Entertainment Tax

A Small Note from Tax History: Entertainment Tax Dispute of Delhi Racing Club

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Introduction 

In 2012, the Delhi Racing Club (‘Racing Club’) lost a tax dispute. The Government of National Capital Territory demanded payment of entertainment tax which the Racing Club unsuccessfully resisted. At first glance, the Delhi High Court’s judgment in The Delhi Race Club Ltd v Government of NCT of Delhi & Ors (‘Delhi Racing Club case’) seems straightforward. It was a low stakes dispute involving a relatively small amount of entertainment tax. And the Delhi Racing Club case, cannot by any stretch of imagination, be called a ‘landmark’ case in Indian indirect tax jurisprudence. Nonetheless, the value of commenting on the Delhi Racing Club case can be underlined because of three observations of the Delhi High Court.   

Firstly, any payment which is related to the entertainment or is a pre-condition for entertainment can be understood be a ‘payment for admission to any entertainment’ and subjected to entertainment tax. Since local bodies are authorized to collect entertainment tax post introduction of Goods and Services Tax (‘GST’), interpretation of the above phrase has a continued relevance.  

Secondly, in Delhi Racing Club case the Delhi High Court reinforced the principle that if law requires that a certain tax shall be collected then any governmental assurance that it shall not be collected will not be binding on the state and its officers. An observation that leaves the taxpayer at the mercy of changes in the governmental attitude towards tax collection.  

Thirdly, the object of entertainment tax is human beings and not the inanimate object in reference to which the tax is levied. The latter’s presence, absence or use can trigger liability to pay an entertainment tax, but it does not mean that it is the object of entertainment tax. 

The judgment is an important reference point for understanding the taxable event for entertainment tax, and its wide scope that can extend to varied forms of payments/charges that are made in relation to an entertainment. A concept that continues to be relevant because laws under which entertainment tax is levied and collected by local bodies adopt similar expressions and phrases as used in relevant entertainment tax legislations in vogue before introduction of GST. 

Facts and Background 

The Racing Club charged entry fees from those who visited its premises to place bets on horse races or otherwise watch the races. The Racing Club became concerned with the nuisance value of mobile phones and introduced an additional entry charge for permitting carrying of mobile phones into its premises. While the Racing Club was collecting and remitting entertainment tax of 25% on the entry fees, the issue was if entertainment tax was also payable on charges levied for carrying mobile phones. 

In February 2002, the Entertainment and Betting Tax Officer under the Delhi Entertainment and Betting Tax Act, 1996 issued a notice to the Racing Club demanding payment of entertainment tax of 25% on charges collected for carrying mobile phones. The Racing Club resisted the demand of tax and argued that mobile phones were not entertainment or in any manner connected to entertainment. The Commissioner of Entertainment, Betting and Luxury Tax responded by banning the use of mobile phones in the Racing Club. Why? The argument was that use of mobile phones in the Racing Club had given birth to illegal betting and the Racing Club had not maintained proper records of mobile phones in the betting ring. The ban caused immediate concern to the Racing Club as it would prove bothersome to its members and visitors. After all, one of the core activities of visiting a horse racing club was to bet on the horse races, one of the rare legal betting activities in India.  

To circumvent that mobile phone ban, the Racing Club agreed to pay half of the entertainment tax demand on charges levied on mobile phones. And agreed to pay the remaining half in yearly instalments. The Commissioner agreed and thereafter rescinded the ban on mobile phones subject to the Racing Club paying entertainment tax on charges levied on mobile phones. 

In 2006, the Racing Club was issued another show cause notice alleging that it had been collecting charges on mobile phones usage from Financial Year 2002-03, without permission under the Delhi Entertainments and Betting Tax Act, 1996. And Racing Club was asked to reply to the notice. The Racing Club’s reply inter alia mentioned that it had already entered a settlement reading payment of entertainment tax on mobile phone charges. But the Racing Club’s reply was found unsatisfactory and a total tax demand of Rs 1,28,03,462/- was confirmed by the Commissioner. The Racing Club approached the Delhi High Court challenging the assessment orders. 

