Service tax on renting issue not likely to get over just yet

: By Sanjeev Sachdeva

In a judgment delivered on April 18, 2009, the Delhi High Court ruled that renting of immovable property is not a service, and hence cannot attract service tax.

The first round of litigation in this contentious issue has thus concluded with relief to retailers’ associations as well as individual retailers. However, it may be naive to consider that this saga is over.

Service tax on “renting of immovable property service” was levied with effect from June 1, 2007. From its very introduction, the levy became controversial. Several writ petitions were filed in various High Courts across the country challenging the levy as being beyond the constitutional powers of the central government. The pending petitions were transferred to the Supreme Court, which directed the Delhi High Court to hear the matter. The Delhi High Court delivered the much awaited judgment last week, striking down the levy and providing relief to a beleaguered business community.

The decision of the High Court assumes significance as it is based on the premise that “renting” is not a service, even though “renting of immoveable property” is defined as a taxable service in the Finance Act 1994. Even otherwise, the premise that renting is not a service is itself an arguable one. A ‘service’ is nothing but the act of doing something useful for a person or an organisation for a consideration.

In other words, a lease or a renting agreement is not a transfer of the property per se, such as sale of property, but only of the right to use a property. Viewed thus, a lease (or a renting agreement) confers a benefit by the property owner (the landlord) on the user of the property (the tenant) for a defined period, and is therefore, nothing but a service.

Coming now to the view of the Court that renting was not liable to service tax, as it did not involve any value-addition, it may be noted that the concept of value added tax (VAT) or a comprehensive goods and services tax (GST) essentially involves capturing the value of economic activity at every stage. Thus, when a retailer sells goods that he has purchased from a wholesaler, he does not add any value to the goods per se, but he does add economic value in the form of his mark-up on the wholesaler’s price.

Hence, VAT is payable by the retailer on the economic value added by him,...