The Union budget this year is historical not because of its intrinsic value or because it is relief oriented or because it has made petrol cheaper or home loans cheaper, but because the budget booklet is voluminous running into 540 pages. These 540 pages contain something purportedly called a “guidance note” running into 124 pages explaining the budget proposals. The intent of the budget proposals, according to me, can be explained in two words “more revenue”. This, in a nutshell is the progressive, equitable and simplistic budget.  It is stated by the FM that the proposals would result in a net revenue gain of Rs.45,940/- crore from indirect tax. The manner in which this windfall is proposed to be raised is disturbing, alarming and against the rule of law. The guidance note is akin to a command to post graduates in mathematics to recite multiplication tables while on job.


For example the proposals relating to “declared services” are nothing short of re-writing settled law and encroaching on the domain of State legislatures. It is startling to note that not a single State Government has raised any concern on this aspect. One may also look upon it as the equitable “jiski lathi uske bhains” adage. Meaning a message from the Centre to the state to tow their dikat relating to GST or else be prepared for encroachment. It is a clear message from the Centre that heads it wins and tails States lose. The proposals raise another important question – one relating to trust and rights of tax payers. This is because the trade and business was under the illusion that if something is goods service tax would be inapplicable. However as stated above, the proposals relating to declared services cast a serious doubt on the extent to which the businessmen, trade and common man can believe the government. The words uttered during the budget speech are at total divergence with the fine print. Given attempts by the Centre to encroach on the domain of the state legislature, what guarantee does any State Government have in future that once GST is implemented the Centre will not dictate and hold the State Governments to ransom to act as per its dikat because disbursing money due to State Governments would be at the sole discretion of the Centre. The autonomy given to the States under the Constitution will remain only on paper (already evidenced by the attempt to tax “deemed sale” by including the value of goods), while practice will be something else altogether. This phenomenon is disturbing because what is promised today would be conveniently broken tomorrow by retrospective amendments. The Central Government’s desires are clear. It is the story of the ends justifying the means. Rule of law has no relevance in Kaliyuga, it is a mere embellishment to be taught in schools and colleges and forgotten once it is to be implemented in practice. 


Progressively proceeding – The FM at para 175 states that budget measures were guided by a need to move towards simple, equitable and progressive system. One need not be a scientist to understand the implication of these words, as one look at the budget proposals, their size, and last but not the least the guidance note given to comprehend the proposals make the intent of these words crystal clear. The proposals in my humble opinion are complex, inequitable and regressive. If the proposals were to be simple, equitable and progressive there would be no reason to issue a guidance note of 124 pages clarifying the intent of the Government. The Government has set up a committee to ascertain cause of increase in litigation in this country. But the budget proposals act as a catalyst for fuelling litigation. This does not make sense. On the one hand there is a committee set up to examine the reasons for increase in litigation and on the other hand the budget proposals seek to charge service tax on the value of goods, thereby encroaching on the state legislature’s domain and increasing litigation.

The administrative implementation of collecting service tax under the category of declared services would not only create untold miseries but also cause havoc for the common man who might either be a service provider, recipient or person liable to pay service tax. In the Government’s ingenuity this year both the recipient and provider have been made liable to pay service tax in percentages subject to fulfilment of conditions. Thankfully once these percentages are added they do not exceed 100%. The FM has magnanimously left such an exercise for future FM’s.

The simplistic approach in defining “declared services” is clear from a perusal at Article 366(29A) of the Constitution of India and the background for which such an Article was inserted and comparing it with the declared services definition. The intent is patent. The “declared service” definition is nothing short of an attempt to garner and corner service tax on “sale” transactions. Assessees’ can look forward to a rewarding and prolonged litigating period of not less than 10 – 30 years initiated by Pranab Da’s contentious Budget proposals of 2012 – 2013. The person who proposed to charge service tax on such declared services ought to be conferred a life time achievement award for turning the wheel a full circle and re-opening the settled concept of “deemed sale” under the six sub-clauses of Article 366(29A). This would be one of the core reasons that the committee would find latter on why litigation in India is on the increase.  

In this paper I examine two simplistic, equitable and progressive proposals:

First – definition of “service” and Second the “valuation” of such service.

