Indian Court Rules Sales Tax Cannot Apply To Telecom Services

by Lorys Charalambous, Tax-News.com, Cyprus

06 March 2006

India's Supreme Court has ruled that states can not levy sales tax on telecom services.

A three-judge Bench held on Thursday that electromagnetic waves and radio frequencies could not be termed as goods, and therefore do not fall under the scope of the sales tax.

"It is clear, electromagnetic waves are neither abstracted nor consumed in the sense that they are not extinguished by the user. They are not delivered, stored or possessed. Nor are they marketable," the judges stated.

The judgment comes after a number of hearings in lower courts, following the Uttar Pradesh Government's decision in 1995 that telecom providers would have to pay sales tax on the revenue earned since this was also taxable under the state's Sales Tax Act.

However, Bharat Sanchar Nigam Ltd and other telecom operators have argued in the courts that the facility of providing telecom services did not amount to a sale.

“The honourable Supreme Court has vindicated our stand that telecom services are not in the nature of sales of goods and are therefore not liable for any sales tax," SD Saxena, director (finance) of BSNL, was quoted as announcing by the Economic Times.

The bench stated that only sales of handsets themselves are liable for levies.

"In a telecom service, sale confines to sale of handsets only. Hence, transfer of right to use can be there only in handsets and not others," the judges ruled.

However, the court did not issue a ruling on the question of whether SIM cards fall within the ambit of sales tax, leaving the relevant authorities to decide using principles already laid down by the court.

Sales tax varies from state to state but in most it is about 12%. However, it is being replaced by a Value Added Tax imposed by the central government, against the fierce resistance of many states.

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