Through Finance Act 2010, the government had sought to levy service tax on renting of immovable property to businesses, despite the fact a similar law enacted three years ago remained non-enforceable, thanks to a Delhi High Court ruling on a petition challenging the law filed by major retailers. Now, the high court has once again put a stay order on the authorities’ move to collect service tax on such rentals paid since July 2007, when the original law was to take effect. A frustrated government has promptly sought Supreme Court’s intervention on the issue.

A bench headed by Chief Justice SH Kapadia recently issued a notice to UTV Software Communications Ltd on the petition filed by the finance ministry. The HC ruling last April was on a petition filed by Home Solutions Retail India Ltd. This petition too comes up for hearing in the Supreme Court on July 13.

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The Centre had moved the apex court last year after the HC interpreted the Finance Act 2007 provision for levy of service tax “on renting of immovable property for use in the course and furtherance of business” as not amounting to a tax on “renting per se,” but “services in relation to renting.” The court also held that such renting is not a “service,” and, therefore, cannot be taxed, besides stating that service tax on renting of immovable properties is unconstitutional.

The government’s intent, despite the ambiguity in the provision, was to tax renting to businesses — something which could have imposed a big burden on retailers and call centres operating on prime property. So, the government subsequently changed the law itself in Finance Act 2010, making it clear that it wants to levy service tax on such renting. Now, the high court’s intervention has again stymied that effort.

Both realtors, who collect the tax and will have to increase rents and retailers and call centres, who will have to fork out large amounts as tax, have a lot at stake, since the government is trying to collect service tax on rents paid since June 2007. R Murlidharan, executive director (tax and regulatory affairs) of PwC drew attention to the impropriety of the practice of changing laws retrospectively to circumvent judicial orders.

The HC order, while disposing of petitions by retailers such as Lifestyle, Shopper’s Stop, Home Solutions Retail India Ltd and Barista Coffee, had brought relief to realtors and all companies operating from rented space. Finance minister Pranab Mukherjee had moved Finance Bill 2010 in Budget 2010, which received Presidential assent on May 11. The Act, which seeks to reintroduce service tax on renting immovable property with certain retrospective amendments also provides liberty to the tax authorities to make all recoveries of service tax with interest, penalty or fine along with other charges, as if the amendment to the Finance Act 1994 by Finance Act 2010 always stood incorporated retrospectively from June 1, 2007. Says advocate Vinita Bhargava, partner with Khaitan & Co: “The 2010 (Finance) Act is another attempt by the government to include such transactions in the net of taxable services. It is trying to cure the defects as the high court had held that renting of immovable property is not a service. The Centre is trying to overrule a principle laid down by the High Court, which is still in existence.” The retailers had challenged the constitutional validity of Finance Act 2007 on the ground that it was beyond the legislative competence of the Union and, thus, Parliament cannot levy such a tax.

Last year, another Bench of the apex court had sought a reply from the Retailers Association of India, the Confederation of Real Estate Developers’ Associations of India and the Multiplex Association of India on a transfer petition filed by the Centre….

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