Service tax on commercial space will hit small retail

New Delhi, Apr 3 (UNI) The Budget proposal to impose service tax on rentals from commercial establishments is causing acute consternation amongst the landlord-tenant community and is bound to squeeze the margins of small and medium retail traders as there will be no opportunity to offset these taxes against output taxes, an industry chamber said today.

According to a FICCI note on the impact of extension of service tax on new assessees, with the given recent spurt in rentals, this would also have an inflationary impact of a very wide nature, particularly affecting the profitability of small and medium retail trade outlets called 'mom and pop' shops.

The chamber has therefore suggested that government should drop the proposal or keep it in abeyance and a small committee with representatives from both landlords and the tenants be constituted to look into various dimensions of this aspect and to make suggestions accordingly for its implementation as was done earlier in the case of truck service providers and insurance services.

In any case, FICCI has argued, where the landlord is not able to recover the service tax from the tenant, it should be provided that it would be deductible as other property-related taxes in the computation of rental income.

While it has time and again urged the government to bring all services under the purview of service tax, barring basic essentials and public utilities, there is certainly a need to ensure the existence of the 'component of service' for the imposition of tax.

In the case of service tax on rental from commercial establishments, it has stated that it is incomprehensible as to how a return from investment in commercial accommodation be construed as 'service'.

Landlords have leased out the commercial spaces on a long term basis under duly executed lease deeds. How can they now charge service tax from the tenants or increase the rentals accordingly.

If the proposal is implemented, both sides would only be trying to shift the onus of tax burden resulting in protracted litigations.

UNI