Supreme Court on Entertainment Tax, and the not-so-entertaining consequences

Recently, a two-judge Bench of the Supreme Court of India put to rest disputes regarding the constitutional validity of the levy of “entertainment tax” by various States on direct-to-home (DTH) service providers – such as Airtel, Tata Sky, etc. The impact of the decision in the digital age, however, may be well beyond the realm of taxation, entering into questions of governmental control of content.

At the heart of the controversy was the interpretation of Entry 62 of the State List in the Seventh Schedule to the Constitution of India, which (prior to the introduction of GST) allowed the States to tax “luxuries”, including “entertainments, amusements, betting and gambling”.

The primary contention of the DTH companies was that the word “entertainments” takes color from “luxuries”, “amusements” and “betting and gambling” (as interpreted by the Court in previous decisions) and means an activity or an event or an establishment of entertainment (e.g., a film exhibition, an amusement park, a video game parlor, a circus, etc.). It was argued that access to such activity, event or establishment should also be beyond the necessities of life to qualify as a “luxury." The word was argued to have a different meaning than “entertainment” as a mere state of mind (of being entertained), since that interpretation would render the taxable event highly subjective and transient.

One argument put forth in support of the above was that by virtue of Entry 33 of the State List (which uses the same words – “entertainments” and “amusements”), States exercise regulatory powers over activities, events and establishments of entertainment (such as movie theatres, etc.). This regulatory power, however, does not extend to any derivation of entertainment by an individual from the comforts of their own home. For example, States do not regulate “broadcasting”, which is a Central subject (Entry 31 of the Union List), except to the extent permissible for reasons of “public order” (under Entry 1 of the State List). Accordingly, in the absence of regulatory powers with the States in respect of DTH services, the same word (“entertainments”) should not be read differently to grant them taxing powers over such services.

However, the Court has now held that the activities of DTH operators include a component of “entertainment”, and the levy of tax by the States is valid. It has held that the activity undertaken by DTH operators involves “at least two aspects”: first, the act of relaying the signals from the satellites of various broadcasters of TV channels (i.e., broadcasting), and second, the object behind relaying of such signals, which is delivery of content to the subscriber (having the “effect of entertainment”). In other words, through the “mode” of broadcasting, entertainment is delivered to the subscribers.

The Court has referred to technological advances since the time Entry 62 had come to be drafted, which have shifted the medium of consumption from live performances to digital platforms like mobile phones. The Court also refers to the principle that entries pertaining to legislative powers are to be construed with the widest amplitude possible.

The interpretation given by the Court, while certainly attractive at first glance, could have drastic consequences.

Particularly, while dealing with the contention of the DTH companies that a different interpretation should not be given to the word “entertainments” for the purposes of regulation (under Entry 33) and taxation (under Entry 62), the Court does hold that the term has to be interpreted identically for both entries.

However, it then proceeds in the opposite direction (of what was argued on behalf of DTH operators), to state that it is the State Legislature which should regulate television entertainment –

“[…] any entertainment or amusement activity conducted by a private entity in a State or authorised by a State Government can be regulated only by the State Legislature. This is because Entry 33 - List II which deals with, inter alia, entertainments and amusements, also includes television entertainment. The regulation could be of Cable Television operators in the State.”

Moreover, it considers that “entertainment” could be through “other digital devices including cell phone or smart phone", even if adopted through broadcasting – presumably referring to the internet – be it through OTT platforms, video-hosting websites, live-streaming platforms, music-streaming platforms, etc.

Due to this finding alone, questions which never required to be asked before now stand opened. For instance, the Court has found “entertainment” from all such media to be taxable under Entry 62, and in the same breath has held that Entry 33 and Entry 62 have to be interpreted identically. If such is the interpretation of the law, the proximate consequence is that the State governments have regulatory powers over any entertainment content being consumed through television or online.

Further, in view of the distinction now made between broadcasting (transmission of signals) and entertainment (the result of the content being displayed), is the Centre still permitted to regulate, as it does television and internet content? Or is such power now required to be redistributed and reconciled with the States’ power to regulate entertainment content? Can a State government, as a regulator of “entertainment”, restrict broadcasting of a particular show, film, YouTube or live-stream channel? Is it even possible to regulate entertainment without entering into the regulation of broadcasting? If not, then how was it possible to read Entry 33 (and Entry 62) to include in its scope “entertainment” provided through DTH?

This one finding in the judgment could unsettle the long-accepted position that it is the Centre which has the power to regulate broadcasting of any kind, and the States can only step in where public order is at risk. Due to this pronouncement, further regulation/ censorship on various media could arise. Moreover, in a federal structure, with diverse socio-political dynamics at play, allowing States to individually control what they deem as “entertainment” would seem ill-advised. It could potentially cause irreparable damage before the Courts are able to step in to rectify the same. If the same is an unintended consequence of a taxation law pronouncement, one would hope that the Supreme Court reviews its decision and restricts the same accordingly.

About the authors: Kumar Visalaksh is a Partner and Ajitesh Dayal Singh is a Senior Associate with Economic Laws Practice.

The views are personal.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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