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Service tax on commercial rental of property will stay
March, 31st 2007

The finance ministry is likely to stick to its decision to levy service tax on renting of immovable property for commercial purposes. This is despite protests from various sectors of India Inc.

North Block sources said that there would be no withdrawal of the tax as the ministry is of the view that property rentals were essentially services and so should be brought under the service tax net.

A final decision will however be taken on the amendments to the Finance Bill, that is expected to be tabled in the Parliament after the recess.

An official said, Commercial rental of property will be treated as a service and a tax of about 12.36% will be levied on it. In the coming years, we may also expand the scope of service tax to property leased for residential purpose. However, at present there is no such proposal, he added.

Finance minister P Chidambaram has introduced service tax on rental of immovable property used for commercial purpose in Budget 2007-08. However the proposal does not extend to residential property, vacant land used for agriculture and similar purposes, land for sports, entertainment and parking purposes, and immovable property for educational or religious purposes.

The move is expected to hit corporates, banks, multinationals, malls, restaurants, BPOs, IT companies and multiplexes the most. At present most of these organizations, especially BPOs only lease property to carry out their functions.

Real estate agents too are feeling the heat of the proposed tax and have protested as they are of the view that it would only lead to higher rental prices.

The reason for protest from all quarters is that the real estate boom, along with the lack of commercial space has already hiked rental rates further. Service tax will be an additional burden.

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