Finance minister Chidambaram may give some relief to lessen the burden of the tax, when he replies to the debate on the Finance Bill, 2007.
NEW DELHI: The 12.36% service tax on renting of commercial properties is here to stay despite the stiff resistance put up by trade and industry bodies. But official sources indicated that finance minister Chidambaram may give some relief to lessen the burden of the tax, when he replies to the debate on the Finance Bill, 2007.
The tax will come into effect when it is notified after the passage of the Finance Bill. The finance ministry is considering the inclusion of a remission scheme in the notification to lower the incidence of the tax.
It is proposed to allow a 25-30% deduction from rent towards repair and maintenance, while calculating the base value for the service tax. Also, interest repayment on borrowed capital for the construction of the commercial property could be deducted before calculating the service tax.
These concessions would be in line with those already permitted under the Income-Tax Act with regard to the tax on income from house property.
The argument that service tax on renting of commercial properties imposed by the Centre may lack Constitutional validity since land, building and real estate are “state subjects” has not cut ice with the finance ministry. Officials pointed out that the legal and constitutional validity of the tax had been studied in depth before the proposal was made in the Budget.
Similarly, the ministry is not convinced by the arguments that “renting or leasing out” of properties is not a “service” and the service tax amounts to a double taxation as the lessor or the landlord is already liable to pay income-tax on rental income.
Officials explained that the renting or leasing out properties is accepted as a service internationally and is taxed in some countries.
The Finance Bill, 2007, proposes to include “services provided in relation to renting of immovable property, other than residential properties and vacant land, for use in the course or furtherance of business or commerce”, among the taxable services. The tax is 12%, but works out to 12.36% after adding the 2% education cess and 1% secondary and higher education cess.
The budget proposal has drawn flak from trade and industry bodies, which feel that given the recent spurt in rentals, this would also have an inflationary impact, particularly affecting the profitability of small and medium traders. The retail sector will be badly hit since there will be no opportunity to offset these taxes against output taxes. A similar predicament will be faced by a large section of IT and ITES companies, who are already operating on strict cost-control due to fierce competitive pricing for their clients.
CENVAT credit of the service tax paid on the ‘rentals’ would be available only to manufacturers of excisable goods and providers of ‘taxable services’ for setting-off their excise duty and service tax liability, respectively, and not to the traders and the providers of both ‘taxable’ and ‘non-taxable’ services and manufacturers of both excisable and exempt goods.
“For manufacturers/traders, service tax would only be an additional cost and is bound to have impact on the final market price of the commodity that is bound to soar. Would it be desirable when inflation needs to be contained?” the Federation of Indian Chambers of Commerce and Industry wondered in a representation to revenue secretary K M Chandrasekhar.
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