The Delhi High Court Judgment 

Section 6 of the Delhi Entertainment and Betting Tax Act, 1996 provided that there shall be levied and paid on all payments for admission to any entertainment an entertainment tax. Section 2(m)(iv), in turn, defined ‘payment for admission’ to mean:

any payment, by whatever name called, for any purpose whatsoever, connected with an entertainment, which a person is required to make in any form as a condition of attending, or continuing to attend the entertainment, either in addition to the payment, if any, for admission to the entertainment or without any such payment for admission;  

The Delhi High Court held that the above sub-clause covered payments to the Racing Club as mobile phone charges since they were connected to the entertainment of watching/betting on horse racing. The High Court added that the manner of collecting the payment, or its purpose is irrelevant if the payment is connected to the entertainment. The High Court clarified that while the taxable event was holding an entertainment, any payment connected with the entertainment attracted a levy under Section 6(1) of the Delhi Entertainment and Betting Tax Act, 1996. And concluded that: 

The only condition is that the payment should be connected with the entertainment, which is the horse races in the present case. The further condition is that the payment should be one which a person is required to make as a condition of attending the entertainment. This condition is satisfied in the case of persons who wish to carry their mobile phones inside the race club. If they want to attend the races carrying a mobile phone with them, they are obliged to make the payment for the entry of mobile phones. (para 19)    

The connection between mobile phones and horse racing – the main entertainment – was obvious and proximate. And on this point, the Delhi High Court was correct in including mobile phones charges within the scope of ‘payment for admission’. This is especially since mobile phones were vital to place and track bets on the horse races.  

The second crucial question the Delhi High Court had to address was if the entertainment tax was being levied on an inanimate object. In State of Karnataka v Driven Enterprises entertainment tax was levied on admission of cars into drive-in cinemas. Driven Enterprises had argued before the Supreme Court that a tax cannot be levied on inanimate objects. But the Supreme Court rejected the argument and held that entertainment tax was not levied on cars but on persons who were entertained, who took their cars inside the theatres, and enjoyed the movie while sitting in their cars. Drawing an analogy, the Delhi High Court in Delhi Racing Club case held that the entertainment tax was not on mobile phones but on persons who insisted on carrying their phones inside the Racing Club and were entertained from horse racing. 

Finally, Racing Club challenged the demand for payment of entertainment tax by arguing that it had previously settled the issue with the Commissioner. The Delhi High Court rejected the Racing Club’s argument by relying on M/S Mathra Prashad and Sons v State of Punjab and held that where a law requires that a certain tax is to be collected it cannot be given up. Any governmental assurance that it will not collect the tax is not binding on the government. Thus, the government retains the discretion to collect or not to collect the tax putting the taxpayer in jeopardy. The government can, as in the Delhi Racing Club case, settle the dispute or agree to collect a certain quantum of tax but later go back on its word and decide to collect a higher amount of tax. If the law permits the government to collect the tax, the government retains the authority to collect it as per its convenience. And any agreements to the contrary with the taxpayer do not bind it. While one can argue that promissory estoppel should apply to the government, but the jurisprudence is clearly in favor of the state and its ability to withdraw any tax concessions in public interest. Even if it prejudices the taxpayer in question.    

Betting, Taxes, and Present      

Delhi Racing Club case was not a rare instance where taxation, betting, and entertainment coalesced and resulted in a significant burden for the taxpayer, i.e., the Racing Club. And since entertainment tax is an indirect tax, by extension members and visitors to the Delhi Racing Club were also affected. The current taxation regime relating to betting and entertainment is bifurcated into two separate taxes – GST as well as entertainment tax. Betting is remit of the former and the entire betting sector has been effectively paralyzeddue to onerous tax rates under GST. 

