Supreme Court Validates Simultaneous Levy of Entertainment Tax and Service Tax: Deciphering the Ramifications

Introduction

In a recent decision¹ the Supreme Court of India had an occasion to address a long pending controversy arising on account of the challenge raised by the taxpayers to levy of entertainment taxes by the States on certain activities carried out by them which qualified as services and on which they had duly discharged service tax. The moot point was whether two distinct taxes could be levied simultaneously on the very same activity. Exploring the labyrinths of the constitutional stipulations and the historic judicial doctrines, the Supreme Court has validated the multiple levies notwithstanding their simultaneous application. This article explores the issues addressed by the Supreme Court, its decision and the consequences thereon in the immediate context of the decision and the larger constitutional and fiscal dimensions distinctively.

Dispute before the Supreme Court

The decision of the Supreme Court has been pronounced in State of Kerala v. Asianet Satellite Communications Ltd.² which was occasioned in view of a large number of appeals arising from the judgments of the High Courts of Allahabad, Delhi³, Gauhati, Gujarat, Jharkhand, Kerala⁴, Madras, Orissa⁵, Punjab & Haryana, Rajasthan and Uttarakhand⁶,⁷ besides two writ petitions filed directly before the Supreme Court under Article 32⁸ of the Constitution. In essence, the dispute was challenge to validity of the taxes levied by various States under their respective entertainment tax legislations on the activity —— popularly known as direct-to-home (DTH) —— involving broadcasting of signals, etc. through television channels to the subscribers of those channels. These legislations⁹ traced the States’ empowerment to levy “taxes on luxuries, including taxes on entertainments, amusements, betting and gambling” under Entry 62 of the State List of Schedule 7 of the Constitution¹⁰.

The key premise of the challenge was that the DTH activity was subjected to levy of service tax under the Finance Act, 1994¹¹ enacted by the Parliament and, hence, it was argued by the DTH service providers that the levy of entertainment tax was unconstitutional, the tax being beyond the legislative competence of the States.¹² Defending the levy, the embedded entertainment in the DTH services was pressed upon by the States to justify their competence qua taxes on entertainment exclusively reserved for them under the Constitution.

Decision of the Supreme Court

Rejecting the challenge mounted by the taxpayers, the Supreme Court affirmed the States’ competence to levy entertainment tax on DTH services notwithstanding the existing levy of service tax on such services. The key findings of the Supreme Court can be summarised as under:

(i) Generic meaning of entertainment encompasses a wide range of activities: It has been impressed upon by the Supreme Court that in common understanding, entertainment subsumes any exhibition, performance, game, sport and any other form of amusement to which persons are ordinarily admitted on payment;¹³ and, that it subsumes within its scope any amusement, diversion, distraction, recreation, fun, play, good time, pass time, novelty, pleasure, enjoyment and satisfaction,¹⁴ etc. Furthermore, the Supreme Court has given its imprimatur to the scope of entertainment taxes which has been judicially construed as “wide enough to comprehend in it, the luxury or comfort with which a person entertains himself. It includes viewing a cinema film inside a driving theatre along with a car/motor vehicle”.¹⁵ Thus, the decision casts a wide leeway available to the States to levy entertainment taxes.

(ii) Implications arise from association with “luxury” which has wide connotations: In addition to the aforesaid, the decision of the Supreme Court further underscores that the expressions “entertainment” and “amusement” need to be additionally appreciated in the wake of meaning of “luxury”, given that inter alia Entry 62 of the State List bundled them together with “luxury”. This is a critical aspect perspective because the expression “luxury” “is not limited to things tangible and corporeal but the entry encompasses all the manifestations and emanations which comprehend the elements of extravagance and indulgence that differentiates luxury from necessity”.¹⁶ The immediate consequence of such a meaning of luxury is that “[a]n expenditure on something which is in excess of what is required for economic and personal well-being would be expenditure on luxury although the expenditure is of a nature which is incurred by a large number of people, including those not economically well off”.¹⁷

