Govt can tax rent on immovable property: HC

The Punjab and Haryana High Court has upheld the Constitutional validity and retrospective levy of service tax on renting of immovable property. The ruling, in favour of the government, will protect over Rs 1,000 crore of revenue the tax department was expecting from the service.

In the Finance Bill 2010, amendments were made in the definition of renting of immovable property to provide explicitly that the activity of renting itself is a taxable service. The change was made with retrospective effect from June 1, 2007. This was likely to get the government another Rs 1,000 crore, apart from Rs 200 crore in the current financial year.

The levy of service tax on renting was challenged by Shubh Timb Steels Ltd, owning commercial property in Himachal Pradesh, on the issue of Constitutional validity and also validity of the retrospective amendment. On both these points, the court ruled in favour of the government.

The outcome of this case might have a bearing on the high courts disposing of similar writ petitions in their respective jurisdictions, said Bipin Sapra, tax partner, Ernst & Young.

In this case, the Constitutional challenge to levy service tax on renting of immovable property was on the ground that service tax under Entry 92C or 97 of the Union List overlapped with the power of the state legislatures under Entry 49 of the State List, which deals with their power to levy tax on lands and buildings.

Entry 92C of the Union List deals with ‘tax on service’, while Entry 97 deals with residual power of the Union government to legislate on matters not in the State List or the Concurrent List.

The court observed that it could not be held that renting of immovable property did not involve any service, as a service could only be in relation to property and not be renting of property. It said renting for commercial purposes is a service and has a value for a service receiver.