'Service' Tax on Renting of Immovable Property: Constitutional Aspects

In a previous post, I referred to a constitutional challenge pending in several High Courts on the amendment to the Finance Act, 1994 by the Finance Act, 2010 levying service tax on renting of immovable property. In terms of the legislative competence of the Union Parliament, there are a few grounds on which a challenge to this provision can be mounted. First, one can consider the issue of whether Parliament has the competence to artificially enlarge the definition of ‘service’. Parliament appears to have that power – even if the subject-matter of the tax is not a real service conceptually, if Parliament has the power to legislate under the residuary entry (Entry 97, List I) then the mere fact that Parliament has incorrectly termed the tax as a service tax ought not to matter. It is noteworthy that similar issues may arise in several contexts – for instance, we have already considered the amendments to the Income Tax Act by Section 26 of the Finance (No. 2) Act, 2009, through which Section 56 of the Income Tax Act, 1961 was amended. As I stated in an earlier post, “among other things, the amendment has artificially expanded the definition of “income from other sources” so as to practically make transfers of immovable property without consideration subject to charge of income tax in the hands of the transferee…” Such types of artificial expansions (when made by Parliament) are possible because of Entry 97. There may be a possible line of argument against such legislative practice based on some stray observations in Kalyana Mandapam – please refer to the discussion in this post on the scope of Entry 97 in the context of Section 56 of the Income Tax Act. This line of argument however appears to be weak; and it would be a stronger case to show that competence of Parliament does not exist as the tax falls within List II (thereby not giving recourse to Parliament under Entry 97, List I). In this regard, the question which arises is – does the imposition of a ‘service’ tax on the renting of immovable property fall within the scope and ambit of Entry 49, List II? The question shall be considered in detail in the next post.