No VAT on Internet service: SC

The Supreme Court restrained States and Union Territories from collecting value-added tax (VAT) and sales tax from Videsh Sanchar Nigam Ltd (VSNL) for providing telecom services, including broadband Internet, to its subscribers.

A bench of judges Ruma Pal and AR Lakshmanan, after hearing senior counsel CS Vaidyanathan, restrained States from either raising any demand or pursuing any assessment proceedings or collecting dues running into millions of rupees from VSNL.

It passed the order on a petition from VSNL challenging the legislative competence of states to levy local taxes on its services. The bench also sought responses from the Central Government and all States and Union Territories.

In its petition, VSNL said it was using telephone lines owned by Bharat Sanchar Nigam Ltd or Mahanagar Telephone Nigam Ltd and other basic telephone service providers for Internet access and Internet services through broadband.

Various States were levying VAT and sales tax on these services on the pretext that they came within the ambit of "sale of goods". VSNL said the imposition of sales tax and VAT was arbitrary and violated its right to carry on business under the constitution.

VSNL contended the levy of such taxes on Internet services was impermissible and beyond the legislative competence of states. It pointed out that it had never collected any sales tax from its consumers and hence the States were not entitled to collect any arrears on account of local sales tax.

It sought quashing of the demands and a declaration that such a levy was unconstitutional.