Pranab Mukherjee’s Budget has caused heartburn amongst owners who are renting commercial immoveable property. The 2010 Finance Bill seeks to impose a service tax on renting immovable property, with a retrospective effect dated from June 1, 2007.

The Delhi High Court earlier had, in a petition filed by Home Solutions Retail pursuant to a notification and a circular issued by the Central government imposing service tax on rentals of immoveable property, held that the relevant law does not entail the renting of immovable property in the course or furtherance of business of commerce would constitute a taxable service and be exigible to service tax. Holding that the interpretation placed by notification and circular on the said provision as incorrect, the court went on to set aside the levy of service tax. As the law stands, renting immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and cannot be regarded as a service. The Government has challenged the Delhi HC judgment, and is currently pending before the Supreme Court of India. The Government has not obtained any stay of the judgment of the High Court till date.

In another petition filed by SSIPL Retail against notices issued by the Government inspite of the above judgment,, the Government has undertaken before the same Delhi High Court to take corrective steps by issuing further instructions, to its officers not to write letters demanding payment of service tax or threaten coercive steps.

Leaving the possibilities of alternative interpretations aside, the Budget amendment proposes that notwithstanding anything contained in any judgment, decree, or order of any court, tribunal or other authority, the service tax liability continues w.e.f. June 1, 2007; the service tax amount from the effective date, along with interest and penalty shall be recovered; and no proceedings in this regard shall be maintained in any court, tribunal or other authority.

This proposed amendment has baffled assessees, who, all this while felt protected by the judgment of the High Court with a hope of favourable outcome from the apex court. In view of the proposed amendment, several questions such as the maintainability and continuation of the Government’s appeal before the Supreme Court; assessees’ remedy to claim exemption of penalty and interest etc., remain unanswered.

The challenge before the Delhi HC on the levy of service tax was two-fold; one, that the notification and circular levying the tax on ‘renting’ are ultra vires the Finance Act; and the other, that the levy of tax on property by the Central Government would be in violation of the Constitution of India, as taxes of such nature are to be levied by the State Government.

The High Court decided the first question against the levy, and while doing so elected not to adjudicate on the second challenge, in view of having admitted the main plea. The proposed amendment to ‘clarify’ the act of renting itself as a ‘taxable service’, adds a new twist. On the one hand, the amended definition can still be liable to challenge as being unconstitutional, an aspect not decided by the High Court. Also, the dispute now enters the complex domain of powers of the legislature to amend laws retrospectively. The new amendment also seeks to levy interest and penalty from June 2007 till such date the Finance Bill receives Presidential assent.

The Supreme Court has repeatedly held that the amendment can have retrospective effect if they are clarificatory in nature. If however, the amendment seeks to change the law, in this case, widen the existing taxing net, it cannot be held to be retrospective in nature. If the amendment changes the law, it is not presumed to be retrospective, irrespective of the use of phrases such as, ‘ït is declared’ or ‘for the removal of doubts’. There are other intricate issues concerning conduct of the legislature to nullify the effect of a judgment of a Court and the capacity of a statute to bar anybody’s right to take recourse to legal remedies, that need consideration.

The stakes are high on both sides, which include not only the service tax amount but also the interest and penalty thereon. One may therefore expect to witness some action in the courts if the Parliament approves and the President grants assent to the Finance Bill in its current form as regards renting of immovable property services.

One can hope that the parliamentarians deliberate and debate on all aspects and implications of the proposed amendment, and the proposed amendment does not get through mechanically. Whichever way the events unfold, the issue of taxability of rents of immovable property has reduced to a ‘cat and mouse’ game between the Government and the assessees.

Alishan Naqvee is a partner and Himanshu Chahar is an associate at LexCounsel Law Offices, New Delhi.