(iii) Scope of “entertainment” has to be contextualised in light of contemporary technological environment: The Supreme Court has further opined that the settled judicial trend has been to give to “entertainments” a meaning which is “broad and wide manner”, which meaning does not restrict to entertainment a public place. As a consequence, in this decision¹⁸, the Supreme Court has concluded that the advancement in technology must be duly factored. To this end, the expanded contemporary extent of entertainment has been picturised by the Supreme Court in the following terms:

8.21. … With the advancement of technology, there can be entertainment provided within the private space or the household also by means of television or other electronic gadgets as well as in a motor vehicle. The growth of technology is such that there is now entertainment available even on a mobile phone (cell phone or even on a smart watch). Thus, the expression “entertainments” cannot be interpreted in a narrow, pedantic or in a myopic way. With the advancement in technology, there can be several modes in which the activity of entertainment can be provided or received. However, what is essential is the object of providing or receiving signals, etc….¹⁹

(iv) The expression “amusement” has its own distinct play: The Supreme Court has also given due credence to the fact that “entertainment” is not the lone expression defining the legislative space and the parallelly employed expression “amusement” maintains an equally importance identity therein. To this end, the decision defines “amusement” to “mean diversion, pass time or enjoyment or a pleasurable occupation of the senses or that which furnished it”.²⁰ This aspect further expands the scope of entertainment taxes.

(v) The fact that regulation of broadcasting and communication is reserved for the Union does not get in the way of the States taxing entertainment and amusements aspects of such broadcasting and communication: The Supreme Court took pain to make a detailed elocution whereby it de-hyphenated the power of the Union under the Constitution to regulate broadcasting and communication²¹ from the taxation powers of the States by assigning eleven distinct reasons derived from the text and semantics of the scope of their respective legislative competences.²² In particular, the Supreme Court has concluded “that broadcasting is a form of communication and entertainment is a species of luxuries” and therefore in a sense these they are only modes i.e. “broadcasting and communication is for the purpose of the entertainment”.²³ By doing so, the Supreme Court has maintained a long-standing practice to perceive and effectuate regulatory and fiscal spaces distinctively.

(vi) Applying the aspect theory, furthermore, the Supreme Court has held that: “the taxable event which forms the basis of the levy under the Central and the State enactments corresponds to different aspects of the activity under consideration”²⁴ and thus, levy of both service tax (on the aspect of service in broadcasting) and entertainment tax (on the aspect of entertainment in the broadcasting) is simultaneously permissible.²⁵

For these key considerations and many additional reasons to supplement its conclusion, the Supreme Court has approved the State legislations levying entertainment taxes on DTH services.

Principles of constitutional law and interpretation emanating from the decision

To address this long-pending controversy with disputes from across the country having already received the consideration of multiple High Courts, the Supreme Court inter alia sketched various aspects of the constitutional scheme which have been adverted in detail in the decision. Each of these are crucial guidance on interpretation of multiple constitutional provisions and doctrines. For ease of reference, these aspects can inter alia be culled out under suitable headings in the following terms:

(i) Constitutional scheme qua distribution of legislative powers inter se between the Parliament and the States

(a) Inspiration: The incumbent constitutional scheme is inspired by the pre-independence constitutional arrangement:

8. … the Devolution Rules drawn under the Government of India Act, 1919²⁶ and thereafter the Government of India Act, 1935²⁷ are the precursors to the distribution of legislative powers between the Union and the States.²⁸

(b) Scheme: The scheme of distribution of legislative powers is addressed by Article 246²⁹ and Seventh Schedule of the Constitution which contains:

8. … three Lists, namely, the Union List, the State List and the Concurrent List. The taxing powers of the Union as well as the States are also demarcated as separate entries in the Union List as well as the State List i.e. Lists I and II respectively. The entries in the Lists are fields of legislative powers conferred under Article 246 of the Constitution.³⁰

