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Sales, service and tax
July, 25th 2013

A small correction is needed to Vivek Mishra's otherwise informative article "Service tax on restaurants and hotels not constitutional". Towards the end of the article Mr Mishra says, "The clause 29A was introduced, as it was felt necessary by the experts to declare those transactions as deemed sale of goods that could otherwise lead to a dilemma in classification between sale of goods and/or services." In fact, the need for the 46th amendment to the Constitution came up because of an apex court judgment in the matter of Northern India Caterers versus Lt Governor of Delhi (decided on September 7, 1978) wherein sale and supply of food in hotels and restaurants were held not as a sale because the basic definition of a sale, i.e. transfer of property, never takes place. In that judgment, English and American law on taxing food supplied by hotels and restaurants was discussed at length and, after doing so, a three-judge Bench declared, "Service of meals to the visitors in the restaurant is not taxable under the Sales Tax Act, 1941".

After this order, for many years restaurants and hotels didn't pay any sales tax. When many states brought this omission to the notice of the Union government on grounds that they were losing revenue , the 46th amendment was introduced, giving the definition "a tax on the supply, by way of or as part of any service..." so that our state governments could treat such transactions as a sale and collect sales/commercial tax (now known as the value added tax). There was no need to differentiate between sales and service, as Mr Mishra claims, because the concept of service tax had not been introduced till then. The service tax concept came in 1994.

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