June 29, 2007
With the decision to impose service tax on commercial rentals, as proposed in Budget 2007, the retailers shall have a bigger hole in their pockets. Their profits were already under squeeze due to high rentals on commercial properties, thanks to an overheated real estate market.
The decision to impose service tax which is otherwise applicable on a service provider, has come as a surprise and has not been received very well by the retailers and landowners renting immovable property. The transactions inviting the hammer of tax are renting, leasing, letting and licensing to further commercial causes. Now, the landlords letting commercial properties to retailers will have to shell out 12% service tax on the rental income.
However, there is a bit of breather as well - pure revenue sharing ventures between the landowner and retailer have been spared the axe. The reason: it does not involve any rental component. Interestingly, pure revenue sharing ventures are not a popular choice in India as yet.
But the fact that such ventures eventually fall under the definition of "furtherance of business" might make it difficult to qualify for exemption, as opined by T.R Rustagi, former Joint Secretary, Ministry of Finance.
Thus it remains to be seen how the industry copes with the spiraling rental percentages eating into their share of profit. So, don’t be surprised if you, as a customer, have to ultimately share the burden of this tax as well, among other evils.