The Delhi High Court has ruled that commercial renting of premises will not attract service tax, in a move that will cheer India Inc fighting a slowdown but leave the central government about Rs 8,000 crore poorer every year.

The Centre will challenge the order in the Supreme Court, said a government official who did not wish to be identified.

Renting of immovable property for use in the course or furtherance of business cannot be regarded a service, and, therefore, cant be taxed, the court ruled while disposing of petitions by retailers such as Lifestyle, Shoppers Stop Home Solution and Barista Coffee.

The order comes as a major relief to realtors and all companies operating from rented space, particularly retailers and call centres. The high court order is a welcome one for the business and shall reduce the input costs in these tough times, Ernst & Young associate director Bipin Sapra said.

It also means a major revenue loss for the government, which collects over Rs 8,000 crore annually as tax on renting services, or more than one-tenth of its service tax net.

In 2009-10, the government expects to collect Rs 68,900 crore through service tax, levied at a rate of 10%. If the government appeals to the Supreme Court, there may be some time before the issue is resolved fully, Mr Sapra said.
The Centre had brought service provided in relation to renting of immovable property other than residential properties and vacant land for use in the course or furtherance of business or commerce under the tax net through Finance Act, 2007.

Subsequently, a detailed notification and circular were issued on May 22, 2007, and January 4, 2008, referring to renting as a taxable service.

This was contested by Lifestyle, Shoppers Stop Home Solution and Barista Coffee before the Delhi High Court. They argued that the Finance Act provided for levy of tax on service provided in relation to renting of immovable property and it could not be interpreted as levy of tax on renting.

The court upheld the view and ruled that the interpretation taken in the notification and the circular on the provision was not correct and ultra vires to the Act, and set them aside. Service tax is a tax on value addition provided by some service providers, and renting of immovable property for use in the course or furtherance of business does not involve any value addition and cannot be regarded as a service, the court observed.

An alternate plea was also taken by the petitioners that the levy of service tax on renting of immovable property would amount to tax on land and, therefore, fall outside the legislative competence of Parliament as it is a state subject.

The court, however, did not examine the alternative plea.