From a direct tax perspective, manner of classification of rental income (house property income vs business income) and consequent tax implications has been a vexed industry issue. In the event the lease rentals are classified as business income, related expenditure incurred thereon is allowable as a deduction for computation of taxable income.
However, in the event the lease rentals are classified as income from house property, a flat deduction of 30% of the rental income and corresponding interest expenditure is allowable as a deduction.
While guidance is available with respect to the classification of income basis various judicial precedents, litigation on the issue prevails since the analysis is very fact specific and needs to be tested on a case to case basis. Hopefully, the principles should attain more certainty in the coming years thereby reducing the litigation and also providing clarity to the industry players.
Further, from an indirect tax perspective, controversy relating to availability of input tax credit (‘ITC’) on construction related services has been haunting the real estate and leasing sector. This issue is now pending before the Hon’ble Supreme Court and all industry players are keenly awaiting for the final word on this issue.