Tuesday, February 25, 2014

service tax on renting of immovable property

1.      Renting of immovable property

1.1.     Definition of renting:
As per section 65B(41),
‘renting’ means allowing, permitting or granting access, entry, occupation, usage 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.

1.2.     Declared service:
As per section 66E (a) of the act, renting of immovable property would constitute as declared service.
As per Guidance notes on service tax issued by CBEC on 20th June, 2012, Renting of immovable property taxable in following cases:
·         Renting of Permitting use of immovable property for placing vending/ dispensing machine
·         allowing erection of a communication tower on a building for consideration
·         Renting of land or building for entertainment or sports
·         renting of theaters by owners to film distributors (including under a profit-sharing arrangement)
·         permitting usage of a property for a temporary purpose like conduct of a marriage or any other social function
·         hotels/restaurants/convention centres letting out their halls, rooms etc. for social, official or business or cultural functions

1.3.     Exemption under negative list or Mega exemption notification:
Renting of immovable property not taxable in following cases as given in negative list sec. 66D or mega exemption notification (25/2012-st, 20.06.2012):
·         Threshold exemption up to Rs. 10 lacs (Notification no. 33/2012-ST, dated 20.6.12)
·         Renting of vacant land, with or without a structure incidental to its use, relating to agriculture purpose which include for animal husbandry or floriculture (Sec. 66D(d))
·         Renting of residential dwelling for use as residence (Sec. 66D(m)) (Residential dwelling means it has to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp–site, lodge, house boat, or like places meant for temporary stay.)
·         Renting out of any property by the Reserve Bank of India (sec. 66D(b))
·         Renting out of any property by a Government or a local authority to a non-business entity (Sec. 66D(a))
·         Renting of precincts of a religious place meant for general public. (Entry 5 of mega exemption notification)
·         Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent. (Entry 18 of mega exemption notification)
·         Renting to an exempt educational institution (Entry 9 of mega exemption notification)

1.4.     Taxability of activities relating to renting:
·         A residential house taken on rent is used only or predominantly for commercial or non-residential use would be taxable
·         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; to others will be taxable
·         Renting of property by education body would be taxable from 1.4.2013
·         Renting of piece of vacant land for facility of vehicles parking on payment to a car dealer – chargeable to service tax
·         Renting of a 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: Taxability of such bundled services has to be determined in terms of the principles laid down in section 66F of the Act
·         Sums received towards following by the existing tenants / occupants or society from builder developer in course of redevelopment:

Hardship/ shifting allowance, Rent allowance, consideration for surrender of tenancy/occupancy rights in tenements, corpus fund to society, corpus fund to members:
Such amount would not be liable for service tax as it relating to sale of rights in development of permanent property

1.5.     Place of provision of services relating to immovable property

As per Rule 5 of Place of provision of service rules, 2012, the place of provision of services provided directly in relation to an immovable property shall be the place where the immovable property is located or intended to be located, irrespective of where the provider or receiver is located.

1.6.     Cenvat credit

1.6.1.  Renting of immovable service is input service:
If assessee is using the premises for the purpose of office as well manufacture or production of goods, rental charges become an input service for the purpose of manufacture of goods. Therefore, service tax paid on rentals can be availed as Cenvat credit and utilized for payment of on final products so manufactured.

1.6.2.  Renting of immovable service is output service:
·         Home solution Retail Ltd v. Union of India (2009) 14 STR 433 (Delhi) – Input credit of service tax can be taken only if the output is a ‘service’ liable to service tax or a ‘good’ liable to excise duty. since immovable property is neither ‘service’ or ‘goods’, input credit on like industrial or commercial construction service or works contract service which are input service for the output namely immovable property, cannot be taken.
·         Service tax paid on security services received for property on rent, service tax paid on society maintenance charges of rented property would be allowed as Cenvat credit against service tax payable on renting of immovable property.

1.7.     Notifications and ciruclars

Deduction of property tax: As per Notification no. 29/2012- Service Tax, dated 20.06.2012, the taxable service of renting of an immovable property would be exempt from so much of the service tax leviable thereon under section 66B of the said Finance Act, as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies:
Example:
Property tax paid for April to September = Rs. 12,000/-
Rent received for April    = Rs. 1, 00,000/-
Service tax payable for April         = Rs. 98,000/- (1, 00,000 - 12,000/6) * applicable rate of service tax

1.8.     Judgments on renting of immovable property

Kerala State Industrial Enterprises Ltd v. CST, Trivendrum (2011) 21 STR 423 (Cestat, Bangalore) – custodian of airport was collecting charges for facilitating x-raying of cargo by customer airlines at assessee’s premises, it was held that charges were collected only for providing air-conditioned space where customer airlines install and operate their x-ray machines and such activity was taxable under renting of immovable property.