The Constitution has divided the topics of legislation into the following three broad categories: (i) Entries enabling laws to be made; (ii) Entries enabling taxes to be imposed; and (iii) Entries enabling fees and stamp duties to be collected.³¹

(c) Relevance of legislative competence: The sequitur of the aforesaid scheme of distribution of legislative subjects is that both, the Parliament and the State Legislatures, are constitutionally injuncted from enacting laws outside their respective subjects:

8.2.8. … if the legislature passes a law which is beyond its legislative competence, it is a nullity ab initio. The legislation is rendered null and void for want of jurisdiction or legislative competence.³²

(ii) Rules governing interpretation of Schedule 7 qua distribution of legislative powers inter se between the Parliament and the States

(a) Expansive construction of legislative fields: The three Lists of the Schedule 7 contain various entries, each of which, in turn, contain distinct legislative subject(/s).

8.2.1. … While interpreting these entries, they should not be viewed in a narrow or myopic manner but by giving the widest scope to their meaning, particularly, when the vires of a provision of a statue is assailed. In such circumstances, a liberal construction must be given to the entry by looking at the substance of the legislation and not its mere form.³³

(b) Harmonisation as first means to resolve conflict amongst entries; doctrine of “pith and substance”: In has been stressed by the Supreme Court that in view of the extensive coverage of the various legislative subjects across different entries, there are bound to be overlaps and conflicts amongst them. The courts are enjoined to ensure that these conflicts are resolved through an attempt to harmonise the conjoint reading of the entries. Where there arise:

8.2.2. … apparent conflict between the entries in the Lists, every attempt must be made by the Court to harmonise or reconcile them. Where there is an apparent overlapping between two entries, the doctrine of pith and substance is applied to find out the true character of the enactment and the entry within which it would fall.³⁴

(c) Where conflict cannot be reconciled, States’ legislative power shall yield to the Parliament: It has been unequivocally concluded that under the constitutional scheme the doctrine of parliamentary supremacy prevails;³⁵ “[i]n case of any conflict between entries in Lists I and II, the power of Parliament to legislate under List I will supersede when, on an interpretation, the two powers cannot be reconciled”.³⁶ This legal position, however, arises, subject to the following test:

8.2.5. Where one entry is made “subject to” another entry, all that it means is that out of the scope of the former entry, a field of legislation covered by the latter entry has been reserved to be specially dealt with by the appropriate legislature. Also, when one entry is general and another specific, the latter will exclude the former on a subject of legislation.³⁷

(d) Each legislative subject subsumes incidental aspects as well: Once a legislative subject is concluded to vest in a particular legislature (i.e. either the Union Parliament or the State Legislatures) the scope of such subject “would also extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in that topic or category of legislation”.³⁸ Having said that, it must be unflinchingly acknowledged that:

8.2.15. … power to tax is not an incidental power. Although legislative power includes incidental and subsidiary power under a particular entry dealing with a particular subject, the power to impose a tax is not such a power which could be implied under our Constitution.³⁹

(iii) Aspect theory as means to expound respective scope of legislative powers: In deciding the lis, the Supreme Court decision also takes recourse to “aspect” theory which is employed as “a tool of constitutional interpretation used in Canada to resolve issues which arise when both the Federal and the Provincial Governments have the right to legislate on a subject-matter”.⁴⁰ The decision summarises the following principles qua application of aspect theory in the Indian context:⁴¹

(i) in interpreting expressions in the Legislative Lists of the Seventh Schedule of the Constitution, a wide meaning should be given to the entries;

(ii) in the scheme of the Lists in the Schedule 7, there exists a clear distinction between the general subjects of legislation and heads of taxation. They are separately enumerated;

(iii) as the fields of taxation are to be found clearly enumerated in Lists I and II, there can be no overlapping in law. There may be overlapping in fact, but there can be no overlapping in law;

(iv) in the first instance, the pith and substance or true nature and character of the legislation must be determined with reference to the legislative subject-matter and the charging section;

(v) the measure of tax is not a true test of the nature of tax; and

(vi) the same transaction may involve two or more taxable events in its different aspects. Merely because the aspects overlap, such overlapping does not detract from the distinctiveness of the aspects.

