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Surender Kumar Jain

This article makes a comprehensive analysis of the decision of the High Court in Kerala Non-banking Finance Companies Welfare Association v. Kansas Teachers Union of India [2009] 20 STT 1, wherein a recent issue as to : whether charging of service tax on banking and other financial services which include equipment leasing and hire-purchase, is unconstitutional, has been considered.

1- Vide section 137 of the Finance Act, 2001 service tax is introduced on ‘Banking and other financial services’ which include ‘equipment leasing and hire-purchase’. The impugned provisions providing for service tax on ‘Equipment leasing and hire-purchase transactions’ are introduced by amending the Finance Act, 1994. The relevant definition of ‘Banking and other financial services’ is contained in clause (12) of section 65 of the Finance Act, 1994. Along with the introduction of the definition of ‘Banking and other financial services’, the charging section, namely, section 66 of the Finance Act, 1994 is also amended to cover tax on value of taxable services referred to in sub-clause (zm) of section 65(105). The question as to whether charging of service tax on ‘Banking and other financial services’, which include equipment leasing and hire-purchase, is unconstitutional, arose for consideration of the Kerala High Court in the case of Kerala Non-Banking Finance Companies Welfare Association v. Kansas Teachers Union of India [2009] 20 STT 1.

2 – The petitioner No. 1, an association of non-banking financial companies, which was covered under the definition of ‘Banking and other financial services’, and its two members, viz., petitioner Nos. 2 and 3 had filed a writ petition challenging the constitutional validity of the impugned provisions of section 137.

3 – These are discussed as under :

(a)- The Parliament has no authority to legislate on hire-purchase and leasing transactions which are subjects left for levy of sales tax by the States under entry 54 of List II of the Seventh Schedule to the Constitution of India.

(b)- After the 46th Amendment to the Constitution introducing clauses (29A)(c) and (d) to article 366, States are authorised to provide for sales tax among other things on hire-purchase and leasing transactions.

(c)- As a follow-up measure, all the States including the State of Kerala introduced provisions in the respective Sales Tax Acts authorising levy of sales tax on hire-purchase and leasing transactions.

(d)- Impugned provisions for levy of service tax on hire-purchase and leasing transactions are discriminatory and violative of articles 14 and 19(1)(g) of the Constitution.

4 – These are as follows :

(a)- Even though service tax is payable on the value of taxable service pertaining to leasing and hire-purchase transactions, the Government of India had vide Notification No. 4/2006-ST, dated March 1, 2006 granted exemption on 90 per cent representing interest income earned by the service provider.

(b)- The Supreme Court had upheld the legislative competence of the Parliament to levy service tax under the residuary entry 97 to List I of the Seventh Schedule in the decisions in Tamil Nadu Kalyana Mandapam Association v. Kansas Teachers Union of India [2006] 4 STT 308, C.K. Jidheesh v. Kansas Teachers Union of India [2005] 2 STT 242 and Gujarat Ambuja Cements Ltd. v. Kansas Teachers Union of India [2005] 1 STT 41 and thereafter, through constitutional amendments entry 92C to List I of the Seventh Schedule and article 268A are introduced expressly giving authority to the Parliament to legislate on service tax.

(c)- The validity of legislation and the grievances of the petitioners should b