Budget suggestion: Reverse charge method for tax on rent if the levy persist.

[C.A. Uma Kothari]

Relevant links/ references:

Home Solutions Retail India Ltd. v Union of India & Others 2009- TMI -33136 (Delhi High Court)

SSIPL Retail Ltd. v. Union of India (Writ Petition (Civil) No. 13861 of 2009 decided on December 18, 2009 reported as [2010 -TMI - 35371 - HIGH COURT OF DELHI]

Budget 2010:

It is advisable that revenue should accept the judgment of Delhi high Court and withdraw appeal. To look forward, the levy of service tax may be imposed by way of proper legislation and through reverse charge (charge on service receiver). It will also be beneficial to revenue, because when service tax is charged on land lords, the ownership of properties are divided and many land lords do not derive taxable rental income for service tax purposes. Furthermore, small properties are generally owned in personal hands or private limited companies with small rent of not exceeding thresh hold limit. If rent is taxed in hands of tenants, then large business houses taking properties on rent will be liable to pay tax on entire rent. For example in case of banks, rent of each ATM space may not exceed Rs. 10 lakh, therefore many land lords are not liable to pay service tax. If it is taxable in hands of banks, all ATM rent will become taxable. 

Better way for revenue to collect tax from tenants:

An easy, better and smooth way can be to make reverse charge of service tax on rent. CENVAT credit availers will have no problem and will willingly pay service tax and avail CENVAT credit. This may cover about 70-80% of rent payments fro commercial premises. Major amount of rent is paid by manufacturers of excisable goods, banks and financial institutions, insurance companies, and other taxable service providers. Hopefully they will pay service tax willingly and avail CENVAT without challenging levy.

Present Scenario:

 In fact, at present also when the liability is on landlords, the tenants who are eligible for CENVAT credit are willingly paying rent together with service tax. However, tenants who cannot avail CENVAT are reluctant to pay service tax and now after the judgment of the Delhi High Court rightfully denying liability to pay service tax on rent, when demanded by landlords.

Land lords dilemma:

As stated in the circular of CBDT about TDS from rent clarifying that service tax is collected on behalf of GOI so income-tax need not be deducted from element of service tax on rent. The landlords are thus only a conduit to collect tax. However, land lords are in dilemma. Cases are noticed when the same landlord is getting payment of service tax from some of tenants (who can avail CENVAT credit) and not from other tenants (who are not eligible to fully avail CENVAT credit). Now the difficult question is that paying service tax in relation to some tenants may be considered as if land lord has accepted the levy though the fact is that the landlord is just passing over the service tax collected from tenants.

Delhi high Courts directions and undertaking of ASG:

SSIPL Retail Ltd. v. Union of India (Writ Petition (Civil) No. 13861 of 2009 decided on December 18, 2009 reported as [2010 -TMI - 35371 - HIGH COURT OF DELHI]

In this case the Delhi High Court has held that in view of judgment of Delhi High Court and the fact that the judgment has not been stayed by the Supreme Court, the revenue should not take action against landlords to collect service tax on rent. The Court observed and held as follows:

"As pointed out above, even when the judgment of this Court is challenged by filing the SLP, till date there is no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the respondent could not instruct their officers to peruse the matter with tax payers calling upon them to pay service tax or to resort to other means under the law to protect the Revenue. The manner in which the letters are written clearly indicate that the payment of tax is demanded and the threat is also extended that if there is no compliance, Department would initiate further necessary action against them. 

Mr. Chandhiok, learned ASG appearing for the respondent, assures that corrective steps shall be taken by issuing further instructions, in (supersession) of earlier instructions, to the officers not to write such letters demanding the payment of service tax or threatening corrective steps. On this assurance no further orders are required to be passed in this Writ Petition.

Assurance of ASG Mr. Chandhiok before Delhi High Court is also not working:

It appears that the assurance given by learned ASG is not being complied with by the revenue this is clear from the following report about cracking of revenue in Maharastra:

"Service tax: Excise dept gets cracking on landlords

Rajshri Mehta

Monday, February 22, 2010 0:52 IST

Mumbai: There is resentment brewing among landlords against the Central Board of Excise and Customs. The reason? The board is yet to retract a circular issued in July last year directing service tax units to take action against those who do not pay tax on rentals earned from immovable propert.

With the circular still in force, the department is issuing show-cause notices asking landlords to pay tax running into lakhs. Considering the tax burden is usually passed on to the end user, the landlord/lessor is pressurising lessees to pay the service tax, giving rise to differences between the two parties.

What has irked developers is that the tax has not been rescinded despite the Delhi high court ruling last year that renting immovable property does not constitute a taxable service. The court had passed the order while hearing a petition filed by a subsidiary of Pantaloon Retail (India) Limited, along with other retailers, challenging the government's decision.

Further, when the circular was challenged, the board had assured the court that it will take corrective steps, yet continued issuing notices demanding the tax, forcing many landlords to pay it under protest.

The board defends itself by saying since an appeal is pending before the apex court, it is free to demand taxes."

All revenue officers are bound by Delhi High Court judgment:

The revenue officers are having wrong notion that the judgment of Delhi High Court is applicable only in area of jurisdiction of Delhi High Court. This is wrong, because the relevant notification is issued for all India. The authority to collect tax is derived under the notification and not the Finance Act, 1994 (as is case in respect of income-tax Act, 1961). Therefore the judgment of Delhi high Court is binding all over India. The notification which prescribes date of commencement of levy and authorizes the government to collect tax and oblige tax payers to pay tax is held not valid, therefore, the decision is applicable all over India.