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ServiceTax - renting of immovable property ?

Asim lasani (AUDITOR) (48 Points)

11 May 2010

What is the status of Service Tax on Rental of Immovable property as of today ? Should the landlord collect service tax from the tennent and pay to the department. Whats the result of court order ?

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RAMESH KUMAR VERMA ( CS PURSUING ) (43853 Points)
Replied 11 May 2010

SIR,

"Renting of immovable property service" was introduced by the Finance Act of 2007, amending the Finance Act of 1994 (collectively and effectively "the Act"), whereby the definition of "taxable service" included, with effect from June 1, 2007:

"Service provided or to be provided to any person by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce"

Subsequently, the Secretary, Ministry of Finance, Department of Revenue, Government of India issued a Notification No. 24/2007 dated 22nd May 2007 ("Notification") and a Circular No.98/1/2008-ST dated 4th May 2008 ("Circular") whereby an interpretation of Section 65(90a) and 65(105)(zzzz) of the Act was placed to levy service tax "on the renting of immovable property" as opposed to on the service(s) provided "in relation to the renting of immovable property".

The amendment, read with the Notification and the Circular in effect brought renting, letting, leasing, licensing or other similar arrangements of immovable property, for use in the course or furtherance of business and commerce, within the service tax net. This new levy severely impacted business models across India as most of the rent arrangements did not even stipulate it beforehand.

The Division Bench of the High Court of Delhi comprised of Mr. Justice Badar Durrez Ahmed and Mr. Justice Rajiv Shakdher, on April 18, 2009, allowed twenty six writ petitions challenging the levy of service tax on commercial rentals. Provided below is the summary of the dispute, the arguments raised by both sides, and the observations of the Delhi High Court.

COURT'S DECISION

The Court held that:

- any service connected with renting of immovable property would be subject to the service tax under the Act;
- renting of the immovable property by itself does not constitute a service;
- service tax is a value added tax and therefore it is levied on the value addition provided by some service provider;
- renting of the immovable property for use in course or furtherance of business or commerce does not entail any value addition and therefore cannot be regarded as service;
- interpretations placed by the Notification and Circular on the provisions of the Act are not correct;
- the Notification and Circular, to the extent they authorize the levy of service tax on renting of immovable property per se, are set aside;
- the alternate plea of the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 List II of the Constitution of India was not examined because of the view taken on the main plea of the petitioners.

As a result, no service tax is payable on commercial rent for immovable property. It is for the Government to approach the Supreme Court of India within 90 days of the date of the judgment, if it seeks to reverse the judgment.