Renting of Immovable Property Service - Proposed amendment may not conform to demarcation of Centre-State powers mandated under Constitution
GOVERNMENT'S determination to collect service tax on ‘renting of immovable property' was reinforced in this Budget where it proposed a retrospective amendment to the relevant provisions of Finance Act, 1994 [clause (zzzz) of Section 65(105)] to nullify the path breaking judgment of the Delhi High Court in Home Solutions Retail India Ltd. & Others vs. UOI 2009-TIOL-196-HC-DEL-ST.
In its D.O. letter D.O.F. No.334/1/2010-TRU Dated 26th February 2010, TRU explained that this amendment was proposed to clarify the legislative intent behind bringing this ‘service' into the service tax net so as to put an end to the cascading effect of the High Court judgment on landlords, whose tenants played truant by not coughing up the service tax portion on their rent bills.
The TRU clarification says:
“ 9.1. …………. the Hon'ble High court of Delhi in its order dated 18.04.2009 in the case of Home Solutions Retail India Ltd. & Others vs. UOI has struck down this levy by observing that the renting of immovable property for use in the course of furtherance of business or commerce does not involve any value addition and therefore, cannot be regarded as service . Apart from the revenue loss caused to the exchequer, the judgement has placed the landlords in a very precarious situation. In view of this judgement, the commercial tenants have stopped them reimbursing the tax element. However, the landlords are receiving regular demand notices from the department issued to protect government's revenue for the interim period.
9.2 In order to clarify the legislative intent and also bring in certainty in tax liability the relevant definition of taxable service is being amended to clarify that the activity of renting of immovable property per se would also constitute a taxable service under the relevant clause. This amendment is being given retrospective effect from 01.06.2007.”
With the proposed retrospective amendment to clause (zzzz) of Section 65(105) of the Finance Act, 1994 and insertion of validation clause through Clause 76 of the Finance Bill, 2010, all actions that were initiated by the Revenue in this regard to facilitate recovery of service tax dues from the erring service providers (landlords) with interest and penalty stands validated with effect from June 1, 2007.
So far so good. The eagerness of the Government to safeguard its revenue is palpable. But in it's over enthusiasm, the Government lost sight of the Constitutional mandate which demarcates the powers of the Union and the State Government in Article 246 of the Constitution.
Explanation 1 to clause (zzzz) of Section 65(105) of Finance Act, 1994, defines immovable property for the purposes of this Act which includes ‘lands and buildings' amongst others. As per Entry 49 of List II (State List) in Schedule VII of the Constitution only States are empowered to impose taxes on ‘lands and buildings'.
While the Central Government may have every right to categorize the ‘renting of immovable property' as ‘service', it certainly does not have the mandate to levy tax on ‘lands and buildings' by regarding such ‘renting of lands and buildings as service' because such an act would tantamount to levy of tax on a matter enumerated in the State List through the back door.
Though the Constitutional validity of the levy was also questioned by the petitioners in the Home Solutions Retail case before the Delhi High Court, the High Court observed that examination of this aspect becomes irrelevant since the main plea of the petitioners that only ‘services in relation to renting of immovable property' are taxable is upheld.
The High Court categorically held that ‘renting of immovable property for use in the course or furtherance of business of commerce' by itself does not entail any value addition and therefore, cannot be regarded as a ‘service' so as to levy service tax.
The Finance Bill is to be enacted in a few days and the renting problem will come back and perhaps this time around the Constitutional validity of the levy will be strongly agitated before High Courts or Supreme Court.
Will the tenants oblige?