Renting of Immovable Property Services: - Applicability, Cenvat credit and circular no. 98/1/2008-ST.
The matter of constitutionally validity of “Renting of Immovable Property Services” by central Government is pending in Hon’ble Apex Court regarding the Constitutional Limitation of Finance Act for levy of Service Tax on immovable properties.
Service tax is the tax of the Country. It is a most significant tool of Central Government to revenue generating. It is only an area which is growing faster in comparing to other area of taxes. Central Government levies service tax through chapter V of Finance Act, 1994 vide Entry 97 of schedule VII of Constitution of India.
Today’s Economic has significantly effected due to boom in Real Estate industry business and big demand of multiplex, Mall and commercial complexes and growing the business of leasing and renting, these effects have also attracted the attention of the Ministry of Finance, therefore for the extent of scope of service tax the Ministry of Finance in its Budget 2007 has introduced a new service namely “Renting of Immovable Property”. It has effected from 1st June, 2007 and levied under section 65(105) (zzzz) of chapter V of Finance Act, 1994. This service is likely played most significant role among the other taxable services.
Taxable service means any service provided or to be provided to any person by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce.
Immovable property includes: -
a.building and part of a building, and land appurtenant thereto;
b.land incidental of use of such building and part of a building;
c.the common or shared areas and facilities relating thereto;
d.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;
e.renting, letting, licensing, leasing or other similar arrangements of immovable property for use in the course of furtherance of business and commerce.
But dose not include: -
a.vacant land solely used for agriculture, aquaculture, farming, forest, animal husbandry and mining purposes;
b.vacant land, whether or not having facilities clearly incidental to the use of such vacant land;
c.land used for educational, sport, circus, entertainment, and parking purposes;
d.building used solely for residential purposes, and buildings used for the purpose of accommodation, including hotel, hostel, boarding house, holiday accommodation, tent and camping facilities.
e.renting of immovable property to or by a religion body.
f.renting of immovable property to an education body other than commercial coaching centre.
Detail discussion of applicability on the basis of legal provisions: -
-Every person is covered under this category of service both in the role of service provider and service recipient but a religious body shall not be liable to collect/pay service tax either in role of a service provider or in role of a service recipient.
-Immovable property must be used for business or commerce (i.e. Factories, office buildings, warehouses, theaters, exhibition halls, building used for multiplexes, ect.) in other words if it is used for personal purpose, it shall be out of purview of service tax.
-If a building partly used for residential purpose and partly used for business or commercial purposes, it shall be deemed property used for business or commercial purposes, therefore it is covered in definition of immovable property.
-Renting of common or shared area and facilities related thereto (i.e. Lift, hall, and other facilities which are used by tenants commonly or shared base) are also covered in this definition.
-In the case of commercial complexes, there may be space for parking purposes in or around the complex and if the owner of this complex is leased out such parking space to other person (tenant), service tax shall not be levied on space around the complex but service tax shall be levied on space in the complex because only “land for parking purposes” has excluded in the definition of immovable property not building.
-If land owner is leased out his land to tenant and tenant used this land for construction of factory or building, which is/to be used for business or commerce, in this situation land deemed to be an immovable property for the purposes of renting of immovable property.
-If leased out vacant land is used solely as vacant land for any purposes, it shall not be covered in definition of immovable property.
B. CENVAT CREDITS
Provider of output service can be availed and utilized cenvat credit of,
-excise duty paid on “Inputs” and “Capital Goods” and;
-service tax paid on “Input Services”.
In light of provisions of service tax, we would be required some brief discussion in terms of inputs, inputs services and capital goods.
Inputs means: -
All goods used for providing any output service,
Except - Light diesel oil (LDO),
- High speed diesel oil (HSD),
- Moter spirit, commonly known as petrol and
- Moter Vehicles.
In simple word, Credit shall be available in respect of duty paid goods (except above), which are directly used for providing any output service. (i.e. material used for repair & maintenance of building, ect.)
Capital Goods means: -
Credit shall be available in respect of duty paid goods, which are covered under the definition of capital goods either these goods are used directly for providing output service or for construction of premises of output service provider. (i.e. Escalators, water cooler ect,)
Input service means: -Meaning part
Credit shall be available on those input services, which are directly used for providing output service.
(i.e. Brokerage, rent, insurance of property, professional fee ect.)
Definition of input service is also covered those services, which are used for construction or setting up of a premises of output service provider and office related to such premises. (i.e. architect service, work contract service, commercial or industrial construction service, Banking and financial service, legal & professional service ect.).
In existence of legal provisions one can easily avail and utilize the Cenvat credits of service tax paid on input services and excise duty paid on capital goods which are used for construction of premises of output service provider but credit shall not be available on those duty paid goods (other than capital goods) which are also used for construction of premises of output services provider because these goods have not any direct relation to providing output service and also it is not covered in the definition of inputs.
According to sub rule 5 of rule 6 of Cenvat credit rule, 2004, the credit of whole of service tax paid on 16 specified taxable services shall be allowed unless such services is used exclusively in or in relation to providing of exempted services and non taxable services are also included in the definition of exempted services. For construction of commercial complex most of the Input services are covered in 16 specified taxable services, therefore assesee is entitled of cenvat credit under the provisions of sub rule 5 of rule 6 of cenvat credit rule, 2004 and definition of input services as well.
But revenue may not allow Cenvat credits on those input services and capital goods which are used for construction of immovable property due to master circular number 98/01/2008 ST.
CIRCULAR NO. 98/1/2008 ST.
As per circular immovable property which is not subject to excise duty or service tax and neither service nor goods , hence service tax paid on construction of immovable property can’t be setup against service tax payable on renting of immovable property service.
Firstly, space of immovable property are completely used for renting purposes and renting of immovable property is an output service, it is clear that immovable property is not subject to service tax but service provide by immovable property is subject to service tax and in view of author this immovable property is clearly the premises of output service provider therefore we can take credit of service tax/excise duty paid on setting up such premises. Secondly, a manufacture of excisable goods pays service tax and excise duty on those input services and capital goods, which are used for construction of factory and an office relating to such factory and a output service provider (other than provider of renting of immovable property) also pays service tax and excise duty on those input service and capital goods which are used for construction of premises of output service provider and an office relating to such premises. Revenue allows credit in this situation both to manufactures and service providers thus provider of renting of immovable property service is also entitled for credit of discussed input services and capital goods.