Facts of the Case

  • The petitioners are entities and associations engaged in the business of outdoor advertisements, which involves erecting physical hoardings after obtaining the necessary commercial permissions from landlords and local regulatory authorities to display advertisements for their respective clients.
  • Following the enactment of the Constitution (One Hundred and First Amendment) Act, 2016, and the subsequent implementation of the Central Goods and Services Tax Act, 2017, and the Karnataka Goods and Services Tax Act, 2017, advertisement tax was legally subsumed into the Goods and Services Tax (GST) framework.
  • Despite this constitutional overhaul, various municipal corporations, municipal councils, and local town authorities within the State of Karnataka continued to issue tax demand notices and threatened the forced removal of physical hoardings if the advertisement tax was not paid.
  • In response, the petitioners filed Writ Petitions before the High Court of Karnataka challenging the constitutional validity of the underlying statutory tax provisions and the legality of the demand notices served upon them.
  • The state government subsequently attempted to introduce the Karnataka Municipalities and Certain Other Laws (Second Amendment) Act, 2021, to retroactively substitute the term "tax" with "fee" in the impugned statutes to validate their collection.

Issues Involved

  • Whether the municipal and state respondent authorities were constitutionally justified under Article 265 in continuing to issue demand notices calling upon the petitioners to pay advertisement tax post the implementation of the GST regime.
  • Whether the statutory provisions of Section 103(b)(vi) and Section 134 of the Karnataka Municipal Corporations (KMC) Act, 1976, along with its associated enabling machinery sections (Sections 135, 139, and Schedule VIII), became unconstitutional, ultra vires, and void due to the deletion of Entry 55 of List II of the Seventh Schedule.
  • Whether the corresponding provisions of Section 94(1)(b)(xiii), Section 94(1-B), Section 133, and Schedule VII of the Karnataka Municipalities (KM) Act, 1964, were rendered constitutionally invalid and liable to be struck down.

Petitioner’s Arguments

  • The petitioners argued that the legislative competence of the State to impose a tax on advertisements was derived strictly from Entry 55 of List II (State List) of the Seventh Schedule to the Constitution of India, which was explicitly omitted by Section 17 of the Constitution (101st Amendment) Act, 2016.
  • It was submitted that because the parent State Legislature was entirely denuded of its power to legislate on advertisement tax, its inferior corporate agents—the municipalities and corporations—similarly lost all delegated authority to levy or collect such an impost.
  • The petitioners highlighted a clear violation of Article 14 of the Constitution, noting that the State had amended the Karnataka Gram Swaraj and Panchayat Raj Act to delete advertisement tax provisions, creating an illegal anomaly where the tax was demanded in urban municipal areas but not in rural panchayat areas.
  • They asserted that the continuation of the impugned provisions on the statute books violated Article 265 of the Constitution, which explicitly mandates that no tax shall be levied or collected except by the clear authority of law.
  • The petitioners maintained that they were being subjected to illegal double taxation, forced to pay GST on their advertisement services while concurrently facing arbitrary demands under obsolete local municipal tax laws.

Respondent’s Arguments

  • The respondent municipal authorities argued that the amounts being demanded from the billboard operators were in the true nature of a "fee" for regulatory services rendered and privileges conferred, rather than an unconstitutional "tax".
  • The respondents relied on landmark judicial precedents to establish that there is no absolute generic difference between a tax and a fee, and that a broad correlation between the collections and the regulatory supervision is legally sufficient.
  • The learned Additional Government Advocate (AGA) argued that the introduction of the 2021 Amendment Act, which substituted the word "tax" with "fee" across the KMC and KM Acts, completely cured any constitutional defect, making the writ petitions entirely infructuous.
  • Certain respondent local authorities contended that the petitioners had voluntarily entered into commercial contracts with the municipalities agreeing to clear these dues, and were therefore legally estopped from challenging the validity of the demands.

Court Order & Findings

  • The High Court of Karnataka allowed the writ petitions, declaring that on and after the implementation of the GST Act, 2017, and the 101st Constitutional Amendment, the power of the State Legislature to levy advertisement tax stood completely withdrawn.
  • The Court explicitly declared Section 103(b)(vi) and Section 134 of the Karnataka Municipal Corporations Act, 1976, unconstitutional, void, and ordered them to be struck down.
  • Consequently, the Court struck down the connected enabling words, provisions, and schedules under Sections 135(1), 135(2)(ii), 135(3), 139, and Schedule VIII of the KMC Act, 1976, along with all pursuing municipal rules and bye-laws.
  • The Court similarly invalidated and struck down Section 94(1)(b)(xiii), Section 94(1-B), Section 133(1), Section 133(2)(ii), Section 133(3), Proviso (iv) to Section 142, Section 324(1)(ff), and Schedule VII of the Karnataka Municipalities Act, 1964.
  • The individual tax demand notices issued against the petitioners were quashed, and the respondents were restrained from taking any coercive action against the erected hoardings.
  • Regarding the restitution of funds, the Court granted the petitioners liberty to submit representations detailing all advertisement taxes paid after the 101st Constitutional Amendment; the respondents were directed to either refund the amounts within six weeks or formally adjust them against other valid outstanding statutory levies.

Important Clarification

  • The Court clarified that inferior corporate bodies like Municipal Corporations and Municipalities do not possess independent, inherent sovereign powers to tax; they remain entirely dependent on their parent state legislatures for the bestowal of such privileges.
  • The Court observed that the newly enacted Bruhat Bengaluru Mahanagara Palike (BBMP) Act, 2020, conspicuously lacked any advertisement tax provisions, proving that the Legislature was fully aware that its taxing power under Entry 55 of List II had ceased to exist.

Sections Involved

  • Constitution of India: Article 14, Article 226, Article 227, Article 243-X, Article 265, Article 285; Seventh Schedule, List II, Entry 55 (Omitted).
  • Amending Statutes: Constitution (One Hundred and First Amendment) Act, 2016 (Section 17); Goods and Services Tax (Compensation to States) Act, 2017 (Section 5).
  • Karnataka Municipal Corporations Act, 1976: Section 103(b)(vi), Section 134, Section 135(1), Section 135(2)(ii), Section 135(3), Section 139, Schedule VIII.
  • Karnataka Municipalities Act, 1964: Section 94(1)(b)(xiii), Section 94(1-B), Section 133(1), Section 133(2)(ii), Section 133(3), Section 142 Proviso (iv), Section 324(1)(ff), Schedule VII.
  • Other State Acts: Karnataka Gram Swaraj and Panchayat Raj Act, 1993 (Section 199(3) omitted via 2017 Amendment).

Link to download the order - https://mytaxexpert.co.in/uploads/1783149233_643compressed.pdf

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