Published & Updated as on - 2010-03-23
Budget
2010 has significant service tax related proposals in store for the real estate
sector. In the previous article, the service tax proposals on property
construction activities were discussed. The article addresses the amendments
concerning the renting of immovable property. Before that it is imperative to
set out first the background relating to the issue. The service in respect of
renting of immovable property has been defined under Section 65(105) (zzzz) of
the Finance Act, 1994 (’The Act’) and was introduced w.e.f. June 1, 2007. The
relevant portion of the definition reads as follows
“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 use in the course
or furtherance of business or commerce and the term “service provider” shall be
construed accordingly. At the outset, it must be noted that tax applies only on
the renting of commercial property and not on residential property. Following
the introduction of this taxable service, several writ petitions challenging
the levy were filed in various courts. In April 2009, the Delhi High Court, in
the case of Home Solution Retail India Ltd & Others vs. UOI & Others
(2009 (237) ELT-209), held that the taxable service in respect of renting of
immovable property, as defined under the relevant sections of the Finance Act
1994, was with regard to any service in relation to renting of property and was
not on the renting of immovable property as such.
Consequently,
the High Court held that the levy of service tax on the renting of immovable
property itself, in terms of the relevant notification issued consequent to the
introduction of the taxable service, was ultra vires the provisions of the Act.
In arriving at its decision, the court relied on the wordings of the definition
to hold that since the activity of renting of immovable property was itself not
a service, the expression ’service in relation to renting of immovable
property’, could only extend to services which are provided in relation to the
renting of immovable property. With regards to the nature of the service tax
itself, the High Court had held that it is a value added tax and the tax is a
tax on value addition done by the service provider and it must have a
connection with the service. Consequently, since the mere renting of immovable
property did not entail any value addition, it could not be regard ed as a
service for that reason as well.
While upholding the
arguments contained in the writ petitions in regard to the above points, the
High Court did not examine the alternate argument that the relevant definition,
should it be construed as applicable to the activity of renting of immovable
property as well, would be violative of the Constitution of India in that the
Central Government could not, in terms thereof, impose a tax on land, as it was
a State subject. Coming back to Budget 2010, the proposal is to amend the
definition of renting of immovable property services, to provide that the
activity of “renting” is itself a taxable service. This amendment is proposed
to be made with retrospective effect from June 1, 2007. The amendment also now
extends the service tax to rent of vacant land where there is an agreement or a
contract between the lessor and lessee for undertaking the construction of a building
or structures thereon for the purpose of business or commerce. These amendments
will come into force from a date to be notified after the enactment of the
Finance Bill 2010. Once that happens, the tax will become payable for the
period from 1st June 2007 and beyond.
Assuming that the
retrospective amendment is constitutionally valid, the point is that the tax
becomes payable on and from 1st June 2007. Some key questions need to be
answered in this regard. One such question is whether such a tax is chargeable
and payable prior to the retrospective amendment coming into force. The legal
position is that the tax is not chargeable or payable before this date. This
would mean that landlords need to enter into a dialogue with their tenants as
to how such back taxes are to be charged for the taxable periods in question
and how they would be reimbursed by the tenants, as per contractual terms.
Another question is regarding interest on such back taxes. Now, Clause 76 of
the Finance Bill 2010 saves actions taken between June 2007 until the date of
the retrospective amendments coming into effect on any proceedings for recovery
of service tax, interest, penalty, fine or charges related to the renting of
immovable property. This could be interpreted to mean that should there be
demands from the department to this effect, such demands will continue to have
force.
However, should there not be a proceeding at all, and
therefore no demand or an order related to the service tax on renting is or was
in force, no interest can apply in the matter. In other words, the
interpretation is that the savings provisions do not authorise the computation
of interest, where no order for interest had earlier been passed. An entirely
similar argument could be made with regard to penalty as well. Independent of
the above position in law, and to avoid prolonged and vexatious litigation on
the point, the Government should seriously consider issuing a clarification
that no interest or penalty will be required to be paid, if the service tax were
to be paid immediately upon the date of coming into force of the amended
provisions. Indeed, this is the only reasonable course to adopt, given that the
service tax on renting per se was held not payable by the Delhi High Court and
taxpayers had legitimately followed this decision and it is only now that the
Government is seeking to undo the decision through the retrospective amendment
in question. In such a situation, imposition of interest and/or penalty will be
highly inappropriate.
In conclusion, the retrospective
imposition of service tax on property rentals will have significant implications,
especially where no offset of such taxes is possible, such as in retail sector.
The Government needs to be sensitive to this point. It is the expectation in
the forthcoming GST, such inability to offset input taxes will be addressed.
Until such time however, this matter will continue to pose significant
challenges.
Source: http://www.indianrealtynews.com |