Service tax on commercial rental property will stay
The finance ministry is likely to stick to its decision to levy service tax on renting of immovable property for commercial purposes.Commercial rental of property will be treated as a service and a tax of about 12.36% will be levied on it. In the coming years, we may also expand the scope of service tax to property leased for residential purpose.”
The move is expected to hit corporates, banks, multinationals, malls, restaurants, BPOs, IT companies and multiplexes the most. At present most of these organizations, especially BPOs only lease property to carry out their functions.
Real estate agents too are feeling the heat of the proposed tax and have protested as they are of the view that it would only lead to higher rental prices.
The reason for protest from all quarters is that the real estate boom, along with the lack of commercial space has already hiked rental rates further. Service tax will be an additional burden.
The 12.36% service tax on renting of commercial properties is here to stay despite the stiff resistance put up by trade and industry bodies. But official sources indicated that finance minister Chidambaram may give some relief to lessen the burden of the tax, when he replies to the debate on the Finance Bill, 2007.
The tax will come into effect when it is notified after the passage of the Finance Bill. The finance ministry is considering the inclusion of a remission scheme in the notification to lower the incidence of the tax.
It is proposed to allow a 25-30% deduction from rent towards repair and maintenance, while calculating the base value for the service tax. Also, interest repayment on borrowed capital for the construction of the commercial property could be deducted before calculating the service tax.
These concessions would be in line with those already permitted under the Income-Tax Act with regard to the tax on income from house property.
The argument that service tax on renting of commercial properties imposed by the Centre may lack Constitutional validity since land, building and real estate are "state subjects" has not cut ice with the finance ministry. Officials pointed out that the legal and constitutional validity of the tax had been studied in depth before the proposal was made in the Budget.
Similarly, the ministry is not convinced by the arguments that “renting or leasing out” of properties is not a “service” and the service tax amounts to a double taxation as the lessor or the landlord is already liable to pay income-tax on rental income.
Officials explained that the renting or leasing out properties is accepted as a service internationally and is taxed in some countries.
The Finance Bill, 2007, proposes to include “services provided in relation to renting of immovable property, other than residential properties and vacant land, for use in the course or furtherance of business or commerce”, among the taxable services. The tax is 12%, but works out to 12.36% after adding the 2% education cess and 1% secondary and higher education cess.
Service tax relief on leased property for business likely
The finance ministry may reduce the service tax burden for leasing of property for commercial use. The ministry is likely to do so with a deduction of about 25% from rents for repair and maintenance work while calculating the base value for the tax.
A notification to this effect is likely to be issued by the Central Board of Excise and Customs once the Finance Bill is passed by both Houses of Parliament.
Finance minister P Chidambaram’s 2007-08 Budget has introduced a proposal to levy service tax at a rate of 12.36% on rental of immovable property used for commercial ends.
But the proposal does not cover residential property, vacant land for agriculture, land for sports-related activities, entertainment and car parking, and immovable property for educational or religious use.
The move has drawn criticism and protests from sections of industry, with many even questioning the validity of the decision to consider leasing of property as a service.
But the finance ministry has stuck to it stand that leasing of property is a service and, therefore, be brought in the ambit of service tax.
The decision is expected to hit corporates, banks, multinationals, malls, restaurants, BPOs, IT companies and multiplexes the most.
At present, most of these organisations, especially BPOs, only lease property to carry out their businesses.
Real estate agents, too, are not very happy with the proposal as they feel the move would only lead to higher rents. The current real estate boom and a lack of commercial space have combined to already trigger a rise in rents. Service tax, realtors say, will only be an extra burden and jack up rents further.