Service Tax on lease rent

[Sucheta Agrawal]

Case A LTd engaged in real estate business.The company puchased land on lease from Local authority on 99 years lease. The company is developing flats on the said land and sold these flats in open market at following structure Basic Cost price 2400 sq. ft Plc as applicable lease rent 85 sq.ft. IFMS 20 Sq. ft. conditions: 1. Total lease payable to the local authority is 12 cr. and the total amount to be collected from buyer of the flat is also same. 2. Total lease payable to the local authority is 12 cr and the total amount to be collected from buyer of the flat is Rs 13.5 cr 3. Total lease payable to the local authority is 12 cr and the total amount to be collected from buyer of the flat is Rs 10.5 cr Questions 1. Whether lease rent paid to the local authrity taxable under serive tax. ( if yes than under what ground) 2. If yes, how does the service tax treatment differ in above three conditions.

[Ramanujam Varadarajan]

As per the amendment made by Finance Act 2010, vacant land given on lease for construction of building to be used for furtherance of business or commerce is liable to service tax under 'Renting of immovable property service'.   In my view, A Ltd acquiring lease of land for construction of flats would be treated as using it of business or commerce and thus subject to service tax.  Thus, local authority collecting lease rent is liable to collect and pay service tax.  The service tax on local authority would not change under all the three scenarios as the  lease rent paid to the local authority remains same.

AI Summary

Renting of immovable property service: lease of vacant land for construction is taxable and lessor must remit service tax. Legislative amendment treats vacant land given on lease for construction of buildings for business or commerce as taxable under Renting of immovable property service. A developer acquiring such a lease for building and selling flats is using the land for business, so lease rent received by the lessor (local authority) is subject to service tax. The service tax obligation on the lessor to collect and remit does not change across scenarios where the developer's sale proceeds differ if the lease rent payable to the local authority remains the same.