One of the more controversial provisions of budget 2010, being made applicable retrospectively, is the explicit provision that the activity of renting is a taxable service.
Background
Service tax on renting of immovable property was first mooted by budget 2007. The tax was sought to be imposed on the service provided in relation to renting of immovable property for use in the course of furtherance of business or commerce.
If you read the above line carefully, you will notice that the tax is on service in relation to renting and not on the rent itself.
Consequently, some experts have the view that the rent income per se should not be subject to service tax, but only peripheral services that are rendered in relation to the renting. For example, if there is a composite lease agreement where the lease payments cover not only the rent but extra services such as maintenance, security, provision of utilities and support staff etc, these would be under the ambit of the service tax and not the rent per se.
So now there was this big confusion among the taxpaying population as to what exactly does the government intend to tax — is it the rent itself or is it the service in relation to the rent?
Finally, on April 18, 2009, the Delhi High Court in the case of Home Solutions Retail India Ltd vs UOI [2009] 20 STT 129, held that while any service connected to renting of property would indeed fall within the ambit of service tax, the act of renting per se cannot be seen as a taxable service. Extracts of the judgment are paraphrased below:
“Service tax is a value-added tax. It is a tax on value addition provided by a service provider. It is obvious that it must have connection with a service and, there must be some value addition by that service. If there is no value addition, then there is no service.
For example, take a service provided or to be provided to ‘A’ by ‘B’ in relation to ‘C’.Here, ‘A’ is the recipient of the service, ‘B’ is the service provider and ‘C’ is the subject matter. The expression “in relation to” may be of widest amplitude, but it has been used in the said Act as per its context.Sometimes, “in relation to” would include the subject matter following it and on other occasions, it would not.
As in the case of the service of dry cleaning, the expression “in relation to dry cleaning” also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65(105)(v), which refers to a service provided by a real estate agent “in relation to real estate”, does not, obviously, include the subject matter as a service.
This is so because real estate by itself cannot by any stretch of imagination be regarded as a service. Going back to the structured sentence, i.e. — service provided or to be provided to ‘A’ by ‘B’ in relation to ‘C’, it is obvious that ‘C’ can either be a service (such as dry cleaning, hair dressing, etc) or not a service by itself, such as real estate. The expression “in relation to” would, therefore, have different meanings depending on whether ‘C’ is a service or is not a service.
If ‘C’ is a service, then the expression “in relation to” means the service ‘C’ as well as any other service having connection with the service ‘C’.Where ‘C’ is not a service, the expression “in relation to” would have reference only to some service which has a connection with ‘C’.But, this would not imply that ‘C’ itself is a service.
From this analysis, it is clear that we have to understand as to whether renting of immovable property for use in the course or furtherance of business or commerce by itself is a service. There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of Section 65(105)(zzzz) and would be exigible to service tax.
The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value-added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition.
Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air-conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz).
In view of the foregoing discussion, we hold that Section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the said Act.”
The Centre had appealed against the Delhi high court judgment and this SLP is still pending. Now, what budget 2010 has done is to basically amend the Act and provided explicitly that the activity of ‘renting’ is indeed a taxable service. What happens now will indeed be interesting.
Stoking already high inflation
It must be realised that all indirect taxes are in fact, surrogate taxes. In the end, it is the consumer who bears them. Service tax is no exception. This tax is ostensibly payable by the service provider, but he recovers it from the availer of the service.
In the current context too, it is the owner or the landlord of the property who is meant to bear this tax, however, it will be eventually recovered from the person renting the property. Most retailers including grocery stores and shopping malls don’t own the property themselves but instead take it on lease. If the cost of the lease increases, it follows that the burden will be passed on the end consumers, thereby pushing up prices. If inflation control is one of the priorities of the government, then perhaps they should desist from levying this tax. In any case, the landlord pays income-tax on the rent received.
The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be
contacted at sandeep.shanbhag@gmail.com
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