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Service Tax Dues Proving Nightmarish for Municipality
June, 25th 2008

The central excise department had levied a service tax of 12.5% on various earnings including rentals received by the urban local bodies. The bodies which were either not aware of the tax provision or did not wake up to the seriousness of the move, are in a soup now.

Municipal council receives an average of Rs 44 lac annually as rentals on various shops and buildings it has rented out to people and institutions. As it failed to remit service tax as per rules, the superintendent of central excise department had served a notice on the municipality, reminding it of its obligation. In the general session of the council held on Friday June 20, it was decided to approach the central excise department with a request to exempt the municipality from service tax, as it has been renting out buildings primarily as a social service and not as a commercial opportunity. The chances of the excise department extending the exemption are almost nil.

The municipality is faced with the predicament of collecting the service tax pertaining to the previous year now. Not only is the municipality short of funds, but even those who have taken municipal premises on rent might resist the move. As the relevant clauses embedded in the rent agreements entered into with the lessees enables the municipality to recover taxes from tenants, it will be difficult for it to recover the previous year's taxes now in a lump sum.

As it is difficult to convince the tenants to cough up the entire emount due at one go, the municipality may be forced to find out some source from which the pending service tax can be paid to the department, and to recover the same in easy instalments from the shop keepers.

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