The conclusions of the Report of the Task Force on the Implementation of Fiscal Responsibility and Budget Act, 2003 are varied. I am only considering the ones on customs, excise, value added tax and service tax.
The net conclusions are so impressive, so full of unexceptional ideals of neutrality, vertical and horizontal equity and so on and they exhort us to emulate best international practices so much that it is no wonder that the report received rave reviews at the first reading from all the leading economic newspapers.
But there are some conceptual flaws that are so fundamental that it will ultimately amount to having no more than what we already have.
First, let me give an exposition of the report. It begins with the 88th Amendment of the Constitution on service tax, which has inserted the entry 92C for service tax in the Union List.
The amendment also inserted Article 268A, which empowers the Union to levy, collect and appropriate service tax whereas the states can only collect and appropriate the proceeds.
This amendment has made the earlier taxing power "more explicit", the report says. But the report concludes as a corollary to this amendment that "the central government now has the power to levy tax on a tax base comprehensively extending over all goods and services and going upto the final consumer". Even the states will levy the same type of tax on goods and services.
The total tax burden on most goods by the Centre and states will be 20 per cent, which is not high, the report says. It proposes a "Grand Bargain whereby States will have the power to tax all services concurrently with the Centre.
Consequently both central and state government will exercise concurrent but independent jurisdiction over common or almost common tax bases extending over all goods and services, and in both cases going upto the final consumer."
This structure looks slick but unfortunately there are conceptual flaws that make the edifice an illusion.
If the power to tax is not concurrent in the Constitution, how do the Centre and states go about levying the tax concurrently? Excise and service taxes are in the Union List. Sales tax is in the State List. There is nothing in the Concurrent List.
On page 6 the report says, "States will have the power to tax all services concurrently with the Centre." This is unconstitutional. In the new, 88th Amendment, the power to levy service tax is only with the Centre. There is no concurrent power. Concurrent power can be given by an explicit provision in the Concurrent List, List III, and not by a mere interpretation.
The power to levy service tax always existed under entry 97 in the Union List under which service tax was being imposed in 1994. Even the Supreme Court has repeatedly confirmed in many cases, particularly in the cases of Empire Industries [1985 (20) ELT 179 (SC)] and Ujagar Prints [1988 (38) ELT 535 (SC)] that entry 97 of List 1, being the residual entry, is the enabling authorisation for levy if not covered under entry 84.
This also applies to service tax under which all service taxes were being levied all along. The power of collection and appropriation also existed earlier, (as in the case of central sales tax,) which has now been explicitly placed in Article 268A. There is nothing new that has happened now due to this 88th Amendment.
But the report has claimed (page 6) that "the 88th amendment has carried these powers forward to extend to all services". It is wrong to say the 88th amendment has carried forward the power of taxation. It has only made explicit the power of taxing services, which was there in the residuary power enshrined in entry 97 of the Union list.
The claim that the 88th Amendment has given the power to tax services "including the services of trading and retailing the goods" is without any basis. The amendment only gives the power to tax services. It doesn't give any power to tax any service like trading or retailing, specifically or separately.
The activities of trading or retailing can be charged to service tax only if they are a service at all. The report has only assumed that trading is a service. It has never proved it. It probably assumed that it is axiomatic.
It has gone only so far as to say that "...the post manufacturing value addition, hitherto exempt from Union excise duties can now be subject to service tax" (page 58). The fact is that dealing in goods and adding value is not a service at all. Herein lies the fundamental error in the whole argument. Nothing can be charged to service tax unless it is a service. That trading and retailing are not services is proved by the following:
The taxable event in the case of a dealer's activity is the act of sale. It creates value by sale. So the taxable event being the act of sale, it is only sales tax that is applicable. In a landmark judgement by the Supreme Court on a reference by the President in May 1963 [Sea Customs Act m1878, reported in 1963 AIR SC 1760], the Supreme Court has clarified, "Though excise duty and sales tax are levied with reference to goods, the two are very different imposts.
In one case the imposition is on the act of manufacture while in the other it is on the act of sale". So it is clear from this judgement, which has been agreed to by dozens of judgements by the Supreme Court in the past four decades, that the taxable event being sale of goods, it is only sales tax that can be imposed, not service tax. The expression "services of trading and retailing of goods" occurring in the second paragraph of page 6 is wholly incorrect and conceptually wrong.
In the CSO National Accounts Statistics trade is classified under the tertiary sector since it cannot be classified under primary or secondary sectors. But merely being in the tertiary sector does not make it a service. When the CSO gives the list of potentially taxable services, it does not talk of trade.
If trade can be charged with service tax, then why do we need VAT? It becomes redundant. The report wants to keep VAT as well (page 55). This is inexplicable.
Trading is dealing with goods and not services. So it cannot be a service for tax.
The report comes to the most astounding conclusion that "the central government now has the power to tax sale of both goods and services" (5.3.4). This means even the power of charging sales tax is with the Union. This power is in entry 54 of List II, the state list. How sales tax can now come to the Union is inexplicable. It can only do so if it is put in the Concurrent list. But that has not been done so far.
The conclusion is that we can only have a tax structure that the Constitution permits. And the Constitution permits the Centre to levy central excise (which, with input credit, becomes CENVAT) and service tax. And with cross input credit (between goods and services), it can become goods and service tax.
For the states it permits sales tax on dealers up to the final consumer (which, with input credit, becomes VAT). The Centre can also authorise states to collect and appropriate some service taxes but the Centre has to levy it. That is all that can be permitted under the present Constitution.
Taxation is not pure economics. It has to be legal, too.
The writer is former member, Central Board of Excise and CustomsPowered by 
