The recent judgement of the Supreme Court in the appeal filed by the Federations challenging the Constitutional validity of levy of Service Tax on Chartered Accountants/Cost Accountants and Architects raises many issues of considerable importance. The Finance Act of 1994 introduced the levy of Service Tax. Service Tax which is one of the major revenue earners for the State is still not covered by a full fledged enactment but is conglomeration of the Finance Act of 1994 and the subsequent Finance Acts amending the provisions and a host of Rules and Notifications making the law and procedure a veritable cobweb.

The Supreme Court while upholding the levy of Service Tax has held that taxes on services is a different subject as compared to taxes on professions, trades etc. In this view the Court has held that Entry No.60 of list II and Entry No.92C of 1997, List I, operate in different areas. In the opinion of the Court while taxes on services did not fall under entry No.60 of List II, it would fall under Entry No. 92 C of 1997 of list I. The Supreme Court while dealing with the rationale for Service Tax has held that the sources of the concept of Service Tax lies in economics and this economic concept has evolved on account of service industry becoming a major contributor to the GDP of economy, particularly, the knowledge based economy. Dealing with the tax on professions, the court held that it is a tax on the individual person/firm/company and is a tax on the status. The privilege to practice obtained by a professional is the basis for the levy of such taxes under Entry No.60. The Court after considering the tests profounded in various decisions has concluded that entry No. 60 is a taxing entry and not a general entry and would not hence extent to include Services. Thus in the opinion of the Supreme Court while professional tax was a tax on the privilege of having the right to exercise the profession, Service Tax is a tax on rendering of service by such a professional to his customers. It is in this view of the matter that the Supreme Court has concluded that Profession Tax and Service Tax operate in two different fields and the Parliament is competent to levy service tax. While concluding, the Supreme Court has made a note of caution that the Constitution (Eighty Eighth Amendment) Act of 2003, which has inserted Article 268 A and Entry 92 C would indicate that Entry 60 of List I, and Entry 92 C of List I operate in different spheres, but that they are NOT dealing with a challenge to the Constitutional validity of the Eighty Eighth Amendment Act of 2003.

The Supreme Court has opined that Service Tax is a value added tax on rendition of service. The service rendered by professionals like Chartered Accountants, Cost Accountants are performances based services. While the constitutionality of the levy has been upheld by the Supreme Court, the impact of the levy on professionals is far reaching since in the Indian context, it will be difficult to pass on the impost to the customer as is expected in the case of indirect taxes. Consequently, the burden of taxation both in regard to profession tax and service tax is bound to fall on the professional himself, particularly since the profession stands on a totally different footing from business. The division of services in to property based and performance based would be proper as an economic basis but to include professions like Charted Accountants or Cost accounts in the category of performance based services along with other performance based services which are businesses in their true import would cause considerable difficulty. Since these services cannot be equated to other performance based services listed by the Supreme Court.

It is for the Government to reconsider the appropriateness of the levy of Service Tax on such professionals.