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Services can be taxing, more or less
April, 05th 2007

The finance ministry has now imposed a service tax on a service that by its own definition and circular is not a service. Howzzat? Property owners who have been renting out immovable office space for commercial purposes may soon be in courts challenging the latest service tax on rental services as the earlier notification (B2/8/2004) declaring renting as a non-service is still valid.

A change of views probably led to the inclusion of 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 in the Budget. However, the definition does not state that it supersedes the earlier clarificatory circular on rental by the tax research unit of the Central Board of Excise & Customs.

The earlier circular, that was issued clarifying certain issues regarding airport services, had said, However, in case a part of airport/ civil enclave premises is rented/leased out, the rental/lease charges would not be subjected to services tax as the activity of letting out premises is not rendering a service.

The issue is likely to create complications and the move may get challenged in the court, a lawyer with a tax consulting firm said, and the previous circular would come handy then. The move has been opposed by various industry chambers, with some of them questioning renting being defined as a service.

Ficci, in a statement on the issue, said the proposal to impose service tax on rental from commercial establishments is causing acute consternation amongst the landlord-tenant community and is bound to squeeze the margins of small and medium retail traders as there will be no opportunity to offset the taxes against output taxes, given that this tax cannot be offset against the state VAT, which alone will apply on sale of goods by retailer.

Also, with the given recent spurt in rentals, this would also have an inflationary impact of a wide nature, particularly affecting the profitability of small and medium retail trade outlets called mom-and-pop stores.

Industry representatives have asked the government to drop the proposal or keep it in abeyance for some time, and a small committee with representatives from landlords and tenants be constituted to look into various dimensions of the aspect and make suggestions. 

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