Operators to pay service tax on the sale of SIM cards: Supreme Court

The Supreme Court has said that operators are required to pay service tax on the sale of SIM cards.

A Supreme Court bench of Justices Mukundakam Sharma and A.R. Dave has said the sale of SIM cards is part of the activation and processing fee, on which the operators are required to pay service tax.

The Bench has added that legally, the amount received by the operator from its subscribers for the SIM card is part of the taxable value for levying service tax. It observed that the payments made by subscribers to procure SIM cards are processing charges for activating mobile services and thus, the amount will be included in the value of the SIM card.

The Bench also said that the value of the SIM card is part of the activation charges, as activating a new connection is not possible without a functioning SIM card and the value of the taxable service is calculated on the gross total amount received by the operator from subscribers.

This comes after Idea Cellular?s petition, challenging the order of the Excise department to pay service tax on the sale of SIM cards.

The Supreme Court has rejected Idea Cellular?s petition and has stated that it found no reasoning in the High court?s judgement and order on this issue.

Idea Cellular was selling SIM cards and was paying sales tax to the Kerala government on these sales. The state’s Department of Sales Tax was charging sales tax under the Kerala General Sales Tax Act, 1963 on the grounds that activation of services was a value addition and therefore fell under their domain.

However, the Department of Service Tax Department objected to this, on grounds that a deactivated SIM had no value and thus imposed service tax and a penalty on Idea Cellular.

This was challenged by Idea Cellular before the Customs Excise and Service Tax Appellate Tribunal in 2003, which on its order dated May 20, 2006, held that service tax cannot be levied on the sale of SIM cards.

Following this, the Service Tax Department approached the High Court, which on September 4, 2008 reiterated their stand on this issue.