Constitutional provisions :
Initially there was no specific entry in the Union List for levying service tax. Service tax was levied by the Central Government by drawing power from entry 97 of the Union List. Entry 97 is a ‘residuary entry’ in List-I, which has been reproduced below:
“97 – Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.”
The ‘residuary entry’ provides wide powers to the Central Government in respect of taxation of the subjects not mentioned in the Lists given by the constitution. However, as a result of deliberations between the States and the Centre and as per the recommendations of the various expert committees, entry 92C was introduced in the VII Schedule in the Union List vide Constitution (92nd Amendment) Act, 2003 with effect from 07.01.2004. Entry 92C reads as under:
“92C – Taxes on services.”
A new Article 268A [Service tax levied by Union and collected and appropriated by the Union and the States] was inserted in the Constitution which reads as follows:
(1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the State in the manner provided in clause (2).
(2) The proceeds in any financial year of any such tax levied in accordance with the provisions of clause (1) shall be–
(a) Collected by the Government of India and the States;
(b) Appropriated by the Government of India and the States,
in accordance with such principles of collection and appropriation as may be formulated by the Parliament by law.
A consequential amendment to Article 270 of the Constitution was also made to enable Parliament to formulate by law, principles for determining the modalities of levying the service tax by the Central Government and collection of the proceeds thereof by the Central Government and the State Government.
With this amendment in the Constitution, the Central Government has become competent to enact a separate legislation on service tax.
Note: Although Parliament has passed the Constitutional amendment making entry 92C to Union List, this provision has not yet been made effective by the Parliament. Consequently, service tax is presently levied by virtue of Entry 97 only.