BUDGET 2010: RENTING OF IMMOVABLE PROPERTY
The Budget 2010 has made the following important
amendments relating to Renting of Immovable Property Service
- ‘Renting’ activity itself regarded as taxable service
(Retrospectively amended from 1 June, 2007)
- Renting of vacant land for construction of building /temporary structure
at later stage for furtherance of business or commerce regarded as taxable service.
This service was introduced in 2007 with a
view to tax the commercial use of immovable property hired on rent. The tax on rent
paid is available as input credit if the commercial activity involves provision
of taxable service or manufacture of dutiable goods. However, the Hon’ble High court
of Delhi in its order dated 18.04.2009 in the case of Home Solutions Retail India
Ltd. & Others vs. UOI has struck down this levy by observing that the renting of
immovable property for use in the course of furtherance of business or commerce
does not involve any value addition and therefore, cannot be regarded as service.
Apart from the revenue loss caused to the exchequer, the judgement has placed the
landlords in a very precarious situation. In view of this judgement, the commercial
tenants have stopped them reimbursing the tax element. However, the landlords are
receiving regular demand notices from the department issued to protect government’s
revenue for the interim period.
In order to clarify the legislative intent
and also bring in certainty in tax liability the relevant definition of taxable
service is being amended to clarify that the activity of renting of immovable property
per se would also constitute
a taxable service under the relevant clause. This amendment is being given retrospective
effect from 01.06.2007.
of vacant land
Under the definition of taxable service pertaining
to renting of immovable property, the renting of vacant land used for agriculture,
farming, forestry, animal husbandry, mining, education, sports, circus, entertainment
and parking purposes, is excluded from the purview of service tax. Further,
‘vacant land’, whether or not having facilities clearly incidental to the use of
such vacant land has also been excluded from the tax net.
It has been reported that in many states,
the local industrial corporations or PSUs or even private organizations rent vacant
land on a long term leases with an explicit understanding that lessee would construct
factory or commercial building on that land. In such cases the ownership of the
land is not transferred to the lessee and thus it is a service provided by the lessor
to the lessee. The situation is similar to renting out a constructed structure for
commercial purposes except that at the time of executing the lease agreement the
land is in a vacant state and that later the lessee constructs commercial structure
thereon after executing the lease deed. Such lease agreements escape service tax
because of the exclusion mentioned above.
Suitable amendment in the definition of taxable
service relating to renting to immovable property is being made so as to provide
that tax would be charged on rent of a vacant land if there is an agreement or contract
between the lessor and lessee that a construction on such land is to be undertaken
for furtherance of business or commerce during the tenure of the lease.