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Clarification w.r.t levy of Service Tax on Restaurants and Hotels

The Hon™ble High Court of Kerala (Kerala HC) in the case of Kerala Classified Hotels and Resorts Association and others Vs. Union of India and others held that levy of Service tax on Restaurants and hotels is beyond legislative competence of Parliament. It was declared that sub-clauses (zzzzv) and (zzzzw) to Section 65(105) of the Finance Act, 1994 (the Finance Act) as amended by the Finance Act, 2011 is beyond the legislative competence of the Parliament as the said sub-clauses are covered by Entry 54 and Entry 62 respectively of the State List in the Seventh Schedule. The Kerala HC also allowed refund of Service tax paid by the Petitioners in the stated case. Being aggressive by the impugned order, the Department filed a Writ Appeal before the Division Bench of the Kerala HC.

The Department placed reliance on the subsequent decision of the Hon™ble High Court of Bombay (Bombay HC) in the case of Indian Hotels and Restaurant Association and others Vs. Union of India and others  wherein the Bombay HC gave contrary judgment denying the decision of the Kerala HC, stated  and upheld the constitutional validity of levy of Service tax on AC Bar Restaurants. It was held by the Bombay HC that:

  • Service tax or tax on a service, which is made taxable by the Finance Act, is a completely distinct tax. It should not be and cannot be equated with a tax on sale or purchase of goods;
  • The Parliament cannot be said to have authority upon the power of the State Legislature to impose a tax on sale or purchase of goods vide Entry 54 of the State List. The power to levy tax by the Parliament contained in the Article 248 of the Constitution of India read with Entry 97 of Union List of the Seventh Schedule of the Constitution enable it to impose a Service tax.

After the Constitution (46th Amendment), the Restaurant activity is deemed as sale of goods and it cannot be said that it is a service. When the said activity is deemed to be a sale of the food and other articles of human consumption, by a constitutional definition, tax on the said activity can be imposed only by the States in view of Entry 54 in State List of the Seventh Schedule.

Since the whole of the consideration received by a Restaurant owner for supply of food and other articles of the human consumption, including the service part of the transaction, is exigible to tax by the State by virtue of the constitutional definition, it is not open to the Union to characterise the same transaction as a service for imposition and levy of Service tax.

Evidently, Section 65(105)(zzzzv) of the Finance Act is a matter enumerated in Entry 54 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter.

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