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This
levy has been challenged by the trade/industry circles on
various grounds. The most important issue that has been
raised is about the authority of the Union government to
levy tax on rentals. This is because service tax is a
Union subject, whereas “tax on land and building” is a
State domain. It is further being argued by many that
renting of immovable property does not involve any element
of “service”.
Recently,
in a writ petition filed before the Madras High Court, an
interim injunction was granted by the court restraining
the government from collecting service tax on rent of
commercial space. Though the injunction would apply only
to the petitioner, the final decision in this regard is
awaited with anticipation.
While
the levy itself is a subject of contention, the
applicability of service tax on lease agreements signed
prior to date of introduction of this levy is also not
free from doubt. It can be argued that in the case of
renting, the taxable event would be the date when the
service provider parts with the property in favour of the
tenant. Accordingly, it can be argued that such existing
lease transactions should not attract service tax.
This
view also draws support from a CBEC circular issued in
relation to ‘Banking and other Financial Services’. It
was clarified that lease or hire purchase agreements
entered prior to the date of introduction of the levy
would not be charged to tax, so long as the property/
goods have also been received by the lessee before the
introduction of the levy. Further, in a recent tribunal
judgment in relation to applicability of service tax on
hire-purchase agreements, it has been held that the higher
rate of service tax would not be applicable for the
contracts executed prior to hike in the rate of tax.
However,
the revenue authorities are likely to take a view that
renting is a continuous service and, therefore,
rentals
received after the date of introduction of this levy would
be subject to service tax. This could result in litigation
between the taxpayers and the revenue authorities. Since
it is not uncommon to have long-term lease contracts, an
appropriate clarification on the issue would help the
taxpayers.
While
the impact of this levy is being felt by various sections
of trade and industry, the levy is having significant
impact on retail sector. It’s so because retailers are
not able to claim any credit of the service tax paid on
rentals in the absence of any service tax or excise duty
liability on their output.
Given
these controversies and issues, it is interesting to wait
and watch the outcome of the decision of the Madras High
Court on this issue. If the court rules in favour of
taxpayers, it will be received with a sigh of relief.
However, if that is not the case, taxpayers will have no
choice but to look forward to the Goods and Services Tax (GST)
regime, which would probably allow seamless flow of tax
credits between goods and services and mitigate the tax
cost.
Source
:
Financial
Express - Bombay, India, dated 24/01/2008
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