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Service tax on commercial rental may lead to flood of litigation

Service tax on commercial rental may lead to flood of litigation
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First Published: Mon, Mar 05 2007. 11 52 PM IST
Updated: Mon, Mar 05 2007. 11 52 PM IST
New Delhi: A Budget proposal to slap as much as 12.36% service tax on commercial rentals will be extended to those contracts where even part of a residential property is used for commercial purposes as long as it is under one contract. This to nail under-declaration of tax.
It is a ‘pre-emptive move’ by the revenue department to prevent landlords from passing of properties being used for commercial purposes as residential to avoid paying service tax, R. Sekar, joint secretary with Central Board of Excise and Customs, told Mint.
The service tax on renting is an indirect tax, or one which the landlord can claim from the tenant. The move may lead to property cases as landlords, who do not have a clause in existing contracts about passing on the tax, are likely to be challenged by the tenants.
The revenue department has instructed its tax-collection officers that the service tax would be applicable on the entire value of the contract. This is being done to check the common practice of owners showing a majority of the leased space as residential so they can pay lower property and utility taxes, Sekar said
With most commercial rental pacts being long term, there is no way landlords can pass on the costs to the tenant, said Pradeep Dinodia, who heads the Federation of Indian Chambers of Commerce and Industry’s tax committee.
“Individual landlords will not be able to collect the money from tenants,” Pinodia said adding, “Do you want litigation between landlords and tenants across India?”
Commercial rents in cities such as Delhi have already risen as a result of last year’s sealing drive by the municipal authorities to ban commercial outlets from residential areas.
“First of all, I don’t think imposing a service tax on commercial rentals is proper because renting property is not a service,” said former solicitor- general and senior Supreme Court advocate Mukul Rohatgi. “On top of that, you want to deem the entire property as commercial even if a portion is being used for residential purposes. Ideally, you apportion the property in half and tax half the contract value, or you should find out which is the dominant use of the property and then assess tax.”
Sekar said the government is merely implementing a tax that is considered the norm in most Western countries.
rahul.c@livemint.com
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First Published: Mon, Mar 05 2007. 11 52 PM IST