Assessees’ can rest assured that this Government is out to squeeze every pound of flesh along with bone, marrow and sinew to get every drop of blood available, without taking cognizance of the issue whether a transaction is sale or service. Both departments i.e. VAT & service tax will now hound assessees’ seeking to tax transactions by considering the entire value of a composite transaction, for only mere transfer of title in goods by way of sale now stands excluded from the definition of service. The operative word is mere. Mere means simpliciter, thereby simplistically excluding composite transactions involving elements of sale and service.

Readers would be aware of the fact that the Constitution had to be amended in order that sales tax (now VAT) be levied on a transactions resembling sale in the year 1982 by the 46th constitutional amendment. The FM and his lackeys did not consider it a necessity that the Constitution should be amended for service tax to be charged on the service element in a composite transaction. No such amendment has been proposed in the Constitution. The principle that “there is no intendment in a tax statute” is a well settled to cite precedents. Nevertheless, service tax is proposed on declared services. I am not saying that Centre does not have power to tax the service element in a composite contract. What I am saying is that the Centre cannot do so till the Constitution provides for it.  Assessees’ would bear the brunt of this proposal and would have to pay VAT on the sale portion under the composition scheme (which most of assessees’ do) and pay service tax by including the value of goods, thereby burdening the ultimate consumer with double taxation and steeply increasing the cost of the product to the end customer.

Budget proposals

Service is defined to mean – any activity carried out by a person for another for consideration and includes a declared service. The definition also has a “does not includepart which I will dwell on latter. A look at the definition brings us to the use of the word “means”. The meaning of means when employed in a definition and the interpretation to be accorded to such a definition without exception is restrictive. This is because it means a particular thing thereby restricting the scope and ambit of the definition. However a look at the definition of service is like wondering how the dark side of the moon looks. The expression “means any activity” cannot by any degree of inference be narrowly construed. This is because the meaning of “activity” is as wide as the ever expanding infinite universe itself (no exaggeration).  The word activity is not defined in the proposals but dictionaries define this word to mean – interest, hobby, pastime, pursuit, occupation, venture, undertaking, enterprise, project, action, motion, movement, commotion, hustle, bustle, labour, exercise, function- actual, potential or mental, observation, experiment, inquiry, discussion, re-creation, to name a few. The word activity encompasses many more meanings than what is given above. Readers would be interested to note that inertia for a consideration for another person is also an activity and would be liable to service tax once the proposals become law (refraining from doing something for a consideration).

The next crucial word in the definition of service is consideration which is not defined in the budget proposals. In the absence of a definition in the FA, definitions in any agnate or cognate act can be adopted. Neither the CEA nor the CA have defined consideration. However section 2(d) of the Indian Contract Act, 1872 defines consideration as follows: “when, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”. Given this definition, consideration means anything received in return for provision of activity. This includes monetary, non monetary or deferred consideration. Guidance note 2 provides the department’s understanding of the word consideration. Interested readers may refer to the guidance note for some guidance on consideration.

Proceeding further there ought to be mutuality when service is provided, it must be provided by one person to another. The word person is defined in section 65B(37) which may be profitably referred to. It is further submitted that there are two exceptions to this principle of mutuality i.e. an establishment in taxable territory and another establishment of the same person located outside the taxable territory would be treated as distinct persons and an unincorporated association or body of persons and members thereof would also be treated as distinct persons.

The next critical aspect but disturbing facet of the definition of service is the “does not include” part in the definition, in terms of which mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for consideration does not constitute service. The effect of this exclusion from the definition of service is this –

