SERVICE TAX
SERVICE TAX ON RENTING OF PROPERTY
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HERE IS MY ARTICLE ON SERVICE TAX ON RENTING OF PROPERTY- AN INTERESTNG SERVICE. WRITTEN BY ME FOR A TOP TAX JOURNAL, NAME ONCE AGAIN??????
ANY WAY IT WILL BE A GOOD SHARE WITH YOU
- CA SUDHIR HALAKHNADI
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Service Tax was introduced in our country in 1994 and it was introduced with a famous quote that when goods taxable in our country why not services. Only three service were covered under the net of service Tax at that time but now more than 100 services are covered under this tax and out law makers have chosen a selective approach to tax the service instead of taxing the whole service sector it is very much difficult for the law makers to choose the more services under its net specially when it is open secret that they dont have the courage to tax some of the very important constituents of the service sector. Now they have started taxing the transactions in the name of services, which are not related with the provision of any service.
Renting of immovable property used for commercial purposes is the one service, which has been covered under the net of service tax w.e.f. 1st. June 2007 by Finance Act, 2007 without providing any answer to basic question how renting of immovable property is a service which is being asked by so many experts ever since the Hon. Finance Minister of country has introduced service tax on it through Finance Bill-2007. If renting of immovable property is without providing any service like maintenance, infrastructure services and other support service then is only a mere renting of a property and it cannot be said that the landlord provides any service to a tenant. Hence one can say that Renting of immovable property for commercial purpose is not a service though it is taxable to service tax per the provisions of the Finance Act, 1994 (the law governing the service Tax in our country) as amended by Finance Act 2007.
Any way when Renting of immovable property has been made taxable it is useful for us to have brief study of this tax which is payable @ 12.36% of the Rent received as reduced by the property tax paid by the assessee for the period for which he is paying service tax.The rate of 12.36% includes the 2% education cess and 1% Senior and Higher education cess payable on service tax. This service is defined in Section 65(90a) and is made taxable as per the provisions of section 65(105) (zzzz) and the renting of the following properties are included in net of service tax if the rented property is used by the tenant for the commercial purpose: -
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1.Building and part of a building, and the land appurtenant thereto.
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2. Land incidental to the use of such building or part of a building.
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3.The common or shared areas and facilities relating thereto.
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4.In case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,
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Here also note that though property tax paid by the assessee is deductible from the rent received but no deduction for payment of Interest or penalty for delayed payment of property tax shall be allowed as such.
Further if the property tax is paid for the period other than the period for which for which service tax is payable then the proportionate property tax paid for the period for which service tax is payable is allowable.
Following properties are specifically excluded for the scope of service tax: -
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1.Properties used for residential purpose or used for residential accommodation such Hotels, boarding houses, holiday accommodations, tents and camping facilities. .
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2.Vacant land solely used for agricultural, aquaculture, farming, forestry, animal husbandry and mining purposes.
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3.Vacant land whether or not having facilities clearly incidental to use such vacant land.
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4.Land used for educational, sports, circus, entertainment and parking purposes.
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5.Properties owned by a religious body or given on rent to a religious body.
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7.Renting of immovable property to an educational body other than commercial training or coaching center.
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If the agreement for renting a property is a composite agreement though the property is used partly for residential purpose and partly for commercial purpose then the service tax will be leviable on whole the value of rent. Let us see the explanation in this respect: -
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For the purpose of this sub-clause, an immovable property partly for use in the course or furtherance of Business or commerce and partly for residential or any other purpose shall be deemed to be immovable property for use in the course or furtherance of Business or commerce.
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Since the exemption as available to small service providers as provided by Notification No. 6/2005-ST dated 1/3/2005 has been increased from Rs.4 Lakhs to Rs.8 Lakhs w.e.f. 1-4-2007 hence the small property holders receiving rent up to Rs.8 lakhs are out of the scope of levy of service tax and it is a great relief to the tenants of these property owners. All the big property owners receiving annual rent more than Rs.8 Lakhs will have to collect service tax from their tenants and deposit the same to the Government @ 12.36% as mentioned above.
It is suggested by some of the experts that if the property owner is paid certain percentage of profit in lieu of use of propertyor the amount for useofproperty is paid by any other arrangement other than rent then this service tax can be savedbut in the opinion of the author the law makers has taken the safeguards against such arrangements and as per Section 65(90a) every such arrangement will be covered by this levy. Let us see Section 65(90a) of the Finance Act, 1994: -
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Section 65(90a) renting of immovable property includes renting, letting, leasing, licensing or the similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include
(i) Renting of immovable property by a religious body or to a religious body; or
(ii) Renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;
Explanation. For the purposes of this clause, for use in the course or furtherance of
Business or commerce includes use of immovable property as factories, office buildings,
Warehouses, theatres, exhibition halls and multiple-use buildings.
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Here see as per the section 65(90a) renting of immovable property includes all the similar arrangements like renting, letting, leasing or licensing hence it will not be possible for property owners and their tenants to make such an arrangement, as mentioned above, to avoid service tax on renting of property.
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