Renting of Immovable Property - A Lucid Guide

[2013] 35 taxmann.com 497  (Article)

Renting of Immovable Property - A Lucid Guide

VINEET SODHANI	DEEPSHIKHA SODHANI
CA	CA

Declared Service

1. Renting of immovable property is a declared service. [Section 66E(a)]

Renting

2. "Renting" [Section 65B(41)] 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;

Immovable property

3. 'Immovable property' has not been defined in the Act. Therefore, the definition of 'immovable property as given in clause (26) of the General Clauses Act, 1897 has to be taken as per which "immovable property" shall include –

♦		land,
♦		benefits, to arise out of land, and
♦		things attached to the earth, or permanently fastened to anything attached to the earth.

Negative List – Residential renting

4. Services by way of renting of –

♦		residential dwelling
♦		for use as residence

are covered within the negative list and, thus, are not chargeable to service tax. [Section 66D(m)]

4.1 'Residential dwelling'

As per normal trade parlance it is –

♦		any residential accommodation,
♦		but does not include hotel, motel, inn, guest house, campsite, lodge, house boat, or like places meant for temporary stay.

4.2 Renting for partly residential and partly non-residential purposes – Bundled Service : Residential dwelling which is for use partly as a residence and partly for non-residential purpose like an office of a lawyer or the clinic of a doctor would be a bundled service. Its taxability will be determined as per section 66F, viz., if bundling is done naturally in ordinary course of business, then taxability is governed by essential character principle. If essential character is residence, then it would be wholly exempt. In any other case, it will be wholly taxable.

4.3 Instances of taxation of renting :

Case	Taxability of renting transaction
(i) a residential house taken on rent is used only or predominantly for commercial or non-residential use.	Not covered in negative list and is taxable.
(ii) if a house is given on rent and the same is used as a hotel or a lodge	Not covered in negative list; is taxable because the person taking it on rent is using it for a commercial purpose.
(iii) rooms in a hotel or a lodge are let out whether or not for temporary stay	Not covered in negative list; is taxable as a hotel or a lodge is not a residential dwelling.
(iv) government department allots houses to its employees and charges a  license fee	Covered in negative list of services provided by government [Sec. 66D(a)]; non- taxable.
(v) furnished flats given on rent for temporary stay for (a few days)	such renting as residential dwelling for the bona fide use of a person or his family members for a reasonable period shall be residential use; but if the same is given for a short stay for different persons over a period of time the same would be liable to tax.

5. Property tax vis-a-vis Service Tax:-

5.1 As per Notification No. 29/2012-ST,

On account of exemption, Value of Taxable Service = Gross amount charged for renting of such immovable property – Taxes on such property, namely, property tax levied and collected by local bodies.

5.2 Interest, penalty, etc., not to be allowed as deduction-Any amount such as interest, penalty paid to the local authority by the service provider on account of delayed payment of property tax or for any other reason shall not be treated as property tax for the purposes of deduction from the gross amount charged.

5.3 Proportionate property tax to be allowed period-wise - Wherever the period for which property tax paid is different from the period for which service tax is paid or payable, property tax proportionate to the period for which service tax is paid or payable shall be calculated and the amount so calculated shall be excluded from the gross amount charged for renting of the immovable property for the said period, for the purposes of levy of service tax.

5.3-1 An example - Property tax paid for April to September = Rs. 12,000.

Rent received for April = Rs. 1,00,000 (exclusive of service tax)

Value of taxable service in April = Rs. 1,00,000 -	12,000	= Rs. 98,000.
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5.4 Exemption not claimed – Excess service tax paid – To be adjusted against service tax liability within 1 year from date of payment of property tax [Rule 6(4C) of Service Tax Rules, 1994] - Where the person liable to pay service tax in respect of service of renting of immovable property has paid to the credit of Central Government :

♦		any amount in excess of the amount required to be paid towards service tax liability for a month or quarter, as the case may be, on account of non-availment of this exemption for the said period at the time of payment of service tax,
♦		the assessee may adjust such an excess amount paid by him against his service tax liability within one year from the date of payment of such property tax, and
♦		the details of such adjustment shall be intimated to the Superintendent of Central Excise having jurisdiction over the service provider within a period of 15 days from the date of such adjustment.

5.5 Consolidated payment of property tax on more than one property - As per Notification No. 29/2012-ST, dated 20-6-2012, the taxable service of renting of an immovable property is exempt from service tax to the extent of the value equivalent to taxes on such property, namely, property tax levied and collected by local bodies.

