In India, tax on services is a relatively new phenomenon. The tax has not been imposed on a comprehensive base to cover all services. Instead, a few services have been included in the tax net through the Finance Act 1994, as amended.

There is no specific entry in the constitution to include tax on services in general. But does that imply enough motivation to raise doubts about the parliament's competence to tax services?In the case of `Addition Advertising vs the Union of India', the high court of Gujarat was to decide the validity of tax on commercial advertising services. The petitioner argued that advertising service is a skill of expression. There can be no tax on the freedom of speech and expression guaranteed under Article 19(1) of the constitution. Secondly, confining the levy on commercial advertising and leaving the non-commercial is based on arbitrary and vague classification. It is a tax on profession or calling and would fall under entry 60 of the state list. Alternatively, it is a tax on advertisement falling within the purview of states.

The court did not find any of the arguments sustainable or convincing. In a short judgement of only five pages, it cleared the confusion prevailing in the mind of the petitioner.Take first the specious argument regarding the freedom of expression. In order to understand the true nature of the tax, the court reminded what the Supreme Court had decided in the `Indian Express Newspapers case' (AIR 1986 SC 515). In that case, the apex court had laid down that while there can be no tax on the freedom of expression, tax can by levied on profession, occupation, trade, industry or business. Clearly, therefore, a tax on an activity which may be of expression is not immune from tax. The contention that the meaning of "commercial advertising service" suffered from vagueness was simply dismissed. "Commercial and non-commercial are well known concepts. If the legislature does not want to tax or wants to tax less the non-commercial advertisements, it cannot be said to be held in any manner irrational." The court also clarified the conceptual confusion between a tax on advertisement and a tax on advertising service: "It is a tax on the services rendered with reference to the advertisement...As a result of the advertising services rendered, it results in an advertisement, which can be published and republished and copied." No one wants to pay taxes willingly. Not surprising therefore that another petitioner approached the high court of Chennai on a different aspect of tax on advertising services. Section 67(d) of the act stipulates that the tax shall be payable on the gross amount charged by the advertisement agency from the client for services in relation to advertisement. The government issued a circular to explain the intent and scope of the levy. It was clarified that in relation to newspaper ads, the commission received by the advertising agency from the newspaper is to be included in the value of taxable service.Adwise Advertising of Coimbatore, challenged the legality of this clarification. Reason. The clarification is repugnant to section 67(d). It tends to extend the definition of "value of taxable service" in relation to advertising services. Commission received by an agency from a newspaper is is income. Thus a tax on commission becomes income tax.The petitioner also asserted that in some other cases, like the tax on services rendered by air travel agents, "commission" is specifically included in their taxable value. But it is not so in the case of advertising services. And, therefore, the circular cannot include something in the taxable value, which is not permitted by legislative intention. It was, of course, an admitted fact that the gross charges recovered by the advertising agency included the commission amount as well. The high court interpreted the scope of section 67(d) on its plain meaning. When so done there is no scope for confusion.

"While considering the service tax, the authorities have only to consider what is the amount received by the agency from the client, and how the agency appropriates is not their concern. That is a matter between the publisher and the agency... The taxing authorities are not concerned with the arrangement between the publisher and the agency...Merely because the publisher permits the agent to retain a portion of the gross amount, it cannot be said that it is not in respect of services in relation to the advertisement."And was it apt to compare the definition of "value of taxable service" in other cases as an aid of interpretation? No, said the high court. "When there is a definition of `taxable service' in so far as an advertising agency is concerned, the authorities have to consider only that definition, and not compare with the other provisions of the statute to verify whether there is any contrary intention."Service tax has been imposed at the rate of five per cent. "This cannot be said to be in any manner unreasonable. In fact, it is on the lower side...", observed the Gujarat high court in the case of `Addition Advertising'. Many, however, are not sure if it is not unreasonable to spin the nascent tax in rounds of litigation.

The author is an official in the union ministry of finance.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.