The Hindu Business Line : Commercial rentals roped in

The Finance Minister, Mr P. Chidambaram, in the Budget had stated that there would not be any change in the corporate income-tax rates. However, apart from the increase in Dividend Distribution Tax and the Minimum Alternate Tax on IT companies, the corporate sector is not going to be very happy with the changes proposed in the service tax which will have an impact on the profitability of the organisation.

Commercial Rentals

The Finance Bill, 2007 proposes to impose service tax on renting of immovable property for use in the course or furtherance of business.

Section 65(90a) covers ``letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce''.

This provision excludes the renting of immovable property by a religious body or to a religious body and renting of immovable property to an educational body other than a commercial training or coaching centre.

An explanation to the provision elaborates that use in the course or furtherance of business or commerce would include use as factories, office buildings, warehouses, theatres, exhibition halls and multiple use buildings. Section 65(105) (zzzz) provides that the tax is on the renting of immovable property by any person to any other person for use in the course or furtherance of business or commerce.

Immovable property includes building, part, appurtenant land, land incidental to the use of the building, common areas and facilities, common areas within a complex. It does not include vacant land used for agriculture, aquaculture, farming, forestry, animal husbandry, mining, vacant land in general, land used for parking, educational, sports, circus, entertainment purposes and building used solely for residential purposes and building used for purpose of accommodation including hotel, hostel, boarding houses, holiday accommodation, and tents.

Commercial property rents are significantly high and the real-estate boom, coupled with the non-availability of commercial space, have resulted in the rentals reaching dizzy heights. There are companies which have a rental bill of more than Rs 10 crore. Service tax shall be an additional burden.

Hardware Engineering Services

The definition of `Consulting Engineer's Services' excluded any advice, consultancy or technical assistance in the discipline of hardware or software engineering.

The Finance Bill, 2007 seeks to remove hardware engineering from the benefit of exclusion.

Maintenance of Software

The Central Board of Excise and Customs vide Circular dated March 7, 2006 had clarified that software maintenance would be liable to service tax w.e.f. July 9, 2004.

Companies had taken a position that software maintenance formed part of information technology services, which was not liable to service tax up to April 30,2006. Interestingly, the Finance Bill, 2007 seeks to introduce an explanation under the category ``management, maintenance or repair services'' to provide that ``goods include computer software".

This leads to the interesting proposition that software maintenance can be taxed only after the enactment of the Finance Act, 2007.

Financial Leasing

Service tax was levied on banking and financial services and the definition included financial leasing. The Finance Bill, 2007, proposes to introduce a definition for `financial leasing'. Accordingly, a transaction is a financial lease if (a) there is a contract of lease between two parties for lease of a specified asset; (b) the contract is for use and occupation of the asset by the lessee; (c) the lease payment is to cover the full cost of the asset; and (d) the lessee is entitle to own or has the option to own the asset at the end of the lease period after making the lease payment.

Financial leases attract VAT and the levy of service tax on a transaction, which amounts to a deemed sale, has been questioned by way of writ petition before the Madras High Court. This new definition brings about the features of a financial lease, which needs to be factored in while determining whether a transaction attracts service tax or not.

(The author is a Chennai-based advocate and tax consultant.)

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