Service tax on renting – Mixed use of property
By
Dinesh Kumar Agrawal, Grad. CWA, ACA
(Former Assistant Commissioner of Excise and Customs)
Recently service tax has been levied on the income earned from renting of immovable property for business or commercial purposes. In terms of Section 65(105)(zzzz) of the Finance Act, 1994 as amended by the Finance Act, 2007 ‘renting of immovable property’ includes renting, letting, leasing, licensing, or other similar arrangements of immovable property for use in the course of furtherance of business or commerce. ‘For use in the course or furtherance of business or commerce’ includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings.
Immovable property intra alia, includes a building but excludes building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
As per explanation 2 of the Section 65(105)(zzzz) of the Finance Act, an immovable property partly for use in the course of furtherance of business or commerce and partly for residential purposes will be deemed to be immovable property for use in the course of furtherance of business or commerce.
The term business and commerce has not been defined in the Finance Act. We use many words like trade, business, commerce, profession, occupation, employment etc to signify ones means of livelihood. In fact, Article 19(f) of the Constitution of India guarantees rights practise any profession, or to carry on any occupation, trade or business any where in India. Therefore, it appears that profession and business are two different terms conveying two different meanings. Generally term ‘profession’ is associated with special knowledge, special privileges and special responsibilities. Profession of doctors, lawyers, chartered accountants, engineers are well known. On the other hand, one associate word ‘business’ with occupation other than profession and employment.
It is a settled principle that in the absence of any statutory definition in the governing act, it is permissible to refer to dictionary meaning as held by the apex courts in the case of Star Paper Mills Ltd. v. Collector of Central Excise, [1989 (4) SCC 724].
Webster Comprehensive Dictionary defines business as 1. A pursuit or occupation; trade; profession; calling 2 Commercial affairs 3 A matter or affairs 4 Interest; concern; duty 5 A commercial enterprise or establishment 6 Those details other than and exclusive of dialog, by which actors portray their parts interpret a play 7 the state of being busy. Further, as per the dictionary, interalia, art, a vocation barter, calling, commerce, concern, craft, duty, employment, handicraft, industry, job, labor, occupation, profession, trade, trading, traffic, vocation, work are synonyms of business.
From the above, it is amply clear that term ‘businesses is comprehensive term and include ‘profession’ also within its ambit. A large number of professionals, in addition to office, use their residence or part of residence for their profession. Some professionals do not have any office and they entirely operate from their residence. Moreover, a large number of small and very small entrepreneurs uses their residence for manufacture and storage of merchandise and operates therefrom. Many housewives carry business of making and selling papad, masala, pickles etc. from their residence.
‘For use in the course of furtherance of business or commerce’ is a very broad term and again required to be interpreted liberally. A meeting with a perspective/existing client or customer in the residence can be considered as use of the residence in the course of furtherance of business or commerce. Nevertheless, manufacture of merchandise or storage thereof in the residence or use of residence as office-cum-residence is definitely a use of residence in the course of furtherance of business or commerce. Therefore, in view of the definition given above, such residence will be considered as immovable property used in the course of furtherance of business or commerce.
Therefore, the question arises as to whether use of residential property rented out for the purpose of residence but used by the tenant for business or commerce also will be subject to service tax or not, and if yes, who will be liable to pay tax?
It will be easier to understand the problem if we first discuss about persons liable to pay tax and then discuss about liability to pay.
In terms of section 68 of the Finance Act, service provider is liable to pay service tax on the amount of rent received by him. In the present case, service provider may be a government, municipal corporation or owner/landlord of the immovable property. The liability to pay service tax by the service recipient has been provided only in a few cases like goods transport agency service and renting of immovable property is not one of them. Therefore, in any eventuality, recipient of rental income remains liable to pay tax and the revenue department cannot ask the tenant to pay service tax.
Service tax is levied on the service provided on of renting of immovable property for use in the course or furtherance of business or commerce. In other words, renting of immovable property for residence is not taxable. Various courts including Hon’ble Supreme Court on many occasions has interpreted ‘for use in’ to mean that alternate use is not restrictive so far as goods are capable of being used for the intended purpose. But in the present case, actual use of the property has also been stipulated and therefore, irrespective of the fact as to whether residential property has been rented out exclusively for the purpose of residence, if same is also found to be used by the tenant for business or commerce, it will be subject to tax.
Now the real issue is whether it is in the realm of possibility and feasible to tax such property subject to tax?
Leave and licensing or tenancy or lease agreements are governed by the Contracts Act and if the agreement does not contain any specific provision about liability for service tax, the service provider has to pay service tax from his own pocket. In terms of Section 67(2) of the Finance Act, where the rent charged by a service provider is inclusive of service tax payable, the value of renting service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
The existing provision makes revenue department omnipresent and subjects at the mercy of revenue officers. The treatment of residential property as commercial property based on actual use or mis-use by the tenants and consequential demand on the landlord will be highly subjective and needs urgent attention of the law makers. It will be better if the property is taxed based on the classification of immovable property by the local bodies like municipal corporations, municipalities etc. instead of leaving on the interpretation of revenue officials whose ingenuity will surpass all the imaginable limits.
(Author may be contacted at
[email protected] or
[email protected])