Furthermore, besides enumerating these tests explaining its application and contours, the decision declares that aspect theory with a distinct Indian version (as contrasted from its Canadian comparable)⁴² is now firmly ingrained in the constitutional scheme and judicial philosophy to address challenges to legislative competence of the Union and the States.

(iv) Scheme of taxation powers under the Constitution:

(a) Revenue collection as underlying foundation of taxation laws: Having traced that the legislative subjects in Schedule 7 can broadly be divided into the legislature’s power to regulate and control versus the power to tax, the Supreme Court concluded that there is a significant distinction between their respective primary purposes:

8.2.16. … The primary purpose of taxation is to collect revenue. Power to tax may be exercised for regulating an industry, commerce or any other activity. The purpose of levying such tax is the exercise of sovereign power for effectuating regulation although incidentally, the levy may contribute to the revenue.⁴³

(b) Taxation powers are dehyphenated from other legislative powers: Taxation is considered as a distinct matter for purposes of legislative competence. Hence, an entry comprising general or regulatory legislative subject is not determinative of the legislative competence to levy a tax. For illustration, “Entry 22 in List I is ‘railways’, and Entry 89 is ‘terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights’. If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions ‘trade and commerce with foreign countries; import and export across Customs frontiers’. If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is ‘duties of customs including export duties’ would be wholly redundant. Entries 43 and 44 relate to incorporation, regulation and winding up of corporations. Entry 85 provides separately for corporation tax.”⁴⁴ Thus, there is enough constitutional guidance to differentiate between the regulatory and taxation powers and delineate their respective contours qua the identified subjects.

(c) Taxation powers are distinctly provided: The scheme of distribution of legislative subjects in Schedule 7 is distinctively followed even for the taxation powers of the Union and the States. “The legislative power to impose a tax or impost can be traced to either List I —— Union List or List II —— State List. List III —— Concurrent List which gives powers to both Union as well as the States to legislate on a subject does not contain any taxation entry.”⁴⁵ Furthermore, because “the entries on levy of taxes are specifically mentioned”, what follows is that “the taxing power can be derived only from a specific taxing entry in an appropriate List”.⁴⁶ In other words:

8.2.14. … there is nothing like an implied power to tax. The source of power to legislate on a subject which does not specifically speak of taxation cannot be so interpretated by expanding its width as to include therein the power to tax, by implication or by necessary inference.⁴⁷

(d) Residuary taxation powers are vested in the Union; only if States are not competent: In terms of Entry 97 of List I of Schedule 7, read with Article 248⁴⁸ of the Constitution, the Parliament is the repository of those taxation subjects which are not specifically enlisted in the Schedule 7. However:

8.4. … before approaching Entry 97, List I which is a residuary entry in the Union List (List I) it would be necessary to first interpret the relevant taxation entry in the State List and it is only in the absence of there being legislative competence in the relevant taxation entry in the State List could such a power be traced to Entry 97, List I in the residuary list provided such a power is not also traceable to any entry in the Union List.⁴⁹

In short, the decision carries rich elocution for those interested in exploring the labyrinths of constitutional scheme qua the legislative powers of the Union and the States.

Enlisting the ramifications of the decision

There are ramifications far and wide of this decision, both for the past and future. Some of these key aspects are enumerated below.

(i) Revival and enforcement of past dues:

As an immediate consequence, tax and interest obligations (and possibly penal consequences) arise for the past. Given the settled law that decisions of the courts are retrospective and because the decision does not give prospective effect to its decision,⁵⁰ it is clear that the decision vindicates the levy of entertainment taxes in the past. Thus, barring a further judicial challenge, the taxpayers concerned will immediately come under scrutiny of the respective State tax authorities who are likely to insist on clearance of the past dues. In view of the experience of the functioning of these authorities, it is, furthermore, likely that the authorities may additionally demand interest for the delayed payment of the tax liabilities under the entertainment tax legislations and also pursue enforcement action for failure to comply with other obligations under these laws.

