Service Tax has been proposed on the activity of ‘Renting of
Immovable Property for Business & Commerce’ in the Finance Bill, 2007-08.
However, as per the authors personal opinion the liveability of service tax on
the above-mentioned activity is debatable. The authors explain herein the
reasons for the same.
The article also provides synopsis on some recent Service Tax
Circulars in relation to ‘Telecommunication Service’ and ‘Banking and Other
Financial Service’
Levy of Service tax has been proposed on the activity
provided in relation to renting of immovable property used in the
course or furtherance of business or commerce vide sub-clause (zzzz) of
section 65(105) w.e.f. the date of the enactment of the Finance Bill, 2007
Renting includes letting, leasing, licensing or other
similar arrangement. The contract is for right-to-use an immovable property
for a consideration.
It is clarified that where renting of immovable property is
a single composite contract involving part of property for use in commerce or
business and part of it for residential / accommodation purposes, for the
purpose of levy of service tax under this sub-clause, entire property under
the contract is treated as property for use in commerce or business and
accordingly the total value of the contract shall be the taxable value.
Immovable properties excluded from the scope of this
service are:
-
Residential properties and accommodations such as hotels,
hostels, boarding houses, holiday accommodation, tents, camping facilities
-
Vacant land solely used for agriculture, aquaculture,
farming, forestry, animal husbandry, mining purposes and also includes
vacant land, whether or not having facilities clearly incidental to the use
of such vacant land
-
Land used for educational, sports, circus, entertainment
and parking purposes
Renting of immovable property in the following cases is
also excluded from the scope of this taxable service:
-
Renting of immovable property by or to a religious body.
-
Renting of immoveable property to an educational body,
other than commercial training or coaching centre, commercial coaching or
training centre as defined under section 65(27).
Service tax is leviable on services provided. In absence of
‘any element of service’ in the activity provided service tax cannot be
levied. A question that can be raised in the context of the proposed activity
of ‘Renting of Immovable Property for Business & Commerce’ is, "What is the
service that is provided by the owner of the property while renting out the
premises?"
Services provided in nature of providing ‘Business Centres’
would fall within the ambit of service tax as the service provider provides
services in nature of office amenities, secretarial services, security
services, etc. The above service is thus rightly taxable under the category of
‘Business Support Services’.
Also in case of Mandap Keeper Services, the mandap
(premise) is used by the Mandap Keeper to provide the Mandap Keeper services.
Thus, the premise is used to provide services.
In the proposed service, the premise will not be used to
provide any service by the owner thereof.
However, in the context of the proposed service of ‘Renting
of Immovable Property for Business & Commerce’ no such services are provided
by the owner to the tenant. In fact the owner of the premises, in most of the
cases just collects rent for the use of ‘Floor area space’ by the tenant.
There could be a case for service tax where the owner of
the property is providing certain services along with the premises such as
loading and unloading of goods, transport services, catering services,
convention services etc. In such cases the service tax should be only on the
services component. However, in case, if it is not possible to bifurcate the
‘rent’ from the ‘cost of services provided’ service tax will be levied on the
entire amount.
However, the big question here is whether there exists any
element of service involved in ‘pure renting of premises’.
In this context, it would be of interest to refer to the
provisions of section 297 of the Companies Act, 1956. The said section states
that the company Law board/The Central Government should approve certain
contracts, entailing sale or purchase of goods or materials or rendering
of service, in which directors or their relatives are interested as
the case may be.
In relation to the above section opinion of the Department
of Company Affairs (DCA) was requested in the issue whether the scope of the
section would extend to a transaction of renting the premise for business in
which the director of the company was an interested party.
The DCA replied. "I am directed to refer to your letter No.
SS SB90, dated March 1, 1990, on the subject mentioned above and to say that
in view of the proposal if the company for taking on rental, premises for the
office of the company, and the fact the transactions in immovable properties
are not covered by the provisions of section 297 of the Companies Act, 1956,
the application of the company has been filed". [Letter No. 9/41/90-CL-X,
dated March 27, 1990 issued by DCA [Source: A Ramaiya, page 2969, 16th
edition].
It is evident that, as the said contract only related to
taking premises on rent and no goods or service was involved, the DCA opined
that the provisions of the said section were not applicable.
Thus, as per the opinion of the DCA the transaction of rent
does not constitute service. Further, in the Finance Act the word ‘Service’
has not been defined in relation to service tax. In absence of any specific
definition of the word ‘service’ in service tax, the meaning of the word
should be determined on the basis of the word used in general parlance.
In general parlance for a common man providing a property
on rent will not constitute as service provided.
If no service is being rendered then to what extent is it
legally tenable to levy service tax on the rental amount itself?
It is debatable whether this proposal of the Finance
Minister to impose service tax on the rental of letting out premises for
commercial purposes would stand the test of law.
The Government has clarified that service tax will not be
levied on money changers. Levy of service tax on money changers was examined
in detail by the Central Board of Excise and Customs. The Board felt money
changing and foreign exchange broking were two distinct activities. While
money changing is an activity of sale and purchase of foreign exchange at
the prevalent market rates, foreign exchange broking is the activity
performed as an intermediary, on a commission or brokerage basis, for
facilitating the clients who wish to buy or sell foreign exchange. It was
earlier proposed to levy service tax on the above under the category of
‘Banking and Other Financial Service’
The interconnection usage service is provided by one
telegraph authority to another telegraph authority. In terms of the existing
definition, in the Finance Act, 1994, "telephone service" means any service
provided to a subscriber by the telegraph authority in relation to a telephone
connection. The subscriber means a person to whom any service of a telephone
connection has been provided by the telegraph authority. Therefore, a
subscriber in respect of telephone service is the person who avails of service
of telephone connection. While providing service of interconnection usage, no
service of telephone connection is provided to recipient telegraph authority.
No doubt, it is a service in relation to a telephone connection; however, as
long as service is not provided directly to a subscriber (as mentioned above),
the service may not fall in the category of telephone service. Therefore, IUC
would not be taxable under the category of service. Opinion of Law
Ministry/Attorney General has also been obtained in the matter. Law Ministry
and Attorney General have opined that IUC is not taxable in any of the
existing taxable services.
However, vide Finance Bill, 2007, a new definition of
‘telecommunication service’ has been incorporated vide clause (104) of section
65 of the Finance Act, 1994 and IUC has been specifically incorporated in the
definition of ‘telecommunication service’ to make it a taxable service.
Further, any service provided or to be provided, to any person, by a telegraph
authority in relation to ‘telecommunication service’ has been made taxable.
This amendment will come into effect from a date to be notified by the
Government after enactment of Finance Bill, 2007. Therefore, after this
amendment comes into effect, service tax would be applicable to IUC charges.
