R S Sharma : Service tax liability on commercial renting starts June ’07
Landlords; who were avoiding payment of service tax on commercial renting taking shelter under umbrella of interim stay by various High Courts on levy of service tax; are in for a big trouble after Punjab & Haryana High Court Ruling dated 22nd November 2010 in case of M/s Shubh Timb Steels Limited Versus Union of India AIT-2010-539-HC wherein the constitutional validity of the levy as well as the retrospective amendment vide Finance Act 2010 which is effective from 1st June 2007 has been upheld.
The landlord being a service provider under the law is liable to pay service tax. The tenant might have vacated the premises but landlord has no escape from tax.Further, in majority of the cases the rent agreements are silent about service tax.In such cases the tenants will simply refuse to pay service tax to landlords.The already bitter relationship between landlord and tenant will turn more bitter.
The petitioner sought declaration of provisions of Section 65 (90a) and Section 65 (105) (zzzz) of the Finance Act, 1994 as ultravires the Constitution.
Union of India claimed that renting of property was different from sale of goods or transfer of property or conveyance. The transaction is not covered by tax on sale of goods. Providing of service with respect to property was covered by service tax. Service tax was on consideration received for allowing use of the premises. Under Article 246(1), Parliament had exclusive power to make laws in respect of matters covered under List I including residue entry. As regards retrospectivity, it was stated that the amendment was clarificatory. The levy was already provided even under un-amended provisions.
The object of the amendment was to overcome the judgment of Delhi High Court against which appeal was pending before the Hon’ble Supreme Court. Judgment of Delhi High Court having not become final, the service providers were required to collect tax even if the same could not be collected on account of the said judgment.
High Court was “unable to hold that service tax on service of renting of property is exclusively covered by Entry 49 List II. Entry 49 of List II relates to tax on land and building and not any activity relating thereto. Income tax on income from property, wealth tax on capital value of assets including land and building and gift tax on gift of land and building have been upheld. It cannot be held that renting of property did not involve any service as service could only be in relation to property and not by renting of property.
Renting of property for commercial purposes is certainly a service and has value for the service receiver. Moreover, the aspect of service element in renting transaction is certainly an independent aspect covered under Entry 92C read with Entry 97 of List I. In any case, subject matter of impugned levy being outside the scope of entry 49 of List II, power of Union Legislature is undoubted.
Question whether levy will be harsh being in addition to income tax and property tax is not a matter for this Court once there is legislative competence for the levy. Even if it is held that transaction of transfer of right in immovable property did not involve value addition, the provision cannot be held to be void in absence of encroachment on List II.”
On the aspect of retrospectivity; it was held that competent legislature can always clarify or validate a law retrospectively. It cannot be held to be harsh or arbitrary. Object of validating law is to rectify the defect in phraseology or lacuna and to effectuate and to carry out the object for which earlier law was enacted. HC did not find any ground to set aside giving of retrospective effect to the amendment from 1.6.2007 on which date levy was initially provided.
The lapse in drafting of the law by the Draftsman led to litigation but the Government amended the law vide Finance Act 2010 as the intention was to levy service tax on renting. The words “in relation to” played havoc and it was claimed that the renting service itself was not taxable and only service provided in relation to renting was taxable.