Service tax on commercial rentals to go

In a major respite for retailers and businesses, the Delhi high court has struck down levy of service tax on renting of immovable property as "unconstitutional".

The Delhi HC decision came on April 18, 2009, in a combined order while deciding on 26 writ petitions filed by petitioners from across the country, including retail chains, challenging levy of service tax on commercial property rentals imposed from June 1, 2007.

The order is understood to be applicable across the country with retrospective effect. In June 2007, the Union Ministry of Finance had brought renting, leasing and licensing of immovable property "for use in the course of furtherance of business and commerce" under service tax, forcing retailers and businesses to cough up 12.36 per cent service tax, including education cess, on rentals. This was reduced to 10.3 per cent from February 2009 after service tax was brought down to 10 per cent.

While the levy had put an additional burden on retailers, corporates and businesses leasing retail and office space, it had also put those who had rented out property before June 2007 in a fix as their rental agreements had not factored it in.

Coming at a time when recession is biting businesses hard, the decision has retailers, corporates and property investors heaving a sigh of relief.

Businesses across the country had challenged the constitutionality of the levy on the grounds that renting does not involve any service, and that the Central government was not empowered to tax transfer of rights in immovable property, which is a state subject as per the Constitution of India.

While some high courts, including Gujarat high court, had granted interim relief to petitioners from payment of service tax until final disposal of their matters, the stays were granted subject to undertakings by petitioners, mainly tenants, to deposit the service tax amount with the government if the tax was ultimately held constitutional.

To avoid multiplicity of litigation, the Central government had sought from the Supreme Court transfer of all writ petitions pending before different High Courts of India, to the Delhi high court for single window adjudication.

[Source: timesofindia.indiatimes.com]