These are taxing times for India’s bureaucrats. With lowered tax revenues, they are going to be looking for clever ways to extract more from the economy. A recent tax case from Karnataka may just provide them with ammunition.
Earlier this month, the Supreme Court deferred substantive judgement on a dispute between Karnataka tax authorities and telecom provider Bharti Airtel dating back to 2006. The Karnataka government claims that Bharti is liable to pay value-added taxes (VAT) worth Rs25.6 crore for its broadband services.
This is bizarre for two reasons. First, state VAT applies solely to goods; states cannot tax services, only the Centre can. And broadband is a service. Karnataka knows this, which brings in the second bizarre element: Karnataka claims that broadband be treated as goods, not services, since it involves what it claims sale and transmission of “artificially created light energy”. We should be grateful for the nuance here, or else Karnataka would have even started taxing sunlight.
The apex court, which could have passed a verdict on the merits of the case, has asked Karnataka’s tax appellate authority to investigate. In the meantime, Karnataka’s success will persuade other state governments to adopt similar measures against Internet providers. Already taxed by the Centre for this service, providers may be suddenly slapped with another tax, at a time when business isn’t great.
This isn’t new: Every time a state government finds a unique tax approach—one that withstands legal scrutiny —other states are quick to follow. A 2005 Supreme Court case that sided in favour of the Andhra Pradesh government slapping a VAT on elevator parts showed this.
Taxation envy is at play here: States resort to inventive schemes because they can’t tax what the Centre can. That’s a problem a simplified tax regime, under the goods and services tax (GST), can solve. Under this, the Centre and states would share a unified services tax, one that would be predictable for businesses. This case provides the kind of situation lawmakers should consider while drafting GST legislation. And what it highlights even more is India’s sore need for a GST regime.
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