Service tax on commercial rent- the notification is beyond the charging section- the draftsmen working for legislators must have open eyes and mind to consider suggestions published, and not with approach of who care …. We can amend law is not desirable

[C.A. DEV KUMAR KOTHARI]

Relevant Links:

Home Solutions Retail India Ltd. v Union of India & Others 2009- TMI -33136 (Delhi High Court)  

 section 65(105) (zzzz) of Finance Act, 1994- charging section.

 section 65(90 a) of Finance Act, 1994  -' renting of immovable property.

Notification No. 24/2007-ST dated 22.5.2007

Circular No. DOF 334/1/2008-TRU dated 29.2.2008

 Circular No 98 dated 4.1.2008

Article by Dr. Sanjiv Agarwal.

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Suggestions by the author on proposed charging section in the Budget 2007:

When the budget 2007 was announced, the author had written an article titled "Proposed service tax on renting of commercial premises-analysis, request to reconsider levy and some suggestions- make tenant, as service receiver liable to register and pay service tax".

 The article was Published in Service Tax Today (A Taxmann) publication) in  MARCH 22,2007  PAGE 55 (Mag.).  In the article author had  made detailed observations on the budget proposals about service tax on  commercial premises and expressed that only some of  services in relation to renting  can be brought in tax net as per proposed section. The author had also made suggestions for consideration of the Finance Minister, with highlight of the relevant suggestion in this context, as follows:

Request and suggestions to the Finance Minister:

It is requested and suggested to the honorable Finance Minister to:

Reconsider the proposal in view of constitutional validity and if found inconsistent with constitutional provisions and also inconsistent with the concept of service tax please drop the same.

If found correct and desirable, to impose tax only on portions of buildings which are used for commercial purposes.

To make the service receiver liable to pay service tax on service used. This will avoid revenue leakage. For example, suppose a building is owned by four persons who let out the same to a company each receiving rent of Rs.60000/- per month amounting to Rs.7,20,000/- per year. In this case all owners may be exempt from service tax. Whereas the tenant, if made liable to pay service tax , will have to pay tax on entire amount of Rs.28,80,000/- paid to four owners.

In case of business organizations several properties are taken on rent from several owners. It would be difficult to monitor owners, instead of that tenants who are organized persons can manage tax affairs easily and it would be easy to monitor them.

To avoid confusion  words "by renting " can be used in meaning of taxable service as follows:

"taxable service" means any service provided or to be provided --

  to any person, by any other person by renting of immovable   property for use in the course or furtherance of business or commerce".

 This is because the words 'in relation to renting' can be construed as service rendered to land lord or tenant in relation to renting of property and not the rent itself.

 Therefore, as per clause (e) of the above suggestions it is clear that the author had in clear terms indicated in his article that the scope of taxable services, as per proposed charging section can be construed to be restricted to services provided by any person to other person (likely to be land lords and tenants) only in relation to renting of properties and not renting of property itself. The author had also suggested proper language to be used in charging section. However, as usual our bureaucrats being overconfident had not taken care of such an important suggestion at right time. If all the suggestions put forth by author were incorporated in the law, the revenue could have gained substantially and without doubt.

Recent article by Dr. Sanjeeva Agarwal:

Readers may refer to a detailed article titled "Renting of Immovable Property - Delhi High Court Judgment analyzed" hosted on this website recently. The article appears to be exhaustive and cover all aspects for past, present and probable future. Hat's off  to Dr. Agarwal. In view of that article the author has preferred a short article mainly concerning the process of law making and desirable attentiveness of draftsmen.

Constitutional validity is still open:

The Delhi High Court has not considered the constitutional validity of the levy of service tax on rent because the court held that as per charging section only services in relation to renting are taxable and not rent itself. The court has held the notification/ circular imposing tax on rent as ultravirse the Finance Act, 2004. The question whether service tax can be imposed on rent is yet to be decided. 

Charging section and relevant notification:

It is very fundamental rule that a tax can be levied only if it is within the four corners of the charging section. Similarly the computation provisions should also be applicable. In case a case does not fall under charging section or a computation of tax cannot be made as per the computational provisions then the charge must fail. In case of service tax, besides the amendments in the Finance Act, notification is required to provide for effective date of levy of service tax. The notification should therefore meet requirements of the provisions of the FA and particularly the charging section. Defect in notifications many times create problems for the revenue as well as tax payers. This is because notifications are many times issued in undue haste and without proper application of mind. Now-a-days lacunae in drafting is also common. One can say that the revenue officials have become a bit careless in their approach while drafting provisions and notifications. This attitude has germinated and developed because the revenue officials think that at any time they can amend the law with retrospective effect of any period of past.

The problem of issuing notifications can be avoided by specifying the date from which a particular service will be taxable in the relevant provision itself.

Problem of revenue with notification relating to commercial renting:

The notification issued by the GOI to notify date of applicability of ST on commercial rent travelled beyond the charging section. As per charging section, the renting of property itself is not covered. We can for see only few services which can fall under this category like:

Consultancy service of a property consultant or broker who  advise the land lord or to prospective  tenants  about suitable course of letting out of property and also or who can advise  his client about taking on rent a property. Services of property broker or property consultants or advocates who draft agreement for letting out of property etc. can fall under this category.  This is because the service of showing property to prospective tenant, advising land lord or tenant to select property or tenant , negotiate terms and conditions, drafting of agreement, execution of agreement etc. can be considered as services in relation to letting out of property. Any other service like air-conditioning or maintenance of property will not fall under this category of taxable service because those services are not in relation to renting of property but they are for enjoyment of property. The service of property consultant to resolve disputes between landlord and tenant also cannot fall under this category because that service would not be in connection with renting of property.

Likely amendment

 As pointed out by learned Dr. Sanjiv Agarwal, the revenue may try to bring an amendment, possibly with retrospective effect. In that case perhaps the article of author published just after announcement of proposals, can be of help to argue that the provision were considered to have limitations right from beginning and therefore, on this issue retrospective amendment should not be allowed. If the revenue has made a mistake or due to overconfidence proper care was not taken the revenue must suffer for the same. Merely because it was in mind of bureaucracy that the rent is taxable, it cannot impose tax on rent.

Care required while drafting legal provisions:

From the experience about the issue in hand the draftsmen working for legislator must learn that while drafting proposals of law utmost care should be taken by competent persons. Casual and careless approach is not desirable merely because there is scope of amendment of law. The draftsmen should also read articles published after release of draft proposals to find out suggestions from public, professionals etc. In this case if a little care was taken the drafting lacunae could have been easily removed as the author had given a proper and desirable drafting.