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Service Tax- Renting of Property

KM Rajeev (others) (118 Points)

06 January 2011

Hi friends

A commercial comlex is owned by 5 persons. Total rent in a year comes to 12 Laks. They are assessed individually for income tax purpose. (not as BOI/AOP). Is service Tax applicable?

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10 Replies

Prakash (Professional) (211 Points)
Replied 06 January 2011

Dear Rajeev,

Service Tax is not charged on Rent of Commercial Complex.

The service tax is charges on services provided or to be provided which are mentioned in The Finance Act.

If I am wrong, updation of my knowledge will be appreciated by anyone.

Regards,

Prakash..

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Prakash (Professional) (211 Points)
Replied 06 January 2011

Further see following details.

a. the levy should be constitutionally valid,

The levy of tax on land and building is subject matter of ‘state’ and is out of scope of the ‘Central list’. Therefore, the Central government is not authorised to impose tax on land and building, even if element of some service is found.

Levy is not valid as it would be ultravirse the Constitution.

b. the tax should be on value of a service,

The service is to be valued for the service rendered. In case of letting out of property, there is no element of service in the context of tax on service. Providing a space cannot be called providing a service by any stretch of language and imagination.

In absence of service the rentals cannot be considered as value of service. Imposition of any service tax on rentals would amount to taxing property in guise of service tax, and that should not be allowed.

c. there should be a service provider and service receiver.

In case of letting out of property a space is provided to tenant and not a service. Provision of service is based on basic concept of services of personal nature though in advanced times personal services may be further strengthened with help of other assets.

The owner is provider of space and not any service by letting out of property.

Owning and letting out of property is an investment activity and not a personal service. Even in the Income Tax Act we find that rental income is assessed under the head ‘income from house property’ and not as a business or professional income.

Only services of personal nature, if any rendered to the tenant by the landlord can be subject to levy of service tax. Such services like cleaning, maintenance, security etc. are already taxable under other categories of taxable services.

KM Rajeev (others) (118 Points)
Replied 06 January 2011

Dear Prakash

I am aware that there are a few court decisions supporting your point of view.

But on a plain reading of the provisions of section 65(105)(zzzz) of the Finance Act 1994, I get the impression that renting of immovable property (commercial complex is a immovable property) is subject to service tax.

I run the risk of giving a wrong advice and later take the blame for the penalty and interest

Renting a commercial complex is a commercial/business activity for the people who owns the complex.

Though their income (rent) is taxed under the head income from HP under the Income Tax Act, we cannot club income tax act and service tax and say "look the income is taxed under the head HP therefore its not a commercial activity"

Please i m waiting for your valuable input on this

KM Rajeev (others) (118 Points)
Replied 06 January 2011

I also request you to carefully read the amendment brought in by the Budget -2010.

The constitutional validity of the retrospective amendment is a matter of litigation. TRENT LIMITED Vs UNION OF INDIA is a good read

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Prakash (Professional) (211 Points)
Replied 07 January 2011

Dear Rajeev,

You are correct.

Thank you for updating my knowledge.

Yesterday I was refering the case law you mentioned and Budget 2010, I found an article by Mr. Chitresh Gupta.

Please see Link for your reference. /articles/budget-2010-service-tax-on-renting-of-immovable-property-4881.asp

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.

Background Analysis

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.

Renting 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.

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KM Rajeev (others) (118 Points)
Replied 07 January 2011

Thanks Prakash

But my question is still unresolved. Here the issue is, property is owned by 5 people. That means the taxable value of services (if taken individually) is less than 10 lakh but if taken together it is more than 10 Lakh.

so what is the applicability of the provisions of service tax in this unique scenario?

I believe I am communicating the issue properly

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 08 January 2011

Originally posted by : KM Rajeev
	Thanks Prakash But my question is still unresolved. Here the issue is, property is owned by 5 people. That means the taxable value of services (if taken individually) is less than 10 lakh but if taken together it is more than 10 Lakh. so what is the applicability of the provisions of service tax in this unique scenario? I believe I am communicating the issue properly

owned by 5 persons and each file their return separately...........

so the property has demarked for 5 shares belonging to each individual,

payment must have been received by 5 individual separately , rent receipt has been issued separately ........

so they avail 10L exemption at individual strength also .........

if the payment / rent receipt is clubbed , then new identity of AOP/partnership has been already formed and here the total rent would be deemed to be taxed in hand of new formed AOP/partnership.

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KM Rajeev (others) (118 Points)
Replied 08 January 2011

Dear Sharma

Thats a good logical way of thinking

Prakash (Professional) (211 Points)
Replied 09 January 2011

Dear Rajiv,

I am not sure about the situation, it is getting more complicted.

But for the time being service tax shall be charged on the rent, which later on can be claimed as reund. It's better than penalty or interest.

However I got recent update on the case while I was going through the Service Tax and the Budget 2010.

Please follow the link for your purusal, in which Service tax on renting of commercial property petition dismissed by punjab and haryana highcourt

https://www.akbatraassociates.com/service%20tax/shubh%20steel.pdf

Regards,

Prakash..

KM Rajeev (others) (118 Points)
Replied 09 January 2011

Thanks Prakash, though that was difficult to read and comprehend. But what i understood is that the HC upheld the constitutional validity (including the retrospective effect of amendment) of the levy. Did the aggrieved move to SC. any news on this?