Service Tax on Access to Amusement Facilities Unconstitutional: Kerala HC sets aside Demand [Read Judgment]

“Attempt to impose service tax on "access to amusement facilities" as unconstitutional, held the Kerala High Court ruling Parliament lacks legislative competence to tax such activities when they are already squarely covered under the State’s power to levy entertainment tax.

The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon allowed the writ appeal filed by Vengad Resorts & Retreats Ltd., which operates an amusement park in Kerala, and set aside the earlier judgment of the Single Judge that had upheld the service tax demand.

The issue came up before the high court after the omission of “admission to entertainment events or access to amusement facilities” from the negative list under Section 66D(j) of the Finance Act, 1994, with effect from June 1, 2015.

After this amendment, the tax department sought to levy service tax on amusement parks, contending that the activity constituted a “service” under the Finance Act.

The appellant challenged this levy, arguing that taxes on entertainment and amusement fall exclusively within the State’s domain under Entry 62 of List II of the Seventh Schedule to the Constitution, and that the Union could not invoke its residuary taxing power under Entry 97 of List I.

The High Court observed that the Kerala Local Authorities Entertainments Tax Act, 1961provides for an all-inclusive levy on admission to entertainment, which expressly includes amusement activities.

The Court noted that the State law taxes not only entry into the venue but also the entertainment or amusement itself, leaving no separate or distinct aspect that could be taxed again as a “service” by the Union.

It held that once a subject is clearly covered under a specific taxing entry in the State List, the residuary power of Parliament cannot be invoked to impose another tax on the very same aspect.

Rejecting the application of the “aspect theory” relied upon by the revenue, the Bench clarified that this doctrine cannot be used to justify double taxation when both levies target the same aspect of entertainment or amusement.

The Court said that, in the present case, the subject matter, incidence, and even the measure of tax under the State enactment and the service tax law substantially overlapped.

As such, taxing the same activity again under the guise of service tax would amount to unconstitutional encroachment into the State’s legislative field.

The High Court further said that constitutional principles laid down by the Supreme Court, reiterating that taxing powers are distinct from regulatory powers, and that a tax specifically assigned to the States cannot be re-characterised by Parliament as a service merely to bring it under the residuary entry.

The absence of any statutory mechanism under the Finance Act to segregate a distinct “service element” from the amusement activity was also noted as a crucial factor undermining the validity of the levy.

As a result, the Court upheld the exclusive authority of States to charge entertainment and amusement under Entry 62 of List II and ruled that the effort to impose a service tax on "access to amusement facilities" is ultra vires the Constitution.

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