Kerala HC on ST on AC Restuarants

Kerala HC rules service tax on AC restaurants invalid

The Kerala High Court on Wednesday held that the Centre's decision to impose service tax on food and beverages supplied by air-conditioned restaurants with licences to serve alcoholic beverages in the 2011-12 budget was beyond the legislative competence of Parliament.

Justice A.M. Shaffique passed the verdict while allowing a batch of writ petitions filed by Kerala Bar Hotels Association and certain bar hoteliers.

The service tax was imposed on air-conditioned restaurants with licence to serve alcoholic beverages in the 2011-12 Union Budget. A service tax of 12.36 per cent applicable on 30 per cent of the bill had been imposed on such restaurants, which came into effect on April 1 last year.

The petitioners contended that Article 366 Section 29 (f) of the Constitution defined supply of food and drinks in hotels as 'deemed sales' and empowered the State governments to collect sales tax on the total value of sales. Therefore, the Centre has no authority or power to collect such service tax.

The court observed that the every purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State government to impose tax on the supply, whether it was by way of or as part of any service of goods either being food or any other article for human consumption or any drink, intoxicating or not.

The Constitution permitted sale of goods during service as taxable. Necessarily, service formed part of sale of goods. Therefore, the State government alone has the legislative competence to enact a law imposing a tax on service elements forming part of sales of goods, the court ruled.

The court also ordered that if the petitioners had made any payments on the basis of the impugned clauses, they were entitled to seek refund of the amount.

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