(ii) The GST quandary!

At a larger level, there are wide ramifications of the decisions especially qua goods and services tax (GST) regime. This is because of the peculiarity of the relationship between entertainment tax as a legislative subject with GST. In order to appreciate this, some bit of background is needed. The Constitution of India was amended by the Constitution (One Hundred and First Amendment) Act, 2016⁵¹ to usher GST. Many existing indirect taxes were subsumed in GST. For illustration, taxes on betting and gambling, luxury taxes, etc. which existed in earlier Entry 62 of State List were omitted upon the introduction of GST, thereby subsuming them within the scope of GST. Thus, after the 2016 Amendment there is no legislative subject available to the States to levy taxes such as betting and gambling taxes, luxury taxes, etc. The position is not the same for entertainment taxes.

Unlike other taxes, the legislative subject of entertainment taxes was not omitted and instead only modified. Prior to the 2016 Amendment, the legislative subject vested in the States under Entry 62 read “taxes on luxuries, including taxes on entertainments, amusements, betting and gambling”. After the amendment, the entry provides for “taxes on entertainment and amusements to the extent levied and collected by a panchayat or a municipality or a Regional Council or a District Council”. Thus, instead of omitting the subject of taxes on entertainment and amusements from the constitutional paradigm, the 2016 Amendment has only redrawn the competence boundaries; earlier the taxes could be levied by the States, post amendment they can be levied by the panchayat, municipality, Regional Council and District Council. Each of these institutions operate at the grassroot democratic levels. The panchayats and municipalities operate at regional level across the country, drawing their competence to inter alia levy taxes from Parts IX and IX-A of the Constitution respectively whereas Regional Councils and District Councils serve similar functions predominately for the tribal and other notified areas under Schedule 6 of the Constitution. The details of their respective functioning are not relevant for the present context. However, what is crucial is that being empowered under the 2016 Amendment, technically each of these panchayat, municipality, Regional Council and District Council can design their own rules and regulations to effectuate the levy of taxes on entertainment and amusements. Differently put, the 2016 Amendment has decentralised the taxing rights over entertainment and amusements from the States to the local authorities, in the process, thereby, exposing the taxpayers to wriggle through differences in the laws, regulations and procedures of these authorities. Thus, with the Supreme Court upholding the validity and remit of entertainment taxes, the taxpayers must prepare themselves for the levy of these taxes in the GST landscape through a maze of criss-cross regulations across the local authorities.

In addition to the above fact that the decision will embolden the local authorities to progressively frame regulations for levy of entertainment taxes, there is a wider aspect arising from the fine print of the decision. The Supreme Court has substantially expanded the scope of entertainment by linking it with the contemporary technological standards. In particular, the Supreme Court has held that entertainment can indeed be caused “within the private space”. Thus, the concept of “access to entertainment”, which has traditionally been the defining trait for levy of entertainment tax (and by implication, also its limitation) has virtually been obviated by the Supreme Court as being irrelevant for the levy. In fact, which aspect is likely to serve as fertile imagination for the local authorities, the Supreme Court has itself concluded that entertainment is “available even on a mobile phone (cell phone or even on a smart watch)”. It is anyone’s guess whether this affirmation implies that mobile phones, smart watch would now be brought within the scope of their entertainment tax laws by the respective local authorities. This crucial aspect is likely to give birth to complex tax issues arising from interfacing of technology and entertainment tax legislations. The States are likely to closely study, and possibly mirror, the wide scope of entertainment vividly set out by the Supreme Court in contemplating the formulation of future entertainment tax legislations to the benefit of their local authorities. In any case, this consequence defeats the idea of one-nation-one-tax, as GST is characterised to be. Though it is a complex, more colloquial and less legal aspect, but surely these implications of the decision intermixed in the light of the legal position post 2016 Amendment is likely to affect the economics of both businesses and consumers.