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1.1. Applicability of service tax to society
As per section 2(44) - definition of “service”, an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons.
Accordingly, if services provided by a society or club to its members would be taxable provided other conditions relating to taxability of service are satisfied.

2. Exemption to society

As per entry no. 28 of mega exemption notification no 25/2012-ST, following exemption has been provided for society:
Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution -
(a)     as a trade union;
(b)     for the provision of carrying out any activity which is exempt from the levy of service tax; or
(c)     up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex;
Based on above any society has received any amount:

(i) for any services or activity which are exempt from service tax (e.g. Municipal tax, water tax, payment made to central or state government) or

(ii) by way of reimbursement of charges or share of contribution up to Rs. 5,000 per month per member for sourcing of goods or service from a third person for common use of its members in housing society or residential complex would be exempt from service tax.

1.2.2.      If income (i.e. total receipts less exempted amounts) of society during year does not exceeds Rs. 10 lacs, in such case benefit of small scale service provider as per notification no. 33/2012-ST, dated 20th June, 2012 would be available.

1.3.     Taxability on society

If society has total income (i.e. total receipts less exempted amounts) of more than Rs 10 lac in year and receives following amount from:

·         If housing or residential society receives any amount of maintenance charges from commercial unit would be taxable.

·         If housing or residential society receives maintenance charges of more than Rs 5,000 from any member then such maintenance charges would be liable for service tax.

Reimbursement charge means charge levied on the members to recover the cost incurred in providing maintenance services by society. Share of contribution means indirect charge recovered by contribution to special reserves funds, such as sinking funds and the like, repair fund, Share Transfer Premium, Vehicle parking charges, non occupancy charges, etc.

Service tax on manpower service

2.1.     Definition:

Supply of manpower service: As per rule 2(g) of service tax rule,1994 , supply of manpower means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.

2.2.     Reverse charge mechanism on supply of manpower:

As per notification 30/2012-ST dated 20.6.2012, In respect of services provided or agreed to be provided of supply of manpower service, the liability pay service tax would be as follows:

Taxable Service
Provided by
Provided to
Percentage of service tax payable by the person providing service
Percentage of service tax payable by the person receiving the service
services provided by way of supply of manpower for any purpose
·   Individual
·   HUF
·   proprietary firm
·   partnership firm
·   AOP
·   Company
·   LLP
25%
75%


2.3.     Activities considered as supply of manpower service:

·         Services of providing employees of agency to business: As per CBEC circular no. 96/7/2007-ST dated 23-8-2007, In the case of supply of manpower, individuals are contractually employed by the manpower recruitment or supply agency. The agency agrees for use of the services of an individual, employed by him, to another person for a consideration. Employer-employee relationship in such case exists between the agency and the individual and not between the individual and the person who uses the services of the individual. Such cases are covered within scope of supply of manpower service.

·         Deputing officers from one company to other: As per CBEC circular no. 137/35/2011-ST dated 13-7-2011, activity of company of providing its staff on deputation to other company for remuneration in the form of reimbursement from other company, would be chargeable to service tax under ‘supply of manpower service’.

·         Supply of manpower on man-hours basis: Future focus infotech v. CST (2010) 25 STT 373 (CESTAT), appellant had supplied personnel to customers to work on their software projects and payment has been received on basis of man-hours. It was held that this is manpower supply service and is taxable.

·         Contract for execution of job: If a person undertakes to produce a given result for the establishment through contract labour and labour works under control of contractor and principal employer has no control over labour. In such case such service would not be ‘supply of manpower’. However, if person supplies contract labour for any work of establishment and labour works under control and supervision of principal employer. In such case such service would be ‘supply of manpower’.

·         Payment on fixed rate basis for different type of work: Divya enterprises v. CCE (2010) 25 STT 60 (CESTAT), in contract of loading and unloading, payment is on the basis of rates fixed for different type of work, then it would not be manpower supply service.

2.4.     Clarification by CBEC

As per CBEC circular no B-1/6/2005-TRU dated 27.7.2005 - Gem and Jewellery Export Promotion Council have represented seeking clarification that hiring of skilled artisans for making jewellery does not constitute supply of manpower taxable under “manpower recruitment services”. When the artisans are hired by any organisation or business, directly, without engaging the services of any other person in any manner, in such cases, the artisans are contractually employed by the company. There is no intermediary and hence no consideration is paid to or payable to any intermediary. The service tax would be leviable only when the services of a person are engaged for recruitment or supply of artisans.

