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Its time to pay Service Tax on your rental income
08 December, 2010 Ahmedabad :
Its time to pay Service Tax on your rental income

It is error alone which needs the support of government. Truth can stand by itself. Recent decision of Punjab and Haryana high court in case of M/s Shubh Timb Steels Ltd, has held that it is time to pay service tax on renting of immovable property. It seems that it is high time government intervenes and comes out with a clear cut guideline on the renting issue.

It is pertinent to recapitulate what transpired in recent past .Service tax levy on renting of immovable properties was introduced from June 01, 2007 by insertion of Section 65(105) (zzzz) in the Finance Act, 1994. The Delhi high court, while examining the scope of this levy, in its judgment dated April 18, 2009, delivered in the case of Home Solution Retail India Ltd. Vs. UOI and others (STO 2009 Del 825) held that renting of immovable property for use in the course or furtherance of business of commerce by itself doesn't entail any value addition and, therefore, cannot be regarded as a service. This order of Delhi high court was appealed against by the department in the Supreme Court and the outcome of the appeal is awaited.

During the pendency of this appeal, in the Finance Act, 2010, an amendment was inserted to the Section 65(105) (zzzz) of the Finance Act, 1994 with effect from June 01, 2007. This amendment substituted the words "in relation to renting of immovable property" with words "by renting of immovable property or any other service in relation to such renting" in Section 65(105) (zzzz).

The amendment was introduced with the intention to rectify and cure the defect in the definition under Section 65 (105) (zzzz) as brought to fore in the observation of the Delhi high court that renting of immovable property can't be regarded as a service. This amendment also nullified ratio of the judgment of the high court and rendered the appeal against this judgment in the apex court in fructuous.

The high court of Punjab and Haryana in the case of M/s Shubh Timb Steels Ltd, vide its ruling dated 22.11.2010 (STO 2010 P&H 451), held that "Service tax on service of renting of property is not 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. 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."

Even if it is held that transaction of transfer of right in immovable property didn't involve value addition, the provision can't be held to be void in the absence of encroachment on List II. It is well settled that competent legislature can always clarify or validate a law retrospectively. It can't 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." The definition under Section 65(105) (zzzz) of the Finance Act, 1994, as prevailing before introduction of the amendment in the Finance Act, 2010, levied service tax on persons or the class of persons who rendered any service in relation to renting of property, whereas the amendment enlarged the scope of this definition and also brought within its ambit the very act of renting of property. The above ruling of the High Court of Punjab and Haryana has set right a wrong perpetuated by the government of India to enlarge the scope of service tax net, with retrospective effect and unfair means.

The only recourse available is to knock the doors of the Supreme Court and hope and pray that this trend of the government of India to rectify the defects in the existing law or to bring new classes of taxpayers under the ambit of an existing law, by introducing retrospective amendment to existing laws, is condemned and strictures passed against the concerned for such act against the law of estoppels.

Taxable Services: Renting of Immovable Property Services

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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