Second proviso to such notification provides that wherever the period for which property tax paid is different from the period for which service tax is paid or payable, property tax proportionate to the period for which service tax is paid or payable shall be calculated and exemption shall be available for such an amount.

The aforesaid second proviso deals with proportionate deduction when the property tax is paid for a period different than the period for which service tax is payable.

The notification grants exemption only in respect of property taxes on "such" property, viz., the property whose rent is liable to service tax.

Therefore, where property tax is not for a single property but is a consolidated sum for more than one properties, then principle of attribution as enshrined in second proviso (though in a different context) can be applied and, accordingly, proportionate sum shall be eligible for exemption.

Property tax may be computed proportionately based on the value of properties (as property tax is generally charged as a percentage of the value of the properties).

Place of Provision

6. Place of provision is determined as per Rule 5 of the PoP Rules. The place of provision of services provided directly in relation to an immovable property, including grant of rights to use immovable property, shall be the place where the immovable property is located or is intended to be located.

Exemption to Renting of hotel, inn, etc.

7. Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes have been summarized in the following table :-

Case	Treatment
Having declared tariff of a unit of accommodation below Rs. 1,000 per day or equivalent;	Fully exempt [Entry 18 of Notification No. 25/2012-ST] Declared tariff includes – ♦   charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, ♦   without excluding any discount offered on the published charges for such a unit; For example : If declared tariff is Rs. 1,100, but discount of Rs. 300 is offered, then service is not exempt, as declared tariff exceeds Rs. 1,000. Since actual amount charged is Rs. 800 (1,000 - 300), tax is payable on Rs. 800. Revision in declared tariff :When the declared tariff is revised as per the tourist season, the liability to pay tax shall be only on the declared tariff for the accommodation where the published/printed tariff is above Rupees 1,000. However, the revision in tariff should be made uniformly applicable to all customers and should be declared when such change takes place.
Any other case	Taxable value = 60% of amount charged by service provider. Condition of grant of abatement [Not. No. 26/2012- ST] : Exemption (by way of 40% abatement) is allowed, if – ♦   CENVAT credit on inputs and capital goods, ♦   used for providing the taxable service, has not been taken under provisions of the CENVAT Credit Rules, 2004.

Clarification on some related issues

8. Various clarifications based on guidance note are as follows –

8.1 Permitting use of property for temporary purpose – Covered :Permitting usage of a property for a temporary purpose like conduct of a marriage or any other social function would be taxable. As per definition allowing or permitting usage of immovable property, without transferring possession of such property is also renting of immovable property.

8.2 Renting of immovable property not taxable in other cases :

♦		renting of vacant land, with or without a structure incidental to its use relating to agriculture. - Section 66D(d) ;
♦		renting out of any property by Reserve Bank of India – Sec. 66D(b).
♦		renting out of any property by a Government or a local authority to a non-business entity. - Section 66D(a).
♦		Renting out any property to an exempt educational institution is exempt.
♦		Renting out of precincts of a religious place meant for general public is exempt.

8.3 Certain instances of coverage :

Sl.No.	Case	Taxability
1.	Renting of property to an educational body	Exempted if provided to an educational institution for the purpose of education which is exempt from the levy of service tax.
2.	Renting of vacant land for animal husbandry or floriculture	Not chargeable to service tax as it is covered in the negative list entry relating to agriculture
3.	Permitting use of immovable property for placing vending/dispensing machines	Chargeable to service tax as permitting usage of space is covered in the definition of renting
4.	Allowing erection of a communication tower on a building for consideration.	Chargeable to service tax, as permitting usage of space is covered in the definition of renting
5.	Renting of land or building for entertainment or sports	Chargeable to service tax, as there is no specific exemption.
6.	Renting of theatres by owners to film distributors (including under a profit-sharing arrangement)	Chargeable to service tax, as the arrangement amounts to renting of immovable property.

8.4 Renting by hotels, etc., for social/other functions–Covered : Hotels/restaurants/convention centres letting out their halls, rooms, etc., for social, official or business functions or letting out of halls for cultural functions fall within the scope of this service.

CENVAT credit

9. Inputs and Input services used in construction of civil strucutre, etc., are not eligible for Cenvat credit under Rule 2(k) and Rule 2(l) of the CENVAT Credit Rules, 2004.

But other services such as cleaning services, etc., availed in relation to renting shall be eligible.

Conclusion

10. The constitutional validity of renting of immovable property under the old law prior to 1-7-2012 was upheld by various judgments of the High Court. Though Supreme Court's verdict is yet to come, no different view is expected.