Service tax on residential + commercial

This query is : Resolved

nitin (Querist)
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29 September 2013 We will receive approx Rs.5 lakh as residential property rent and rs.9 lakh as commercial property rent p.a . as far as i know service tax is liable only if commercial rent crosses 10 lakh p.a. and there is no service tax on residential rent. please clarify i am correct and as above rent we will be receiving we need not pay service tax.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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21 October 2013 Service Tax On Rental Property

For Residential Property

In most cases, if you are leasing your property for residential use, you need not have to pay the Service Tax. However, there are certain rules regarding this. For example, if your total income from the rental property in a year crosses Rs.10 lakh, you have to charge and pay service tax on the rental income charged.

This is because once the income from the rent crosses Rs.10 lakhs, the landlords are treated as service providers who are required to register and pay Service Tax to the Government under the applicable Service Tax laws in India.

The procedure to do that is to register with the relevant Service Tax office having jurisdiction over the property. For instance, if you are located at Andheri in Mumbai, the relevant office nearest to Andheri will be the centre for the Service Tax Application.

Even if a tenant does not reimburse Service Tax to the landlord, the landlord will have to pay Service Tax on his own. However, this is only applicable only if the income from the rent for the property crosses Rs. 10 lakhs, and otherwise, you are not required to pay or charge Service Tax in the case of residential property.

For Commercial Property

Since June 1, 2007, landlords giving out their property for commercial use should pay Service Tax on the property. They have naturally tried to pass on the liability to the tenants.

The biggest challenge in most cases was that the existing rental agreements between the landlord and tenant did not have any mention of the Service Tax component, because the agreements were made at a time when the Service Tax was not applicable. Therefore, when the Service Tax became applicable on June 1, the tenants insisted that the landlord bear the Service Tax on his own and refused to re-imburse the Service Tax collected.

The sensible approach is to make sure that your rental agreement contains the words “all future tax liabilities arising on account of this Agreement, now or in the future, will be borne by the tenant”. By the inclusion of this clause, you make it very difficult or impossible for the tenant to escape tax liability on account of Service Tax or other taxes.

What is included in the scope of the term “renting of immovable property”?

The words “renting of immovable property” include all kinds of renting, leasing, licensing or other similar arrangements with regard to immovable property. This could include, for example:

Giving out a property on rent to a religious body, like a temple or church
Giving out a property on rent to an educational training centre or a skill development centre. This may or may not include a commercial training or coaching centre
Giving out a property on rent for residential purposes
Giving out a property on rent for office space or other commercial use such as a commercial unit
Giving a go down, shed, warehouse or factory on rent
Even if you are using the property partly for residential use and partly for commercial use, it still counts as a commercial use of the property. For instance, if you are running a restaurant in the front portion of your house and the rear portion is given out to residential tenants, the whole property will be treated as commercial property for the purpose of Service Tax.