February 28, 2008

The expression “Sale” is defined in the Sales Tax/ VAT Law to include ‘transfer of right to use’. Therefore, ‘renting/leasing’ is also covered by the definition of “sale”. Accordingly, service tax on renting is nothing but a tax on sale, which is barred by the Constitution.

2. ‘Service’- Concept of

The expression ‘service’ has not been defined in the Finance Act, 1994 (the Service Tax law). The taxable event being rendering of service, the expression needs to be defined for service tax purpose, as the expression ‘manufacture’ has been defined for Central Excise and the expression ‘import’ has been defined for Customs purpose. The general meaning of the expression ‘service’ in common parlance cannot be applied for service tax purpose. The expression as has been interpreted by various Courts in different contexts, or by the Department in some other contexts (eg. ‘Storage and Warehousing services) suggests that only transfer of right to use certain property without any further performance of work, cannot be called ‘service’.

3. Definition

As per the definition proposed in Finance Bill, 2007, taxable service means any service rendered in relation to renting of immovable property. The term ‘renting’ has been defined to mean the arrangement of renting. Therefore, the rent amount per se is not taxable as per the definition. Only the service of a middleman to arrange for such renting arrangement is taxable, which is already covered under ‘Real Estate Agent’ category.

Therefore, it seems that the intention of the Ministry of Finance is not to tax the Agent’s service, but the rent amount per se. This will give rise to litigation, or the definition may be changed in the Finance Act, 2007.

4. Actual Use or Intention To Use

As per the definition, the property if actually used for furtherance of existing business or commerce, then only service tax is applicable, and not an intention to use the property for business or commerce.

5. Part Use For Business

As per the clarification given by the TRU, even if a property is partly used for business or commerce, the whole rent amount for the complete property will be chargeable to service tax.

6. Cenvat Credit

The service tax paid by the owner for construction of a property, either to the construction contractors or to Architects, consultants, labour suppliers etc. shall be ‘input services’ for the lessor. Therefore, such service tax paid on input services shall be allowed to be set off against the service tax liability on the rent.

7. Transitional Credit

In case of properties already completed before imposition of service tax on rent, the service tax already paid on various input services also merit Cenvat credit to be adjusted against the service tax liability on the rent amount. However, specific provisions for the same are missing in the Cenvat Credit Rules. In view of this, the Rules require to be amended to provide for such transitional credit, as is allowed on Central Excise or VAT. Otherwise, it will have a huge impact on the existing promoters, and against the principle of cascading effect.

Filed under About Service Tax by Arun Kumar Agarwal

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February 28, 2007

An Overview of Changes Proposed In Finance Bill’ 2007

Changes Are Proposed In A Number Of Provisions Of The Finance Act, 1994, Service Tax Rules, 1994, Cenvat Credit Rules, 2004 And Export Of Services Rules, 2005.

1. Increase In Threshold Exemption Limit For Small Service Providers

1.1 The threshold limit of service tax exemption for small service providers is being increased from the present level of Rs.4 lakhs to Rs.8 lakhs with effect from 01.04.2007, by amending notification No.6/2005-Service Tax, dated 01.03.05 vide notification No. 4/2007-Service Tax, dated 01.03.07.

1.2 Consequent upon the increase in the threshold exemption limit from Rs. 4 lakh to Rs. 8 lakh, the limit for obtaining service tax registration has also been increased from Rs. 3 lakh to Rs. 7 lakh by amending notification Nos. 26/2005-Service Tax and No.27/2005-Service Tax, both dated 07.06.05 vide notification Nos. 5, 6 & 7/2007- Service Tax, dated 01.03.07.

2. Widening Of Service Tax Base

2.1 In continuation of the policy of widening of the service tax base, the Finance Bill, 2007 proposes to,-

• Levy service tax on more services,

• Expand or clarify the scope of existing services, and

• Carve out separate services from the existing services and specify them as separate taxable services.

2.2 Services of same category are grouped together and defined as a separate taxable service. Newly specified services may contain part or whole of existing individually specified taxable services. The scope and coverage of taxable services should, therefore, be interpreted for classification purposes strictly in accordance with the statutory provisions existing during the material point of time.

2.3 Following services are specifically included in the list of taxable services:

(i) Service provided by a telegraph authority in relation to telecommunication service [sub-clause (zzzx) of section 65(105) refers];

(ii) Service provided in relation to mining of mineral, oil or gas [sub-clause (zzzy) of section 65(105) refers];

(iii) Service provided in relation to renting of immovable property for use in the course or furtherance of business or commerce [sub-clause (zzzz) of section 65(105) refers];

(iv) Service provided in relation to the execution of a works contract [subclause (zzzza) of section 65(105) refers];

(v) Service provided in relation to development and supply of content for use in telecom services, advertising agency services and on-line information and database access or retrieval services [sub-clause (zzzzb) of section 65(105) refers];

(vi) Service provided by any person, except a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, in relation to asset management including portfolio management and all forms of fund management [subclause (zzzzc) of section 65(105) refers]; and

(vii) Service provided in relation to design services [sub-clause (zzzzd) of section 65(105) refers].

2.4 TELECOMMUNICATION SERVICE: Following telecommunication related services, which are presently specified as separate taxable services, namely:

(i) telephone connection [sub-clause (b) of section 65(105)]

(ii) pager [sub-clause (c) of section 65(105)]

(iii) leased circuit [sub-clause (zd) of section 65(105)]

(iv) communication through telegraph[sub-clause (ze) of section 65(105)]

(v) communication through telex[sub-clause (zf) of section 65(105)]

(vi) facsimile communication[sub-clause (zg) of section 65(105)]

are being merged under the proposed “telecommunication service” [sub-clause (zzzx) of section 65(105)], and the term “telecommunication service” [section 65(109a)] is being defined comprehensively. Specific inclusion and exclusion of telecom services may be seen in the definition.

Services provided by the telegraph authority to any person in relation to telecommunication are covered under this service. It may be noted that the present condition namely, recipient of service needs to be a subscriber, under telecommunication related services has been changed under the proposed Telecommunication Service. Telecommunication Service includes services provided to any person and not confined only to subscriber.

2.5 MINING SERVICE [section 65(105)(zzzy)]: Presently, geological, geophysical or ther prospecting, surface or sub-surface surveying or map-making services relating to ocation or exploration of deposits of mineral, oil or gas are leviable to service tax under survey and exploration of mineral service” [section 65(105)(zzv)]. Services such as-

• site formation and clearance, and excavation and earth moving, drilling wells for production / exploitation of hydrocarbons (development drilling)

• well testing and analysis services

• sub-contracted services such as deploying workers and machinery for extraction / breaking of rocks into stones, sieving, grading, etc.

• outsourced services,

provided for mining are individually classified under the appropriate taxable service. Services provided in relation to mining of mineral, oil and gas are comprehensively covered under this proposed service. With this, services provided in relation to both exploration and exploitation of mineral, oil or gas will be comprehensively brought under

the service tax net.

The trend is to outsource part or whole of the mining activities. Since exploration and mining of mineral, oil or gas are comprehensively brought under the service tax, field