A Note On Renting of Immovable Property

 

1.                  Constitutional Validity

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.