Entertainment tax is now a de facto tax on admissions to events such as sporting events, broadcasting services, and for public exhibition of cinematographic films. And is collected by local bodies. Thus, the Delhi High Court’s interpretation of ‘payment for admission’ remains relevant even under the current entertainment tax regime. Since all entertainment tax laws still use the same phrase to delineate their scope and identify the taxable event. 

However, to conclude, and to place the tax controversy in the larger context: recreational clubs including racing clubs such as the Delhi Racing Club have other legal troubles to encounter for now, onerous taxes and high tax rates form only a small piece of their ongoing existential fights.   

Patna High Court Prevents Levy of Entertainment Tax Citing 101st Constitutional Amendment

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A Division Bench of the Patna High Court on 18 May 2023 pronounced a judgment that inter alia required it to examine the interaction of Bihar Entertainment Tax Act, 1948 (Act of 1948) with the 101st Constitutional Amendment Act, 2016 (‘101st Amendment’). While the case involved both, statutory and constitutional issues relating to the scope and nature of entertainment tax, in this post I will focus on the Constitutional aspect of the case. More specifically, nature and scope of power of States to levy entertainment tax after the 101stAmendment.  

Introduction 

The petitioner was a Multi System Operator (‘MCO’) who challenged its tax liability under the Act of 1948. State of Bihar argued that the MCO was liable to pay entertainment tax for transmitting programs it received through satellite. The MCO argued that the tax liability was that of local cable operators who broadcasted those signals to the subscribers and were responsible were providing connection to the subscribers, latter being the taxable event under the Act of 1948. One of the petitioner’s grounds of challenge was the State of Bihar’s lack of competence to levy entertainment tax after the 101st Amendment. There were two prongs to the petitioner’s argument: first, Entry 62 in List II has been amended by the 101st Amendment denuding State the power to levy entertainment tax. Pre and post amendment versions of Entry 62 in List II are respectively as follows: 

Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. 

Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council. 

As per the petitioner the field of legislation, i.e., entertainment tax, was no longer available to a State in the form it was available before the 101st Amendment. Entry 62 in List II has been substituted and only permits levy and collection by local bodies. Consequently, after the 101st Amendment, State of Bihar cannot levy and collect entertainment tax through Commercial Tax Officers as provided in the Act of 1948 and the relevant Rules. 

The second prong of the petitioner’s argument rested on Section 19 of the 101st Amendment which states as follows:

Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier. (emphasis added) 

The petitioner urged that the Act of 1948 cannot justify levy of entertainment tax after the 101st Amendment and one can agree that is a reasonable conclusion since Section 19 only saves ‘law relating to tax on goods or services or on both’. But the petitioner went a step ahead and argued that there is no justification for levy and collection of entertainment tax for the period prior to the 101st Amendment since the power for levy and collection stands extinguished by the substitution of Entry 62 in List II. Now courts have recognized that the effect of substitution is that it repeals and introduces a new law, but the doctrine of ‘substitution effect’ has not yet been fully tested and applied regarding legislative entries in the Constitution. Neither is there complete jurisprudential clarity if the effect of substitution is retrospective in nature. (paras 7-9) In my opinion, the petitioner in making the latter argument was making a novel claim in the constitutional context.  

The State of Bihar, on the other hand, tried to justify its power to levy and collect entertainment tax despite the 101st Amendment amending Entry 62. To begin with, it stated that the 101st Amendment introduced a new clause, i.e., Article 366(26A) which defined ‘services’ as anything other than goods. The State adopted an unusually wide and non-contextual interpretation of ‘services’ to argue that every tax other than on goods would be covered by Section 19 of the 101st Amendment including entertainment tax. The State further referred to Sections 173 and 174 of the Bihar Goods and Services Tax Act, 2017 and claimed that while these provisions repealed the Act of 1948, recovery of arrears of tax was allowed as if the Act of 1948 was not repealed. The State made an alternative plea that the levy and collection of entertainment tax before the 101stAmendment certainly cannot be challenged. The State argued that the repeal and saving clause of Bihar Goods and Services Tax Act, 2017 not only preserved pre-existing tax liability, but also saved the levy and collection of tax prior to the 101st Amendment.       

