note 3].
However, DTH services providers being located in one State and their
customers being spread across the country have raised a red flag on the issue
of determination of the place of entertainment to decide the jurisdiction of
the State which can levy and administer the tax. There is no clarity as to how
to determine the place of entertainment in such cases i.e., will it be the
place where infrastructure is located or the place where the customer is
located or the place where books of accounts are kept.
The Uttar Pradesh Entertainments and Betting Tax Act, 1979 as amended in
year 2009 defines 'place of entertainment' as including a place where the books
of account, pertaining to the entertainment (DTH service), are kept. Does it
mean that the UP Government has the power to impose entertainment tax provided
by DTH operators irrespective of the fact that the subscribers are located
outside the State?
Entry 62 of List II of Seventh Schedule of the Constitution has been used
in the sense of an activity or service namely, the providing of
luxury/entertainment and what could be taxed by the State under that entry
would be entertainment through such service [see end note 4]. Therefore, entertainment
can only be provided by way of a service. Hence, the criteria and the principles for determining the place of
entertainment and the place of supply of services should be same.
For taxation of services, the basic choice between the destination and
origin principles traded between jurisdictions is well known. Having location
of infrastructure or where the books of accounts are maintained as place of
entertainment (origin principle) suffers from two deficiencies. First, it will
not efficiently allocate tax across various jurisdictions and provide revenue
to the States. Second, it will offer tax planning opportunities to DTH service
providers to shift the location of infrastructure or books of accounts to
states having no entertainment tax or lower rate of entertainment tax. However,
this principle achieves consumption efficiency since consumers pay the same
price for any commodity whichever jurisdiction they reside in.
With the increasing “disconnect” between performance and consumption of
services in a territorial sense, the traditional rule for determining the place
of taxation of services by reference to the service provider’s establishment
becomes problematic. Adoption of consumption based principles for determining
the place of entertainment would restore a balanced sharing of tax revenue
among States though this would impose burdensome compliance costs on DTH
In implementing the principle that consumption of services which are not
capable of direct delivery from a remote location should be taxed where
consumption occurs, which is now characterized as the “destination principle,”
the OECD consultation paper adopts as its basic proxy the rule that “the place
of consumption should be deemed to be the jurisdiction where the customer is
located (‘Main Rule’).”With the increasing “disconnect” between performance and
consumption of services in a territorial sense.
Even in EU, from January 2015, all suppliers of goods and services will
be required to account for VAT based on the rates applicable where their
non-business customers are based. In India also, the general rule for
determining the place of provision of services is the location of service
Therefore, determining the place of entertainment in case of DTH services
on the basis of location of customer could be a better alternative which would
ensure consistency in the principles adopted by the State for finding place of entertainment
and the Centre for finding place of provision of service. It is imperative that
all the States must address this issue and must adopt the same principle for
determining their jurisdiction and power.
However, a more effective solution may lie in multilateral coordination
by all the States, not in unilateral efforts by a single State.
[The author is a
Senior Associate, Lakshmikumaran & Sridharan, New Delhi
Textile Worker's Union versus P. R. Ramakrishnan (AIR 1983 S.C. 75)
- Halsburay’s Laws of
England, 4th ed., Vol. 45
- Bharti Telemedia Limited and Ors. vs. The State of
Jharkhand & Ors
- Godfrey Phillips India Ltd. v. State of
Uttar Pradesh, (2005) 139 STC 537 (SC).