Retailers, realtors and companies operating their businesses from rented space can now breathe easy. The Delhi High Court has ruled that commercial renting of premises will not attract service tax. It would also mean a major revenue loss to the government. It collects over Rs 8,000 crore annually from renting service. In 2009-10, it expects to collect Rs 68,900 crore through service tax levied at the rate of 10%.
The court held that renting of immovable property for use in the course or furtherance of business could not be regarded as a service, and, therefore, can’t be taxed. It gave this ruling while disposing of petitions by retailers such as Lifestyle, Shoppers Stop Home Solution and Barista Coffee. “The high court
order is a welcome one for the business and shall reduce the input costs in these tough times,” Ernst & Young associate director Bipin Sapra said.
The Centre will appeal against the ruling in the Supreme Court as the decision could have serious ramifications for service tax collections, an official in the government, who didn’t wish to be identified, said. “If the government appeals to the Supreme Court, there may be some time before the issue is resolved fully,” Mr Sapra said.
The Centre had brought “service provided in relation to renting of immovable property other than residential
properties and vacant land for use in the course or furtherance of business or commerce” under the tax net through the Finance Act, 2007. Subsequently, a detailed notification and a circular were issued on May 22, 2007, and January 4, 2008, referring to ‘renting as a taxable service’, a move contested by the petitioners.
They had taken the line that since the Act provided for levy of service tax on service provided in relation to renting of immovable property, it could not be construed as levy of tax on renting. The court upheld the view and ruled that the interpretation in the notification and the circular was not correct and ultra vires to the Act and set aside both of them.
Service tax is a tax on value addition provided by some service providers and renting of immovable property for use in the course or furtherance of business did not involve any value addition and could not be regarded as a service, the court observed. An alternate plea was also taken up by the petitioners that the levy of service tax on renting of immovable property would amount to tax on land and therefore, fall outside the legislative competence of Parliament as it is a state subject.
The court, however, did not examine the alternative plea. - ET