Service Tax - Taxability Of Lease Premium (Part-1)
August, 25th 2015
Renting of immovable property is a taxable service as a declared service. The term ‘Service’ has been defined inclause (44) of the new section 65B inserted by the Finance Act, 2012 as applicable w.e.f. 1.7.2012 and means –
carried out by a person for another
and includes a declared service.
As per clause (a) of section 66E of Finance Act, 1994, declared services including the activity of 'renting of immovable property.
Charging of Tax
Section 66B states that service tax shall be charged at the rate of 12 % plus both education cesses (upto 31.05.2015) and 14% (w.e.f 01.06.2015) on value of all taxable services i.e. other than those specified in the negative list or exempted services, which are provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
Section 66B of the Finance Act, 1994 specifies the charge of service tax which is essentially that service tax shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list. Thus, as per charging section 66B, Service Tax shall be applicable on all services except services under negative list or exempt services as per exemption notification.
Clause (m) of section 66D contains an entry in negative list relating to services by way of renting of residential dwelling unit for use as a residence. The condition is that it should be a residential unit and that such unit should also be used as a residence only.
Thus, properties meant of commercial use shall be subject to Service Tax.
Renting of Property
As per clause 41 of Section 65B of the Finance Act, 1994 (as amended), ‘Renting’ means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property.
Clause (viii) above is the residual clause which covers all arrangements which may not be covered under first seven alternatives, i.e., right to use, sub-lease, space sharing etc. The meaning of term ‘other similar arrangements’ may be construed as the arrangement of immovable property in which someone is allowed, permitted, granted access and also include the activities which is similar to letting, leasing and licensing of immovable property. Leasing would include all types of leasing including a sub-lease.
'Renting of Immovable Property' is defined under rule 2(1)(f) of the Service Tax Rules, 1994 as follows:
“renting of immovable property” means any service provided or agreed to be provided by renting of immovable property or any other service in relation to such renting.
Service Tax is levied on value of the taxable service as determined in term of provision of section 67 of the Finance Act, 1994. As per section 67 of the Finance Act, 1994 the gross amount charged in respect of provisioning of taxable service shall be chargeable to Service Tax. As per section 67(1)(i) of the Finance Act, 1994, if the entire consideration received in money then the gross amount charged shall be such consideration.
Without 'consideration', an 'activity' cannot be said to be a 'service'. ‘Consideration’ means something in return. ‘Consideration’ for a service provided or agreed to be provided by service provider means anything which the service receiver or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or to abstain from doing for receiving the service.
In simple terms, ‘consideration’ means everything received in return for a provision of service which includes monetary payment and any consideration of non- monetary nature as well as deferred consideration.
Any amount received against provisioning of the taxable service shall be the gross amount charged and shall be chargeable to Service Tax. But if any amount is received from the service receiver which is not in relation to provision of taxable service, then such amount shall not be chargeable to Service Tax. Valuation is only a measure of tax whereas incidence of tax is on taxable event, i.e., rendering of service.
In Federation of Hotel and Restaurant Association of India v. Union of India (1989 (5) TMI 50 - SUPREME Court,it was held that the subject of a tax is different from the measure of the levy. The measure of the tax is not determinative of its essential character or of the competence of the legislature. Following this, in Tamil Nadu Kalyana Mandapam Owners' Association v. Union of India and Others 2001 (4) TMI 26 - MADRAS High CourtMadras High Court held that there can be no dispute that section 67(1) is nothing but the measure of the tax which cannot be considered while considering the true nature of the tax.
Delhi High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India (2012) 12 TMI 150;, has held that what is to be taxed is the gross amount charged by the service provider ‘for such service’. The words ‘such service’ are important for taxation. It is only the value of ‘such service’ which can be taxed and nothing else. The value of service, to be taxed, can, therefore, never exceed the gross amount charged by the service provider for such service provided.
It is often seen that the lessor charges to the lessee a consideration called rent, rental charges, lease charges etc which could be annual or monthly or based on any other term. In certain cases, a lump-sum amount is also received at the beginning known as 'lease premium' or 'one time premium' or 'salami' or 'pagdi'. These are generally non-refundable and are payable in case of long term leases. While rentals / lease changes are taxable for sure, there is a doubt or confusion on taxability of one time lease premium. While the revenue intends to levy and collect Service Tax on the same, assessees are contesting such demands on the plea that it is not a consideration for service rendered.