Difficulty Removal Power Limits: Why Levy of Service Tax Under Removal of Difficulty Order is Illegal

Abstract

Service Tax is levied in India in terms of Chapter V of the Finance Act, 1994. Prior to the enactment of Finance Act, 2012, service tax was levied on the service providers upon rendering of taxable services where the taxable services were specifically defined in Section 65 of the Act and most services had specific nomenclatures such as ‘business auxiliary service’, ‘technical inspection and certification service’, etc. The entire basis for levy of service tax was, however, revamped by the Finance Act, 2012 whereby service tax is levied on all services other than those enumerated in the negative list or those specifically exempted by the Government. Moving the Finance Bill, 2012 the Finance Minister stated before the Parliament that the “movement towards the negative list will result in reducing nearly 290 definitions and descriptions in the Act to 54, and the exemptions from the existing 88 to 10, of course merging some of the existing exemptions into a revised notification. In terms of number of pages, the law will be shorter by nearly 40 per cent”.

Thus a number of changes were introduced in the Finance Act, 1994 to levy service tax under the new regime with effect from 1st July, 2012. In order to ensure that the transition to the new regime was smooth, the Finance Act, 1994 was inter alia amended vesting the power to the Central Government to make arrangements ‘for the purpose of removing the difficulty’ in giving effect to the changes made by the Finance Act, 2012. In exercise of these powers the Central Government has issued two orders in June 2012 purporting to remove the difficulties in implementation of the changes. These orders are of critical importance as they relate to the charging provision in terms of which service tax as also ‘Education Cess’ and ‘Secondary & Higher Education Cess’ is levied from 1st of July, 2012 onwards.

This paper examines the scope of powers of the Government in terms of the ‘removal of difficulty clauses’, as delineated in various judicial pronouncements to test the legality and validity of these orders passed by the Central Government. The author is testing the hypothesis that these orders have been passed in excess of the powers conferred upon the Government and may not stand scrutiny if challenged before appropriate courts.

Keywords: Removal of Difficulty, Service Tax, India, Delegated Legislation

JEL Classification: K19, K34