Service Tax is unconstitutional...No says FM

Service tax on rent is constitutionally valid and is not a surrogate tax on income, reports CNBC-TV18.

The Budget has projected a huge Rs 12,000 crore increase in service tax for this year, much of which, is expected to come from the tax on commercial rent.

Analysts say that it violates the constitutional scheme, as the power to tax immoveable property is vetted in the states, but the Finance Ministry says that the tax has been introduced after due diligence. "We have examined the international experience in respect of rent and find that it is imposed in a number of countries,” says KM Chandrasekhar, Revenue Secretary.

The Finance Ministry officials say that the service tax on commercial rent is not like house tax - a levy on property. They cite the example of professional tax, which is imposed by the states, in addition to which the Centre too taxes services rendered by the same professionals.

Service tax on commercial rent is not income tax by other means they say. "It is meant to be paid by tenants and passed on to them, though it may be collected from property owners,” says R Sekar, Joint Secretary, Finance Ministry.

From the objections raised at post-Budget meetings with industry chambers, this tax is clearly headed for litigation. The Finance Ministry may have got the proposal vetted through the Law Ministry but that will not insulate it from a legal challenge. For example, the attorney general has advised that the call option given to strategic investors in state enterprises sold by the previous NDA government violates the Companies Act - that issue has now gone to the courts. It remains to be seen whether this tax too, is headed in the same direction.