In a significant ruling with major implications for fiscal federalism, the Kerala High Court has declared the Central government's attempt to levy service tax on entry tickets to amusement facilities as unconstitutional. The judgment, delivered on December 18, 2025, reinforces the state's exclusive power to tax entertainment and amusements.
Court Overturns Earlier Order, Upholds State's Taxation Rights
A division bench comprising Justices A Muhamed Mustaque and Harisankar V Menon allowed an appeal filed by Vengad Resorts & Retreats Limited, which operates an amusement park in Valanchery, Malappuram district. The bench set aside a previous single-judge order from March 22, 2016, that had dismissed the company's petition.
The core of the dispute dates back to 2015, when the Central government, through an amendment to the Finance Act, 1994, removed "admission to entertainment events or access to amusement facilities" from the negative list. This move empowered the Centre to impose a service tax on amusement parks, a decision immediately challenged by the resort company.
The Legal Battle: State List vs. Residuary Powers
The appellant company argued forcefully that taxes on luxuries, entertainments, and amusements fall squarely within the powers of the state government as per Entry 62 of List II (State List) of the Constitution of India. They contended that Kerala already imposes an entertainment tax under the Kerala Local Authorities Entertainments Tax Act, 1961, which covers admission fees.
The company's legal team asserted that the Centre's parallel service tax on the same activity was not only an unconstitutional encroachment on the state's domain but also resulted in illegal double taxation, burdening both businesses and consumers.
High Court's Decisive Observations and Rationale
The High Court bench agreed with the appellant's arguments. In its detailed observations, the court stated that the existing state law provides for a comprehensive levy on both admission and entertainment, leaving "nothing further" to be taxed by the Union government using its residuary powers.
The judgment made several key points:
- The Constitution explicitly grants states the authority to tax entertainment and amusement facilities.
- Since the state law already covers admission fees and the entertainment activity itself, the Centre cannot tax the same activity under a different label like 'service'.
- The court noted the absence of any legal mechanism to separate a 'service element' from the entertainment tax levied by the state, making dual taxation on the same transaction impermissible.
- The bench rejected the Centre's reliance on the 'aspect theory,' distinguishing this case from others involving broadcasting or professional services. Here, both governments were attempting to tax the identical aspect—'entertainment and amusement.'
Consequently, the court declared the imposition of service tax on "access to amusement facilities" unconstitutional, ruling that such a tax can be levied only by state governments. This verdict clarifies the boundaries of taxing powers and protects states' fiscal autonomy in sectors explicitly assigned to them by the Constitution.
