This year's list of services sought to be taxed include renting of immovable property for use in commerce or business.
Annually, the provisions on Service Tax announced in the Finance Bill resemble the Railway Budget. Akin to new trains being introduced and the extension of some others, new services are added and the scope of some extended. The similarity ends there as the Railway Budget is awaited with a sense of expectation while the Service Tax provisions are expected with a sense of concern.
This year's list of services sought to be taxed include renting of immovable property for use in commerce or business. Instead of troubling the notification makers with the task of researching for exemptions from this clause, the Budget speech itself excludes from the scope of the levy residential property, land for agriculture and similar services, land for sport, entertainment and educational or religious purposes.
Section 65(90A) does the formality of defining the levy to be on "letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce." A detailed definition of immovable property has also been added to drive home the point. A few niggling issues could have been tackled upfront instead of a subsequent notification.
To get an idea as to what would constitute a service, one looked up Wikipedia, which says that in services and marketing, a service is the non-material equivalent of a good. Service provision has been defined as an activity that does not result in ownership and this is what differentiates it from physical goods. This definition found legal sanction in Escotel Mobile Communications vs Union of India wherein it was held that both the process of selling a SIM card and activation would fall under the definition of a taxable service.
Recently, the Supreme Court in Bharat Sanchar Nigam Ltd v Union of India referred to the above decision to decide that telecom services did not attract sales tax. By bringing under the Service Tax the services component of a works contract, Budget 2008 has made redundant the decision in Gannon Dunkerly and Co vs State of Rajasthan wherein it was ruled that an indivisible works contract cannot be broken up into its separate portions and brought to tax.
To make doubly sure that the small service provider also pays service tax on works contract, a composition rate of 2 per cent has been introduced. To err on the side of caution, one could state that when goods are transferred, sales tax is payable and when an economic activity is undertaken and goods are not transferred, service tax is payable.
Any immovable property that is let out has to be maintained. Whether maintenance charges would fall under renting is a question that begs to be answered. The immediate answer would be no since there can hardly be a nexus between renting and maintenance but one is reminded of the days of the Income-Tax Act when furnishing was not considered to be a part of rent for the purposes of tax deduction at source till a clarificatory notification brought everything under the tax deduction laws.
The advantage of having a service tax law in its present form is that one can always bring to tax services under any other head the maintenance charges can be taxed under the category repair or maintenance service by adding immovable property to the defining section.
Huge commercial complexes normally pay utility bills and obtain a reimbursement from the tenant. Whether these would also be covered in the new levy is a matter that could be contested. The increase in the threshold limit should satisfy an individual who has let-out his property for commercial purposes and who earns a monthly rental in excess of Rs 33,333 since he would have had to pay Service Tax under the erstwhile limits.
There were fears that the Indian economy has over-heated and inflation is rampant. Most of the heat and price-rise can be seen in the real-estate business. The latest levy could spark a rise in the prices of real-estate making it even more inaccessible for the ordinary man and thereby fuelling inflation.
Mohan Lavi (The author is a Hyderabad-based chartered accountant.)