The Hindu Business Line : `Milestone of a judgement'

On March 2, the apex court ruled that that the imposition of sales tax on any facilities of the telecom services is untenable in law because such services are not goods. The case was Bharat Sanchar Nigam Ltd (BSNL) vs Union of India. To know how professionals view the judgment, eWorld sent out five questions to experts. Part 1 of Case Sensitive in eWorld dated March 27 carried their responses regarding the Immediate implications and the Logic overflow. Here is the rest of the response.

Challenges ahead

Were the States to challenge the verdict, what grounds may be open to them? "There is no scope for the States to challenge, whereas the assessees may have to seek a review on only one aspect: the SIM card," writes N. Venkataraman. He anticipates that the Sales Tax authorities may wish to tax the prepaid SIM card on its entire value. "A debate on this subject needs to be avoided as the industry is moving more towards prepaid cards and recharge voucher coupons," he prays. SIM cards only facilitate an advance payment to secure the services for the specified value and duration and there is no sale of goods involved, argues Venkataraman. "A SIM card is similar to an air-ticket or a train ticket or a cinema ticket. It is personalised so as to contain the details of that person. An air-ticket/train ticket/cinema ticket entitles that service to such a person. A SIM card or a recharge coupon entitles a customer to receive telecom service."

Porus F. Kaka

Porus F. Kaka thinks it will be extremely difficult to re-adjudicate this issue on current legal positions. Dr Sanjiv Agarwal concurs: "Once we have Apex court's verdict now, it may be extremely difficult for the States to challenge it."

As far as the State governments are concerned, all is not lost, says S. Murugappan. "The judgment has not ruled out levy of sales tax on sale of SIM cards. It has observed that the sales tax liability is to be decided on the facts of each case. Therefore, depending upon the terms of the service connection and the providing of SIM card, the states may have to decide the sales tax liability." As per the judgment it is clear that activation charges cannot be subjected to sales tax, he adds. "But the same is not the case with SIM card. States have to decide this based on facts of each case. This can give enough room for state governments to interpret and demand sales tax. As a consequence, there is scope for another round of litigation."

S. Murugappan

There's more on SIM card from Murugappan. "Supply of the `card' is for using the `service' and in that context, it can be stated that such sale is incidental. On the same basis, a handset or a telephone instrument also will be incidental for availing telephone service." He anticipates that on what is `incidental' the states may seek review of, or clarifications on, the judgment. "Ultimately, it will depend on the facts of each case and any attempt at a division of the amount towards cost of service and cost of goods (based on the intention of parties) can create difficulties and be dubbed as artificial."

The road to GST

N. Venkataraman

Will the judgment be relevant when we move on to GST regime by the end of the decade, as stated by the Finance Minister in his recent Budget Speech? "The judgment is a milestone because it demarcates the powers of the Union and States to impose and collect taxes within their domain," says Venkataraman. More disputes are likely to arise in this area, especially when services are traded for ultimate consumption by the receiver of the service through supply and distribution chains, he expects. "However, with the advent of GST, a debate on this distinction will vanish since every activity whether sale or service would suffer one tax and at one common rate," he adds. Kaka emphasises that today the judgement is extremely relevant, with its focus on the dominant theory of the transaction. "Once a general GST is introduced, at the same rate, for both goods and services, then perhaps more procedural rather than a classificatory issues may arise. If tax is payable either as a good or service at the same rate, then really the main issue of chargeability (specially if the GST covers all goods and services) may not become so contentious. However, the right and power to tax and division of revenue, between the Union and the States, may continue to be an issue." According to Agarwal, the BSNL judgment would be taken care of in the GST regime when there would be a common tax on goods and services. "The problem of tax or no tax would arise only when part of it will be taxed and part of it exempt. For example, services to diplomatic missions may be exempt from levy of tax but sales tax may be applicable subject to conditions. GST regime would have to take care that either full transaction is taxable or exempt." Murugappan draws attention to how the judgment on hand hinges on the fine distinction between `goods' and `services'. "Same transaction may involve two or more taxable events in different aspects and there can be overlapping too. Therefore, if we move on to a GST regime, then the distinction now sought to be made, will not be relevant."

The worldview

Dr Sanjiv Agarwal

How are telecom services taxed in other countries? "Wherever there is GST, it suffers a single tax," writes Venkataraman. "World over, there is a common tax either in the form of GST or VAT," writes Agarwal. "There is no choice of exemptions or taxability. When everything is subject to tax, there is no room for any interpretation or escape. The entire amount charged from the subscriber or consumer is taxed at a common rate and there is no difference between goods and services." Murugappan informs that SIM cards and prepaid cards are charged to sales tax in the US. "Countries such as Spain and Italy charge sales tax on SIM cards. Last year, Bangladesh introduced tax on sale of SIM card much to the annoyance of telecom service providers," he adds. "In fact, in the US, for the telecom service itself there is a federal excise tax of 3 per cent. Apart from this, states can levy the state and local taxes under GST provisions. New Zealand and Australia charge taxes on telecom goods and services under GST," writes Murugappan.

Three parties

Venkataraman highlights that the dispute had three parties, viz. the States arguing for sales tax, the operators arguing that they are liable only to service tax, and the Union supporting the operators by arguing that there was liability only to service tax and not sales tax. "The tax liability was estimated to be around Rs 8,500 crore and the industry had to run through this process for nearly five to six years. The case is a clear example of lack of will and coordination between States and the Union, with the operators having to suffer for the same."

Instead, the issue could have been resolved between the Governments, opines Venkataraman. "A classic case where legislative and executive prudence ran exactly counter to the commercial exigencies of the industry and the apex court was made to sit and resolve the controversy over a period of four weeks," he rues. An instructive case.

Cases@TheHindu.co.in

Concluded

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