2.5.     Cenvat credit

Sanghi Industries Ltd v. CCE, Rajkot (2009) 234 ELT 367 (Cestat, Ahmedabad) – service tax paid on manpower supply to power plant and operation and maintenance of power plant and where inputs and capital goods were used for power plant set up by various manufactures for generating electricity to provide excisable goods. Hence it was held that Cenvat credit would be admissible on supply of manpower service.

2.6.     Judgments

Harish Kumar contractor v. CCE, Panchkula (2010) 17 STR 67 (Cestat, Delhi) – Labour provided to municipality is covered under supply of manpower.

Martial Security and Detective services v. CCE, Meerut (2010) 17 STR 35 (Cestat, Delhi) – supply of bus conductors to state road transport corporation was covered under supply of manpower.

CCE, Ahmadabad v. Azur Cyber Pvt Ltd (2009) 20 STT 90 (Cestat, Ahmadabad) – assesse was engaged in providing manpower to various organization for doing temporary work and assessee offered its staff for deputation at clients place, it was held that service provided were actually manpower supply service and not recruitment service.

K Domodar Reddy v. CCE, Tirupathi (2010) 25 STT 69 (Cestat, Bangalore) – assesse was carrying out activities of loading of cement bags into closed wagens, drawing of bags to stenciling floor etc. and it was compensated for different items of works at separate rates prescribed in contract. Since it did not supply manpower or charged for labour on man day or man hour basis and he acted as a contractor employing his own labour. Hence such activity would not be supply of manpower services.


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service tax on service by to goverment authority

1.      Services by or to Government authority

1.1.      Definitions
1.1.1.  Local authority
As per section 2(31) of act, "local authority" means-
)       a Panchayat as referred to in clause (d) of article 243 of the Constitution ;
b)       aMunicipality as referred to in clause (e) of article 243P of the Constitution ;
c)       a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund ;
d)      a Cantonment Board as defined in section 3 of the Cantonments Act, 2006
(e)       a regional council or a district council constituted under the Sixth Schedule to the Constitution
f)        a development board constituted under article 371 of the Constitution; or
g)       a regional council constituted under article 371A of the Constitution:;
The definition of ‘local authority’ is very specific as explained above and only those bodies which fall in the definition comprise ‘local authorities’. It would not include other bodies which are merely described as a local body by virtue of a local law. However, it may be noted that services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution are specifically exempt under the mega exemption. Thus some of these local bodies may comprise governmental authorities. However, other statutory body, corporation or an authority created by the Parliament or a State Legislature is neither ‘Government’ nor a ‘local authority’.

1.1.2.  Governmental authority:
As per mega exemption notification, “governmental authority’’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W  of the Constitution;  
Further as per guidance note on service tax issued by CBEC on 20th June, 2012, CBEC has clarified that the phrase ‘Government’ has not been defined in the Act. As per clause (23) of section 3 of the General Clauses Act, 1897 ‘Government’ includes both Central Government and any State Government. As per clause (8) of section 3 of the said Act ‘Central Government’, in relation to anything done or to be done after the commencement of the Constitution, mean the President. As per article 53 of the Constitution the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, in terms of article 77 of the Constitution all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President.
Similarly as per clause (60) of section 3 of the General Clauses Act,1897 ‘State Government’, as respects anything done after the commencement of the Constitution, shall be in a State the Governor, and in Union Territory the Central Government. Further as per article 154 of the Constitution the executive power of the State shall be vested in the Governor and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, as per article 166 of the Constitution all executive actions of the Government of State shall be expressed to be taken in the name of Governor. Therefore, State Government means the Governor or the officers subordinate to him who exercise the executive power of the State vested in the Governor and in the name of the Governor.

1.1.3.  Support services:
As per section 2(49) of the act, "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis;

1.2.     Negative List of Services – 66D
As per section 66D(a) of act, services provided by Government or a local authority would be exempt form service tax excluding the following services to the extent they are not covered elsewhere-
(i)      services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;
(ii)    services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(iii)  transport of goods or passengers; or

(iv)   support services, other than services covered under clauses (i) to (iii) above, provided to business entities;

With respect to above entry CBEC has clarified following in Guidance notes on service tax issued by CBEC on 20th June, 2012:
(a)     Support service from Government
For the support services provided by the Government, other than where such support services are by way of renting of immovable property, to business entities, service tax will be payable on such services by the service receiver i.e. the business entities receiving the service under reverse charge mechanism. (para 4.1.6)
  • Support services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services. (para 4.1.7)
  • Services provided by government security agencies are support service as similar services can be provided by private entities. However the tax will be actually payable on reverse charge by the recipient. (para 4.1.8)
(b)     Service provided by department of post office: agency or intermediary services on commission basis (distribution of mutual funds, bonds, passport applications, collection of telephone and electricity bills), which are provided by the Department of Posts to non-government entities would be liable to service tax. (para 4.1.11)

