Service Tax on Accommodation-Short Life but Enormous Litigation

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Service Tax on Accommodation-Short Life but
Enormous Litigation
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• Introduction
• The constitutional validity of levy of service
  tax on restaurants and short-term accommodation
  has been challenged many times before different
  High Courts. The issue has also travelled upto
  the Supreme Court. Moreover, there are contrary
  opinions of different High Courts on the issue
  which further adds fuel to the fire of
  litigation. The service tax, being Central Law,
  is applicable uniformly throughout India. If
  there are contrary decisions on the
  constitutional validity of statutory provision,
  it puts the hapless assessees in awkward
  position. This is for the reason that it is
  believed that the assessees are bound to follow
  the decisions rendered by their jurisdictional
  High Courts with the consequence that the
  assessees are under delimma whether to continue
  the practice of charging and collecting service
  tax from their customers or to discontinue the
  practice of collecting service tax by adopting
  the favourable ruling of the High Court. This
  article is an attempt to analyze the decision
  rendered recently by the Hon'ble Delhi High Court
  in the case of Federation of Hotels and
  Restaurants Association of India v. Union of
  India 2016 72 taxmann.com 161.

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• Backdrop of erstwhile judicial pronouncements on
  issue
• 3. It is pertinent to mention that prior to the
  recent Delhi High Court's decision, the
  constitutional validity of levy of service tax on
  restaurants and short-term accommodation service
  was raised before the Kerala High Court twice.
  The judgments are briefly summarized as follows
• Union of India v. Kerala Bar Hotels
  Association 2014 48 GST 705/51 taxmann.com 365
  (Ker.)
• 3.1 It was concluded that service tax on
  restaurant levied under section 65(105)(zzzzv) is
  beyond the legislative competence of the Union
  because supply of food and consumables is
  considered as 'deemed sales' and only the State
  Government has exclusive right to impose tax on
  supply of food under Entry 54 in List II of the
  Seventh Schedule.
• It was also held that similarly service tax on
  short-term accommodation service levied under
  section 65(105)(zzzzw) was not within the domain
  of the Union, because Entry 62 of List II of the
  Seventh Schedule empowered States alone to impose
  tax on the activity as luxury tax.
• The above conclusion was arrived at on the
  analogy that service tax on restaurants and
  short-term accommodation is brought by the Union
  by invoking the residuary field of legislation
  contained in Entry 97 of List I of the Seventh
  Schedule. However, it is settled that before
  exclusive legislative competence is claimed for
  the Parliament, by resorting to the residuary
  Entry, the legislative incompetence of the State
  legislature must be clearly established. But, in
  the present case, the Entry Nos. 54 and 62 of
  List II clearly empower the States to impose tax
  on the activities of supply of food and
  accommodation services respectively.
  Consequently, Union cannot invoke residuary
  legislation to impose service tax on the said
  activities which are within the exclusive domain
  of the States.

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• Kerala Classified Hotels and Resorts
  Association v. Union of India 2013 40 STT 253
  (Ker.)
• 3.2 It was concluded in this case also that
  Government of India could not impose any service
  tax on accommodation and restaurant services by
  exercising residuary power under Entry 97 of List
  I of the Constitution of India when States
  expressly have power to impose tax on said
  activities under Entry nos. 62 and 54 of List II
  of the Seventh Schedule.
• However, the Hon'ble Bombay High Court took a
  contrary stand in the case of Indian Hotels and
  Restaurant Association v. Union of India Writ
  Petition No. 2159 of 2011, dated
  8-4-2014 wherein it was held as follows
• It was concluded that service tax on restaurants
  under section 65(105)(zzzzv) is a distinct tax
  which cannot be equated with tax on sale or
  purchase of goods and the Parliament is fully
  competent to impose a tax on a service under
  Article 248 of the Constitution of India, read
  with Entry 97 of List I of Seventh Schedule. The
  High Court denied the contention that by imposing
  service tax on supply of goods in restaurants,
  the Parliament has encroached on power of the
  State Legislature to impose tax on sale or
  purchase of goods under Entry 54 List II. It is
  worth noting here that the Special Leave Petition
  in this case has been admitted by the Supreme
  Court and the matter is pending in the Apex
  Court.

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