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Injunction against service tax on rent of commercial buildings
October, 16th 2007
The Madras High Court has granted an interim injunction restraining the Union Finance Ministry from collecting service tax on rent of commercial buildings following a petition filed by General Star Kitchen Pvt Ltd, which operates a restaurant in Chennai Citi Centre.

In the order dated October 9, the court has granted two weeks injunction. The case has been posted for hearing on October 22.

The order has evoked the interest of developers and landlords who have been affected by the Union budget levying 12 per cent service tax on rent or lease of commercial space. Those particularly affected are the owners who have leased space to retailers and information technology companies, say real estate developers.

While the manufacturing sector is able to treat the tax as input credit and pass it on, the retailers and other service providers find the new tax eating into their margins, they say.

The petitioner has challenged the levy of service tax on the grounds that the Union Government has no power to levy any tax on rentals accruing from building in the form of service tax or otherwise. Such a levy is a tax on rent, which in turn is a tax on property. Under the Constitution, only the State Government has the exclusive power to levy tax on land and building.

The petitioner has also submitted that there is no service involved in letting out immovable properties. The Union Government is attempting to levy a tax on service, which it is not entitled to under the federal framework of the Constitution.

The petitioner has also argued that the Government has drawn a distinction between letting properties to business or commerce, on which the service tax is levied, and other leases. There is no distinction between the landlord who lets out property for a commercial purpose or otherwise. So, the distinction is hostile and discriminatory and violates the fundamental right of equality under law.

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