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Service tax on rental income
Source : The Hindu Property Plus Published On : 2008-02-02 City : Chennai

Renting of immovable property is considered a service and has been included in the list of taxable service, finds out C.H. GOPINATHA RAO

 

     Service tax is a form of indirect tax imposed on specified services called ‘taxable services’. The system of levying service tax in our country was introduced in 1994. Initially services of telephones, non-life insurance and stock brokers were brought under the service tax net.

 

     The revenue collected through service tax increased form Rs.407 crore in 1994-95 to Rs. 23,000 crore in 2005-06. The service tax net has been widened further over the years, and more and more services were gradually added. As on date, about 104services attract service tax.

 

     In 2006-07, service tax was increased from 10 percent to 12 percent. The effective rate as of now is 12.3 percent of the income. Of this, 2 percent of the service tax is towards education cess and 1 percent of service tax being the secondary and higher educationcess. For the purpose of levying service tax, the value of any taxable service should be the gross amount charged by the service provider for the service rendered.

 

     From June 1, 2007, renting of immovable property is considered as service and has been included in the list of taxable service. Taxable service provided or to be provided to any person by any other person in relation to renting of immovable property for use in the course of furtherance of business or commerce. For the purpose of taxable service, immovable property includes (i) building or part of a building and the land appurtenant thereto (ii) land incidental to the use of such building (iii) the common or shared areas and facilities relating thereto and (iv) in case of building located in a complex or an industrial estate all common areas and facilities relating there to, within such complex, or estate.

 

     However this does not include

(a) Vacant land solely used agriculture, aquaculture farming forestry animal husbandry mining purpose.

(b)  Vacant land whether or not having facilities clearly incidental to the use of such vacant land

(c)  Land used for educational. Sports, entertainment and parking purposes

(d)  Building used solely for residential purposes
 

     The tax payable in relation to rental of an immovable property is the total rental amount of property tax paid. The rental income from buildings used solely for residential purpose does not attract service tax. 

 

          For example, if one gets a rental income from a commercial or partly commercial property of Rs. 1 lakh a month and has no other income through business or other profession, the net rental income would then be annual rental income minus the property tax, sewage and water tax. If these taxes amount to Rs. 2 lakh per annum then net rental income in the above example would be Rs. 10 lakh per annum. This is more than Rs. 8 lakh per annum (service tax is exempted upto Rs. 8 lakh per annum) and would attract service tax. The tax payable in this case would be (Rs. 10lakh x 12%) Rs. 1, 20,000. In addition, another 3% less is levied on the service tax amount to Rs. 3,600. In total, this property will attract Rs. 1, 23,600 as service tax.

 

Exemption limit

 

                        A threshold level of service tax exemption limit of Rs. 8 lakh, with effect from April 1, 2007, for small service providers has been provided subject to the condition that the aggregate value of the taxable services rendered by such person from one or more premises does not exceed Rs 8 lakh in the proceeding financial year.

In the case of a doctor or an advocate having a professional income of Rs. 10 lakh and rental income of Rs. 5 lakh, the service tax payable is nil, since his professional income is not levy able for service tax and the rental income is less than Rs. 8 lakh. If an auditor or an architect is in the same position, he has to pay service tax for the total sum of Rs. 15 lakhs.

If the auditor settles the property in favor of his wife, who is only a housewife, then he need not to pay the service tax for the sum of Rs. 5 lakh although for purpose of income tax the income of the husband and wife will be clubbed together.             

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