The prices of immovable properties have shot up over the last five years. There is also a sharp rise in the rents of immovable properties simultaneously. With the arrival of MNCs and a revolution in the work culture due to the computerization has increased the demand for well-furnished properties in the country. This trend has drawn the attention of Indian Finance Ministry too. With an aim to broaden the Service tax base, the Finance Ministry, in Budget 2007, proposed to cover several new services under the umbrella of service tax net, and “Renting of Immovable Property” is one of those. The Department intends to gain significant tax revenue from this new service sector. The activity of renting immovable properties for commercial use is taxable with effect from 1st June 2007.
What is Immovable Property?
According to the definition, in all the civil law systems, immovable property is the equivalent of “real property” in common law systems, i.e. it is a piece of a land or any permanent feature or structure above or below the surface. Immovable properties include premises and property rights, houses, land and associated goods and chattels. Immovable properties are located in and always have a fixed address.
As per the Indian Law, Explanation 1 to section 65(105)(zzzz) states that types of land & building are included in the meaning of “Immovable property” and types of land & building are not included in “Immovable Property” for the purpose of applicability of service tax on its rent.
Details of the same are as under:-
(I) Included in Immovable Property:-
i. Building and part of building, and the land appurtenant thereto;
ii. Land incidental to the use of such building or part of building;
iii. The common or shared areas and facilities relating thereto; and
iv. In case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate.
(II) Not Included in Immovable Property:-
i. Vacant Land solely used for agriculture purpose, aquaculture purpose, farming purpose, forestry purpose, animal husbandry purpose, mining purpose.
ii. Land Used for educational purpose, sports purpose, circus purpose, entertainment purpose, parking purpose.
iii. Vacant Land, whether or not having facility clearly incidental to the use of such vacant land.
iv. Building used solely for residential purpose.
v. Building used for accommodation purpose (like hotels, hostels, boarding houses,
holiday accommodation, tents, camping facility).
What is Renting of immovable property?
Renting of immovable property includes renting, letting, licensing or other similar arrangement of immovable property for use in the course of furtherance of business or commerce. “For the use of furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple use buildings.
As per section 65(90a) “renting of immovable property is for use in the course or furtherance of business or commerce.” Further as per section 65(105) (zzzz) taxable service means any service provided or to be provided to any person by any other person in relation to renting of immovable property for the use in the course or furtherance of business or commerce. Here it is pertinent to note that meaning of the word “person” is not specifically defined in the statute related with service tax.
Who are liable to pay service tax?
Every person who is providing taxable services for more than Rs.1,000,000 in any financial year (from 1st April to 31sty March) is liable for tax. As service tax is an indirect tax so payer can collect the tax from the service recipient. In case immovable property the owner is the service provider and tenant is a service recipient. If the service provider is located in India, he is the person responsible for paying the service tax, irrespective of whether he has collected the service tax from the receiver. However where the service provider is located outside India and the service receiver is located in India, then the service receiver will treated as the service provider and service receiver is the person liable for paying service tax.
Properties are not liable for service tax
i. Renting of immovable property by a religious body or to a religious body
ii. Renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching center.
iii. Land used for educational, sports, circus, entertainment and parking purpose and
iv. Building used solely for residential purpose and building used for accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
General exemptions
a) Services provided to the united nations or an international organization declared by the central government
b) Services provided to a developer of Special Economic Zone (SEZ) or a unit of a Special Economic Zone which satisfy prescribed conditions.
c) Services provided for official use of a foreign diplomatic mission or consular post in India/ Service provided for personal use of family member of diplomatic agents or career consular officers posted in foreign diplomatic mission or consular posted in India.
Impact of ‘partly used for business and partly for residential’
According to the explanation 2 to section 65(105) (zzzz), it has been clarified that if an immovable property is partly used in the course or furtherance of business/commerce and partly for residential or any other purpose, then it shall be considered as an immovable property for use in the course of furtherance of business or commerce. For example, in small cities/towns it is generally found that a building is taken on rent by bank branch in which, banking activities are conducted on ground floor while other floors are being used for the purpose of residence. In such condition, as per the Indian law, service tax will be applicable on consolidated rent for branch and residence.
Rate of Service Tax
The Finance Act 2007 did not say anything about the rate of service tax and hence it has not been increased service also. The service tax will be charged at the rate of 12% plus 2% education cess & 1% secondary & higher education cess. Therefore a service provider will own the immovable property and service recipients will be tenant, and service provided will be charged as the service tax on the rent at prescribed rates.
Whether Ownership is Necessary
If we take the statutory definition into consideration then we find that it is not necessary that an immovable property has to be given on rent only by the owner of said property. Therefore, if a person other than the owner sublets the immovable property, he may come under the Service Tax net.
Impact on Business & Trade
We can safely say that after enactment of above said provisions, the service tax burden of all commercial and official organizations will increase significantly, especially on those who are constituting the part of metros and state capitals. Tax burden of the manufacturers will also increase because most of them are having storage spaces in various cities on rental basis. Besides, some of the manufacture not having own factory but working in a factory taken on lease will also be affected.
Presuming that a service provider is not providing any other service but receiving rent of around 66700/- or more per month from immovable property, then he shall have to pay service tax. Further, since the concept of “commercial concern” is not used in statute for this service, thereby government offices and charitable institutions may have to pay service tax on the rent of immovable property used by them for business activities even with no profit motive with ultimate object of charity. It is also pertinent to note that exclusion is granted only for religious & educational body and not for charitable body. However, true charitable institutions also deserve the said exclusion.
Clarifications Required
Some issues like joint ownership of property, renting of furniture & fittings in addition to building etc. are yet to be clarified in the statute. Some sort of litigation may arise between owner and tenant on the agreement executed for certain fix period for fix rental amount including local taxes etc. on the principal of estoppels, which is required to be given due care. Besides this, the rules regarding valuation of services require due clarification on the amount spent on repair, maintenance, whitewash, electricity & water bills etc. either borne by owner or borne by the tenant. However, it is clear that owner will not get any deduction of expenditure incurred by him on repair, maintenance etc. of immovable property because service tax is chargeable on gross value.
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