BACKGROUND

The constitutional validity of imposition of goods and services sax (“GST”) on lease/ rent payments have been challenged in various courts in India. In the matter Myrayash Hotels Private Limited vs. The Union of India[1], the petitioner had filed a writ petition before the High Court of Bombay challenging the constitutional validity of paragraph 2 and paragraph 5(a) of Schedule II of the Goods and Services Tax Act, 2017 (“GST Act”) and Goa Goods and Services Tax Act, 2017. In the said matter, the petitioner contended that in case of transactions related to lease/ rent, which involves non-provision of services, GST cannot be levied on the same under Article 246A of the Constitution of India (“COI”). It was further contended by the petitioner that only the state legislatures have power to impose tax on transactions related to immovable properties as set out under Entry 49 List II of the Seventh Schedule[2] of the COI.

The Hight Court of Bombay, while referring to another case viz. Retailers Association of India (RAI) vs. Union of India & Ors.[3], dismissed the aforesaid writ petition and observed that the judgement delivered in Retailers Association of India (RAI) was rendered in the context of service tax and therefore the principle laid down therein will also apply insofar as GST is concerned. In the said matter, the High Court of Bombay held that the legislative basis of imposing services tax in the leasing transaction cannot be questioned and also since the service tax was imposed under the Entry 97 of List I of Seventh Schedule of the COI[4].

The petitioner in Myrayash Hotels Private Limited challenged the aforesaid order passed by the High Court of Bombay and also challenged the constitutional validity of levy of GST on lease/ rent payments and subsequently filed a special leave petition[5] (“SLP”) before the Hon’ble Supreme Court of India (“SC”). The SC, while admitting the appeal, directed the appeal to be listed before 9 SC Judges (“Bench”) and tagged the matter with Civil Appeal No. 4487 of 2010[6]. It may be noted that in the said Civil Appeal, the SC vide its order dated April 5, 2018 directed, that since the scope of Entry 49 List II of the Seventh Schedule of the COI is pending before the Bench, the matters related to service tax are also to be listed before the said Bench.

SCOPE OF ENTRY 49 LIST II OF THE SEVENTH SCHEDULE OF THE COI AND RESIDUARY POWER OF THE PARLIAMENT

The Central Government under Article 246A of the COI enacted GST Act, whereby GST is levied on goods and services. As per paragraph 2 and paragraph 5(a) of the Schedule II of the GST Act, (i) any lease, tenancy, easement, license to occupy land; (ii) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly; and (iii) any renting of immovable property is ‘supply of services’ and thus, GST is leviable on such activities.

In Union of India vs. H.S. Dhillion[7], the SC summarized the ambit of expression ‘tax on lands and buildings‘ under Entry 49 of List II of the COI as follows: (i) it should be on units i.e. land and building as separate units; (ii) the tax cannot be a tax on totality i.e. not a composite tax on value of all land and buildings; and (iii) tax is not concerned with division of interest in the building or land. The SC held that tax under Entry 49 of List II is not a personal tax, but a tax on property. With respect to residuary power of the Parliament, the SC held that it is as much a power as conferred to the Parliament under Article 246 of the COI.

JUDICIAL PRONOUNCEMENTS.

The High Courts of Bombay and Delhi have upheld the constitutional validity of levy of GST on leasing transaction and on appeals by petitioners the SC has admitted appeals against such orders/ judgments. It is pertinent to note that various courts including SC have delivered judgements on the constitutional validity of levy of service tax on the leasing transaction (principle therein may apply to GST as has been held in Myrayash Hotels Private Limited) and 2 contrary views have been taken by the courts while determining the issue. In State of West Bengal vs. Kesoram Industries Ltd[8], it was held that Entry 49 of List II would include all types of taxes imposed on lands and buildings and same would fall within the exclusive authority of the state legislature and in no manner fall within Entry 97 of List I, by virtue of which Parliament can legislate. In Home Solutions Retail India Ltd. vs. Union of India[9], it was held by the division bench of the High Court of Delhi that the renting of immovable property for furtherance of business of commerce by itself does not entail any value addition, and therefore cannot be regarded as a service. Reliance was made on judgement of All India Federation of Tax Practitioners & Ors vs. Union of India & Ors[10], wherein it was held that for imposition for service tax, there should be a value addition for rendering of services and thus, no service tax is leviable on the same and any enactment imposing such tax on leasing transaction would be unconstitutional and ultra vires.

Another view was taken by the High Court of Delhi, in Home Solutions Retail India Ltd. vs. Union of India[11], wherein the High Court of Delhi rejected the view taken by the division bench in Home Solutions Retail above and observed that a tax levied on activity or service rendered related to the land or building would fall under the category of tax on land and building and levy of service tax on a particular kind of services cannot be struck down on the ground that it does not conform to a common understanding of word ‘service’. The court held that imposition of service tax is not a tax on land and building as enumerated under Entry 49 of List II, what is being taxed is an activity, which implies letting and leasing the immovable property for commercial and business purpose and its furtherance. It was further held that when a premises is leased for commercial purposes, it is basically for purpose of facilitating commerce, business and promoting the same, thus an element of value addition is involved therein. Once there is a value addition, there is an element of service, service tax gets attracted and the imposition of such service tax/ GST gets out of the purview of Entry 49 of List II and falls under the residuary entry, i.e. Entry 97 of List I.

The SC while hearing the SLP and Civil Appeal No. 4487 of 2010 has directed that since the scope of Entry 49 List II of the Seventh Schedule of the COI is pending before the Bench in the matter of Mineral Area Development Authority and Others vs. Steel Authority of India and Others[12], which specifically dealt with “Whether the majority decision in Kesoram Industries Limited could be read as departing from the law laid down in the seven-Judge Bench decision in India Cement Ltd. vs. State of Tamil Nadu and Whether “taxes on lands and buildings” in List II Entry 49 of the Seventh Schedule to the Constitution contemplate a tax levied directly on the land as unit having definite relationship with the land? …“. The SC accordingly held that it is of the opinion that these matters should await the decision of the Bench whereafter the hearing of these matters will be taken up once again in the course of which it will be open for the parties to urge such additional points as may be considered relevant. The SLP was deferred until disposal of the issues pending before the Bench in Mineral Area Development Authority and Others. The SC further clarified that there is no stay against the recovery and it will be open for the revenue authority to recover the tax in accordance with law and on its own merits.

THE WAY FORWARD

Owing to the conflicting orders/ judgments passed by courts in India over the years wherein one view is that in a leasing transaction there being no services provided, GST should not be imposed. Another view taken is that tax imposed on land and building is based on the total value of the property, which is covered under Entry 49 of List II and the service tax imposed on leasing transaction is a separate tax imposed on the value addition, which entails in a leasing transaction.

As most of the judicial pronouncements relate to service tax and not specifically deals with GST, the decision of the Bench on the scope of Entry 49 of List II would be a landmark judgement, which could bring a closure to the debate on the constitutional validity of levy of GST on lease/ rent payments.

Footnotes:

[1] Writ Petition No. 715 of 2019.
[2] Taxes on lands and buildings.
[3] 2011 (187) ECR 0039 (Bombay).
[4] Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.
[5] SLP No. 6080 of 2022.
[6] Union of India and Others. vs. UTV News Ltd., Civil Appeal No. 4487/2010.
[7] AIR 1972 SC 1061.
[8] (2004) 10 SCC 20.
[9] 158 2009 DLT 722 (DB).
[10] (2007) 7 SCC 527.
[11] WP (C) No. 3398/2010.
[12] (2011) 4 SCC 450.