101st Constitution Amendment Narrows State’s Power to Levy Entertainment Tax  

Patna High Court agreed with the petitioner’s arguments and made some interesting though not fully reasoned observations.  

To begin with, the High Court did not agree with the State’s argument that the definition of services encompassed entertainment tax. The High Court rightly reasoned that if the term ‘services’ was intended to subsume every tax there was no reason to retain Entry 62 and it could have been deleted like some other entries such as Entry 52 relating to entry taxes which was deleted via the 101st Amendment. Entertainment tax survived the 101st Amendment albeit in a modified form presumably with an intent to keep it as a separate levy instead of subsuming it under GST. In stating so, the High Court offered a more credible interpretation as compared to the State’s expansive understanding of the term ‘services’ under Article 366. (paras 32 and 33)

As regards the impact and effect of Section 19, the High Court stated that inconsistent provisions in State legislations could be continued for one year or till their repeal/amendment by respective State legislatures, whichever was earlier. However, the Act of 1948 while validly legislated under Entry 62, as it existed then, could not be sustained after the 101st Amendment because of the changes made to Entry 62. This conclusion also is a right understanding and naturally flows from the High Court’s understanding of the scope of Section 19, i.e., it did not extend to entertainment tax.    

However, as regards the petitioner’s argument that entertainment tax cannot be collected even for the period before the 101st Amendment, the High Court concluded that: 

The tax for the period prior to the amendment, though levied on the taxable event occurring, cannot also be collected since there is no transition provision available under the 101st Amendment making such collection of entertainment tax permissible for one year or by way of a repeal; by an enactment, consistent with the amendment, with a saving clause for continuance of the levy and collection under the old Act as it was never repealed. (para 40) (emphasis added)  

The above observation does not fully add up. Why would a transition provision be necessary to collect tax for a taxable event that occurred before the 101st Amendment? If at the time of occurrence of the taxable event, State of Bihar had the authority to levy and collect entertainment tax, it should be allowed to recover the same even after the 101st Amendment. Why should the power to recover pre-amendment tax liabilities cease abruptly if the transition provision does not encompass entertainment tax? Transition provisions, such as Section 19, aim to smoothen transition and allow States time to impose taxes under pre-existing laws such as VAT and/or amend the stated laws in consonance with the new regime, in this case GST. The High Court was right in observing that Section 19 excluded entertainment tax and thereby did not allow States to levy and collect entertainment tax for taxable event under the Act of 1948 occurring after the 1.07.2017, the date of 101st Amendment. However, there is little to justify that Section 19 also implies that taxable events occurred and tax liabilities incurred by taxpayers before that date should not be satisfied by taxpayers.

The High Court to fortify its reasoning needed to engage more deeply with the argument that Entry 62 in List II has been substituted and its resultant effect. A prima facie conclusion is that Entry 62 has been amended/modified, retaining power regarding entertainment tax with the State subject to it being levied and collected at the local level. However, given the transformative changes introduced in indirect tax regime – labelled under the umbrella heading of GST regime – by the 101st Amendment it would not be out of context to suggest that Entry 62 is substituted. There are arguments that can be made from both sides, but the judgment provides little insight about the scope of arguments and neither does it engage with this crucial issue in a meaningful manner. In my view, States are allowed to recover arrears of tax relating to the period before the 101st Amendment and a typical savings clause such as in Sections 173 and 174 of the Bihar Goods and Services Act, 2017 is usually beyond reproach. The onus is on the petitioners to prove that the tax arrears cannot be collected. In this case, the High Court thought that the petitioners have discharged the burden, but its reasoning didn’t seem sufficiently persuasive.     

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