Service tax on ' Rent on Immovable Property'

[Pradeep Kaushik]

Respected Sir,

We have taken a fectory premises on Lease in Gurgaon (Haryana). Our landlord is Charging Service tax on Rent amount. Please suggest, that Service tax on Rent for Immovable Property, is eligible. Should we reimburse the Service tax to our landlord. Is it mandatory for our landlord to get his registration in this service also.

Kindly give reference of any circular/ Notification in support of your valuable reply.

Best Regards.

Pradeep Kaushik

[YAGAY andSUN]

Service tax on renting of immovable property is applicable though it has been stayed by the SC in the case of Retailers Associations, Mumbai against the Mumbai high courts judgment holding constitutional validity of service tax.  It is advisable to pay the service tax as charged by the your landlord.  He has to get himself registered with the Serivce Tax Department. Further you can get the deduction of property tax paid on such property on which service tax has been paid by you.

[NEERAJ KUMAR, RANCHI]

I do agree with what Mr Khatri has mentioned.

 

[DEV KUMAR KOTHARI]

As the position stands today, Five  High Courts have upheld validity of service tax with retrospective effect. The Supreme Court has stayed operation of Bombay High Court for  demands up to 30.09.11 but there is no stay from 01.10.11. The matter is pendign before the Supreme Court.

You are payign rent for factory. Therefore, you may be eligible for CENVAT, so there is no harm to  play safe, pay ST charged by landlord (if he gives tax invoice showing relevant particulars) and avail CENVAT.

I suggest that factory owners, and other tenants can make a representation to the concerned authoriteis to make ST on rent on reverse charge basis. That is the service receiver to be liable to pay directly. This will help in keeping track -  payment, CENVAT and litigation. In case ST is paid and CENVAT is not availed, and if the levy is ultimately held illegal,  refund will be easily available as tenant will be able to show payment and no CENVAT availed.   

My personal opinion is that in case of letting out of proeprty on  rent basis,  there is hardly any element of service rendered by landlord. If one lend money he get interest even if buyer has not used money and does not make any value addition. Likewise in case of property tenant has to pay rent even if he does not use property. Rent is for possession and permission to use and not for any service.

The tenant may make value addition, for that he will pay service tax on his value additions.  Landlord give possession of premises, then he does hardly any work becasue in most of cases, maintenance is also carried by owners associaitns and for that there is separate levy. Even if premises in not used by tenant and even if it is kept vacant, any value addition is not made even by tenant, still  rent is payable. 

Considering from reward angle also rent is reward for (a)  capital deployed and reward is about half poercent per month of the capital value of property that is present market value  of property(b) wear and tear of property (c) risks associated with holding of property (d) risks associated with letting out of property (e) risk of property remaining vacant (f) risk of rent becoming un-recoverable and (g)  certain payments payable by landlord like local and other  taxes, wealth tax, income-tax etc.

On stuydy of a large sampel of rental income we find that in net result landlord gets a net after tax return of about 4-6% a year on the market value of property. suppose a property is valued at say Rs. one crore. Its monthly rent will be aout  Rs. 60 -75 K. Taking figure on higher side of 75K pM  annual rent will be  9 lakh. After paying local tax (about 2 lakh)  Income -tax 1.71 lakh) , Wealth tax (1 lakh)  etc. the net earning will be around Rs. 4-5 lakh per year depending on leviability of WT, rate of IT and municipal tax.. This will be most of times even less than FDR interest on market value of property.

The common saying is that proeprties are bought for investment to conserve money for long-term  and to gain out of appreciation and not to earn regular income. Regular income in most of cases is much less than totally secured FDR with nationalized banks.

Thererfore, there is no case of n any value addition even by criterion of rewars gained  on letting out of properties.

If at all  there is value addition it  is by tenant if he does some activiteis. Therefore, tenant may be liable to pay service tax on service rendered by him.

I hope these contentions shall be raised before the SC by counsels.

 

 

AI Summary

Service tax on rent: tenants may face liability and can claim CENVAT if eligible; consider reverse charge. Service tax on renting of immovable property is being imposed and litigated; landlords charging it should register and issue tax invoices. Tenants using rented factory premises may claim CENVAT credit if the premises are used in taxable manufacture or services, so paying the charged tax and claiming input credit is commercially prudent. Adopting a reverse charge arrangement is suggested to ensure clear payment records and simplify potential refunds if the levy is later invalidated. Commentary questions whether letting constitutes a taxable service, arguing rent is primarily compensation for capital and risk rather than a value-adding service by landlords.