With the passage of time, different technologies and standards evolve. Similarly, law cannot stand still; it must change with the changing social concepts and values [see end note 1]. Tax laws though necessarily enacted in its own time, are nevertheless to be construed as taking note of the advances in technology.
Entertainment tax in India is being levied for more than a century now. Levying taxes on different forms of entertainment was originally a British practice under which taxes were imposed on disorderly houses using any building or room for public entertainment on Sundays under a series of Sunday Observance Acts [see end note 2]. In India during pre-independence era several laws were passed to impose huge taxes on events of entertainment and amusement. Bengal at that time was the first state to levy a tax of such kind under Bengal Amusement Act of 1922 following which the Bombay Entertainment Duty Act was passed in 1923 and soon after many other similar legislations were introduced in different States. Earlier entertainment tax was levied on movie tickets, large commercial shows and large private festival celebrations. In the late 1990s, States started levying entertainment tax on cable service.
The dispute regarding determination of place of provision of entertainment to find out the jurisdiction of state which has the power to levy tax never cropped up as the provider as well the receiver or customer were in the same State. With the advent and growth of Direct to Home or DTH services in India, a new way of reaching the homes of consumers has emerged. DTH has eliminated the role of cable operators who earlier acted as middlemen and took satellite television to different households.
Most of the States are levying entertainment tax on entertainment through DTH services. Time and again concerns have been raised pertaining to the constitutional validity of entertainment tax on DTH services stating that it is beyond the State’s competence to levy tax on such operations. However, it is a settled principle now that none of the entries in the Lists in the Seventh Schedule of the Indian Constitution is to be read in a narrow or restricted sense and that each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be included in it. The courts have time and again upheld the constitutional validity of entertainment tax on DTH services [see end note 3].
However, DTH services providers being located in one State and their customers being spread across the country have raised a red flag on the issue of determination of the place of entertainment to decide the jurisdiction of the State which can levy and administer the tax. There is no clarity as to how to determine the place of entertainment in such cases i.e., will it be the place where infrastructure is located or the place where the customer is located or the place where books of accounts are kept.
The Uttar Pradesh Entertainments and Betting Tax Act, 1979 as amended in year 2009 defines 'place of entertainment' as including a place where the books of account, pertaining to the entertainment (DTH service), are kept. Does it mean that the UP Government has the power to impose entertainment tax provided by DTH operators irrespective of the fact that the subscribers are located outside the State?
Entry 62 of List II of Seventh Schedule of the Constitution has been used in the sense of an activity or service namely, the providing of luxury/entertainment and what could be taxed by the State under that entry would be entertainment through such service [see end note 4]. Therefore, entertainment can only be provided by way of a service. Hence, the criteria and the principles for determining the place of entertainment and the place of supply of services should be same.
For taxation of services, the basic choice between the destination and origin principles traded between jurisdictions is well known. Having location of infrastructure or where the books of accounts are maintained as place of entertainment (origin principle) suffers from two deficiencies. First, it will not efficiently allocate tax across various jurisdictions and provide revenue to the States. Second, it will offer tax planning opportunities to DTH service providers to shift the location of infrastructure or books of accounts to states having no entertainment tax or lower rate of entertainment tax. However, this principle achieves consumption efficiency since consumers pay the same price for any commodity whichever jurisdiction they reside in.
With the increasing “disconnect” between performance and consumption of services in a territorial sense, the traditional rule for determining the place of taxation of services by reference to the service provider’s establishment becomes problematic. Adoption of consumption based principles for determining the place of entertainment would restore a balanced sharing of tax revenue among States though this would impose burdensome compliance costs on DTH service providers.
In implementing the principle that consumption of services which are not capable of direct delivery from a remote location should be taxed where consumption occurs, which is now characterized as the “destination principle,” the OECD consultation paper adopts as its basic proxy the rule that “the place of consumption should be deemed to be the jurisdiction where the customer is located (‘Main Rule’).”With the increasing “disconnect” between performance and consumption of services in a territorial sense.
Even in EU, from January 2015, all suppliers of goods and services will be required to account for VAT based on the rates applicable where their non-business customers are based. In India also, the general rule for determining the place of provision of services is the location of service recipient.
Therefore, determining the place of entertainment in case of DTH services on the basis of location of customer could be a better alternative which would ensure consistency in the principles adopted by the State for finding place of entertainment and the Centre for finding place of provision of service. It is imperative that all the States must address this issue and must adopt the same principle for determining their jurisdiction and power. However, a more effective solution may lie in multilateral coordination by all the States, not in unilateral efforts by a single State.
[The author is a Senior Associate, Lakshmikumaran & Sridharan, New Delhi]
- National Textile Worker's Union versus P. R. Ramakrishnan (AIR 1983 S.C. 75)
- Halsburay’s Laws of England, 4th ed., Vol. 45
- Bharti Telemedia Limited and Ors. vs. The State of Jharkhand & Ors
- Godfrey Phillips India Ltd. v. State of Uttar Pradesh, (2005) 139 STC 537 (SC).