1.3.     Exemption under the Mega Exemption Notification
1.3.1.  As per entry 12 of mega exemption notification no. 25/2012-ST, dated 20th June, 2012, following services would be exempt from service tax provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -
(a)     a civil structure or  any other original works meant predominantly for  use other than for commerce, industry, or any other business or profession;
(b)     a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(c)     a structure meant predominantly for use  as (i) an educational, (ii) a clinical, or  (iii) an art or cultural establishment; 
(d)    canal, dam or other irrigation works;
(e)     pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or
(f)      a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

1.3.2.  As per entry no 25 of mega exemption notification, services provided to Government, a local authority or a governmental authority by way of -
(a)     carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or
(b)     repair or maintenance of a vessel[1];
Vide notification no. 3/2013-ST, dated 1st March, 2013, in entry no. 25 of notification, services provided to Government, a local authority or a governmental authority, by way of repair or maintenance of aircraft would be omitted and the same would not be exempt from service tax.

1.3.3.  As per entry no. 34 of exemption notification, if Services received from a provider of service located in a non- taxable territory by Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession would be exempt from service tax.

1.3.4.  As per entry no 39 of mega exemption notification, if Services provided by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution would be exempt from service tax.
Following clarification has been provided by CBEC in Guidance note on service tax issued on 20th June, 2012
Functions entrusted to a municipality under article 243W of the Constitution:
‘Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow—
a.       the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to—
                          i.      the preparation of plans for economic development and social justice;
                         ii.      the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;

b.       the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.’
Matters listed in twelfth schedule are:
(i)         Urban planning including town planning.
(ii)       Regulation of land-use and construction of buildings.
(iii)     Planning for economic and social development.
(iv)      Roads and bridges.
(v)        Water supply for domestic, industrial and commercial purposes.
(vi)      Public health, sanitation conservancy and solid waste management.
(vii)    Fire services.
(viii)  Urban forestry, protection of the environment and promotion of ecological aspects.
(ix)      Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.
(x)        Slum improvement and upgradation.
(xi)      Urban poverty alleviation.
(xii)    Provision of urban amenities and facilities such as parks, gardens, playgrounds.
(xiii)  Promotion of cultural, educational and aesthetic aspects.
(xiv)  Burials and burial grounds; cremations, cremation grounds; and electric crematoriums. (para 7.3.2)

·         Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution are only exempt and not all service provided by governmental authority are exempt (para 7.3.3)

1.4.     FAQs on services by or to a government or local authority
1. Would various entities like a statutory body, corporation or an authority constituted under an Act passed by the Parliament or any of the State legislatures be ‘Government’ or “local authority”?
A statutory body, corporation or an authority created by the Parliament or a State legislature is neither ‘Government’ nor a ‘local authority’ as would be evident from the meaning of these terms explained in point nos. 2.4.7 and 2.4.8 above respectively. Such statutory body, corporation or an authority are normally created by the Parliament or a State Legislature in exercise of the powers conferred under article 53(3)(b) and article 154(2)(b) of the Constitution respectively. It is a settled position of law of Government (Agarwal Vs. Hindustan Steel AIR 1970 Supreme Court 1150) that the manpower of such statutory authorities or bodies do not become officers subordinate to the President under article 53(1) of the Constitution and similarly to the Governer under article 154(1). Such a statutory body, corporation or an authority as a juristic entity is separate from the state and cannot be regarded as Central or State Government and also do not fall in the definition of ‘local authority’.

Thus regulatory bodies and other autonomous entities which attain their entity under an act would not comprise either government or local authority.

2. Would services provided by one department of the Government to another Department of the Government be taxable?

If services are provided by one department of the Central Government to another department of the Central Government or by a department of a State Government to another department of the same State Government then such service would not be taxable as it would amount to self-service. To be taxable a service has to be provided to another person.

On the other hand if a service is provided by a Central Government department to a State Government department or vice versa or a by a State to another State Government or by a Government to an autonomous body, the same would be taxable if such service does not fall in the negative list. It is another matter that most of the services provided by the Government are in the negative list.


3. Would taxable services provided by Government or local authorities still be liable to tax if they are covered under any other head of the negative list or are otherwise exempted?

No. For example, transport services provided by Government to passengers by way of a stage carriage would not be taxable as transport of passengers by stage carriage has separately been specified in the negative list of services. The specified services provided by the Government or local authorities are taxable only to the extent they are not covered elsewhere i.e. either in the negative list or in the exemptions.
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[1] Amended by notification no. 3/2013-ST, dated 1st March, 2013