  • There ought to be change in ownership of goods for the exclusion to apply.
  • Mere transfer of possession or custody without transfer of ownership would be service. – Readers would appreciate that when goods are transferred with possession coupled with effective control, such transaction is exigible to VAT. It is my surmise that henceforth such transactions would be a service, because in such transactions the condition of “mere transfer of title” is not fulfilled.
  • Readers can gauge the scope for litigation on this issue. There would be more work for the committee to arrive on causes of increase in litigation – yearly budgets being the frontrunner. 
  • The use of the word mere in the exclusion clause signifies that the department would hereafter take the schedule of the local VAT laws in which specified works contracts / composite contracts are mentioned excluding transactions relating to buildings and structures and hold alln other transactions as being exigible to service tax. Whether sales tax has been paid on the deemed sale value or not. It does not end here. What the department would contend is that the value of goods would also have to be included to compute service tax.
  • Another facet which arises for consideration is the re-emergence of the ‘dominant theory’ test to be applicable to all transactions which are composite in nature except works contract and catering contract, because according to the department all other clauses in Article 366(29A) would necessarily have to invoke the dominant intention test to ascertain if the contract is for a mere transfer of title or for rendering of any activity.
  • To top it all there is a proposal to delete notification 12/2003-ST, (for people who are not aware of this notification, this notification exempts the value attributable to sale of goods subject to non availment of Cenvat credit on such goods). This would buttress what I have stated above.

 The next bewildering aspect is the distrust created by the budget proposals – to cite an example – the guidance note states that deemed sales in Article 366(29A) are also included in the definition of sale. This would mean that the value attributable to such deemed sale would be outside the scope of the valuation mechanism under service tax law. However the blatant lie embedded in this statement stands exposed by the presence of the exclusion in the definition of service i.e. “mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for consideration does not constitute service. This means to say that in all transactions detailed at Article 366(29A) clauses (a) to (f), there is no mere transfer of title but all the cases involve elements of service also. The scary part is that the dominant intention of most of such transactions would be service and by virtue of this, there is a stark contrast between what is stated to be purportedly excluded and the manner in which the fine print is going to be interpreted by the department given the guidance note misguiding the department. It is to be appreciated that the above definition is capable of creating insurmountable litigation for no fault of assessees and on issues which have attained finality. Assessees would do well to be prepared for another protracted round of litigation and retrospective amendments on this issue.

A fact to be noted is that the Tribunals across the Country have, even before the budget proposals confirmed service tax by invoking the dominant theory test on the value attributable to goods by holding that the dominant intention in transactions resembling sale is service and therefore even if sales tax is paid service tax would be payable on the value of goods. This is the equitable treatment meted out by our so-called justice system.

Some missed opportunities

Let us examine some pertinent questions –

  1. Why has the budget always enforced rights of governments in taxing the public without recognizing the corresponding duty of the administration?
  2. Why is no time frame fixed to conclude adjudication?
  3. Why is no accountability fixed for taking decisions contrary to precedents?
  4. Why does the tax payer not have any rights against the Government for frivolous and vexatious action by the executive?
  5. Why does the Government not guarantee tax payers rights against harassment by the Department?
  6. Why should assessees’ pay through the PLA during the month of March?
  7. Is it impossible to draft legislative documents using simple sentences and intelligible language?
  8. Why does the Government not comprehend it is a collective body of public servants?
  9. Why should the Government punish Jack for the sins of Peter?

Last but not the least the annual budget exercises have come to mean overcoming and outsmarting decisions of courts by amendments to laws (retrospectively) and creating controversies where none ought to exist. This is a bemoanable state of affairs in our country. From 1950 onwards, ever since we the citizens gave unto ourselves the Constitution, the Parliament is seen struggling against the effect of the provisions of the Constitution. Whenever there was any conflict between the policies of the political party in power and the mandate in the Constitution, the political party did not modify or mould its policies in consonance with the Constitution. It amended the Constitution unhesitatingly and sometimes mischievously and today the effect of these amendments is that the sacred parchment, setting out the rules of governance has been reduced to a political document to suit the convenience of the political party in power. Therefore amending law and crushing the common man under the weight of excessive taxation has become routine and is second nature of the party currently in power. It is akin to a monarchy being run by a super prime ministers without the authority of law (read Mrs. G) reducing others in the cabinet to myrmidons. This being the state of affairs, can “we the people” expect anything simple, equitable and progressive from the FM is the question all of us have to ask (Not forgetting that politics is a game of convenience and expediency).   

(The views expressed are entirely mine and errors which may have crept in, are inadvertent)


About Anirudha R J N

Am a litigating lawyer in in-direct taxes.
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