(iii) Simultaneous levy upheld: Implications thereon

It is not for the first time that the Supreme Court has upheld simultaneous levy of taxes on the same activity. There are judicial precedents abound, especially those which cite the aspect theory to justify multiple taxes highlighting existence of different aspects therein. For illustration, in the context of service tax itself, simultaneous levy of professional tax (on the aspect of exercise of profession) was not found to come in the way of upholding the levy of service tax (highlighting the service aspect therein) on professional activity.⁵² Having said that, the instant decision carries implications in the larger context of exercise of taxation powers by the Union and the States.

Let us take a few illustrations to appreciate the aforesaid complexion: (a) A contemporary development is the recent vindication of States’ rights to levy taxes on mineral rights and taxes on land and building⁵³ whereas levy of GST also extends to various aspects of immovable property transactions.⁵⁴ (b) As another illustration, which is a challenge to the pre-GST reflection of the Union’s levy of service tax on renting of immovable property, this decision is likely to have a bearing on the challenge which is pedestaled on the fact that the tax on land is exclusively within the remit of the States.⁵⁵ (c) The validity of levies relating to those in entertainment industry, such as the cess levied under the Karnataka Cine and Cultural Activists (Welfare) Act, 2024⁵⁶, etc. is also likely to be examined in the light of this decision. In all such cases, the aspect theory, which effectively permits dual taxation on the premise that there can be multiple aspects in a single activity —— all of which aspects can be distinctively brought to tax, is —— are likely to sway the appreciation of these disputes. This premise appears to be the natural conclusion emanating from the approach of the Supreme Court in so far as its decision approves the levy of entertainment tax (by inter alia invoking the aspect theory) and holds that DTH services also have an aspect of entertainment (besides the services) which can be distinctively subjected to entertainment tax.

At a larger level, it may not be a speculation but a hard reality that the aspect theory approving simultaneous taxes is weighed in by the Union and the Staes to levy taxes on various activities and transactions despite these activities being already subject to GST. To exemplify this aspect, the contemporary constitutional landscape permits levy of various taxes, such as, terminal taxes on goods or passengers,⁵⁷ consignment taxes,⁵⁸ road taxes on goods and passengers,⁵⁹ animal taxes,⁶⁰ etc. just to name a few fiscal subjects, which may have an overlapping aspect with GST as a tax on supply or other taxes. Thus, the decision in the larger context, illustrates the width of constitutional options available to the Union and the States to shore up revenues by additional meals, the plight of the citizens on account of the cascading effect and high incidence of these taxes notwithstanding. This is besides the fact that multiple additional levies in form of cesses and surcharges are already in vogue as a means to supplement the collection from existing taxes.

Conclusion

At the outset, it must be appreciated that the decision carries rich fodder for students of constitutional law insofar as it elaborates upon various salient and predominant constitutional law theories and doctrines. In the immediate context, the decision settles a long pending dispute qua the correctness of the entertainment tax levy. In addressing the dispute, the principles invoked by the Supreme Court have revisited various key principles, which are relevant not just from context of the dispute per se but which also have their implications far and wide on the other pending challenges, such as the illustrations discussed earlier.

One may be compelled to say that from a constitutional standpoint the decision reflects the correct legal position given that the tenets invoked and reasons assigned are firmly instilled in the constitutional doctrines and are guided by past precedents on the subject. While the jury is still out on the likely inspiration this decision will serve for future entertainment tax legislations, the decision certainly adds to the misery of the taxpayers and the citizens who are burdened by high tax incidence arising from the simultaneous application of multiple taxes on same transactions, thereby echoing the musing of the Supreme Court that “bad economics may be good law and vice versa”.⁶¹