Service Tax on Renting of Immovable Property – Developments and Issues
Service Tax is one of the indirect taxes imposed in our country on the services availed by consumer. It forms huge part of the revenue. Levy of Service Tax is governed by the Finance Act. Taxable services are declared by way of a negative list. Services such professional services, hotel service, etc are under the purview of the service tax are liable to service tax. One of such service is Renting of Immovable Property. Lots of issues have arisen as to levy of service tax on the income arising from renting of immovable property. Here we will discuss certain issues regarding the above stated matter.
Basically the issue arouse on the first definition of taxability of renting of immovable property service via section 65(105)(zzzz) of the finance act and the same was “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”. The above definition led to many issues. So the definition was amended as on 01.07.2010 and it covered mere renting in the above definition along with retrospective effect from 01.06.2007.
Due to amendment in the definition, various service tax payers who did not pay service tax on mere renting were held liable to pay service tax on rent received since 01.06.2007 till date. This created a great chaos. One of the case law took place before the definition was amended and it was the case law of M/s Home Solution Retail India Ltd & Others v/s UOI, 2009 (237) E. L. T 0209 (Del). In this case it was held by the Delhi High Court that the basic definition covered only service of renting but not mere renting of the immovable property and because Service tax is levied on value addition, mere renting of immovable property does not add any value so the same will not be liable to service tax.
Amendment in the definition gave rise to another issue again and the case was dragged to the High court again by M/s Home Solution Retail India. Here in the case law of M/s Home Solution Retail India & Others v/s UOI and others, 2011 (21) S. T. R. 109 (Del.) High Court proved that mere renting involves value addition and so rental income will be chargeable to service tax with retrospective effect as per the amended definition. Other case laws also took place regarding this issue. Some of them were Cinemax India Ltd vs. UOI, 2011(24) STR 3 (Guj), Utkal Builders Ltd v. UOI, 2011(22) S.T.R. 257 (Ori), etc.
Further in the budget of 2012-13, a section was inserted which was related to penalty to be imposed on Service Tax payables. The section was named 80(2) and it stated that “No penalty is impossible on service tax payables as on 06/03/2012 i.e. service tax payable on rents received / receivable till February, 2012, if the service tax along with interest is paid in full within a period of six months from the date on which Finance Bill receives the assent of the president.”
With respect to section 80(2), the applicable date will be 28th of May, 2012 as the assent of president was received on the said date. The if there is any service tax payable outstanding as on 28th of May, 2012 and it has been paid off along with interest thereon from the period starting from 28th May, 2012 and ending on 28th November, 2012, then no penalty will be imposed on same. Else the tax as well as interest will attract the penal provisions. With regards to the said section 80(2) and amended section 65(105)(zzz), it is necessary to discuss the few points to clarify the imposition of penalty. Thus the points of clarification are as follows:
- Service tax liability is imposed on the assessee for the income received from mere renting of immovable property from the period 01.06.2007.
- Another point of discussion is related to the small service providers. If the value of service provided by the service provider in the previous year was less than Rs. 10 Lacs, then the exemption of small service provider will be available and such exemption can be claimed in the succeeding year till the limit of first 10 Lacs receipt of service income.
- Before levying service tax on the amount of renting of immovable property, the amount of municipal taxes is to be deducted and then only service tax will be levied on the amount arrived at as value of taxable service. But always remember that interest and penalties paid to government authorities by any other name will not be allowed as a deduction while arriving at the value of taxable service.
- In case the assessee has paid municipal taxes after levying service tax, then the benefit of deduction of Municipal taxes will be available in the subsequent period. Else the refund can be claimed within one year from the date when municipal taxes are paid.
- For arriving at value of taxable service till 30th June, 2011, assessee can follow the method of receipt basis i.e. amount of actual receipt of rent received till 30th June, 2011 will be considered as value of taxable service and the service tax will be levied on the same. In cases where rent income is received after 30th June, 2011 on renting of immovable property, assessee is liable to pay service tax on the basis of earlier of monthly due or the date of payment. Thus accrual basis will be followed even if the rent is not actually received by the assesse, he will be liable to pay service tax.
- Assessee will be able to avail CENVAT credit on duty paid on capital goods such as Lifts, Escalators, DG Sets etc. It will also be available against service tax paid on input services such as Insurance of Premises, Telecommunication, etc.
- Another important point of discussion is levy of interest on service tax payables which are in arrears. In cases where the service tax is to be paid from the retrospective effect from June 2007 till the date of introduction of tax on such income i.e. 01.07.2010, it is illogical that the interest will be levied from June 2007 if service tax payable is in arrears after 01. 07.2010. Thus the interest will be leviable for the period after 01.07.2010 because the section itself was not in existence and so no tax was payable. So interest provisions will also be attracted from the date on which the tax became payable. For example if the assessee fail to pay service tax till 5th July, 2010 which is payable for the rent income received since June 2007, than the interest will be levied only for the month of July 2010 and not for the period starting from June 2007.