The decision of Union Finance Minister to levy a 12.5% tax on commercial lease rentals has created a tense situation for the India real estate industry. This may add to the property prices further thereby crippling already suffering consumers, say industry watchers.

The service tax is certainly going to pass to property buyers because the landlord will not absorb it. And the tax scenario may put off the potential real estate shoppers.

However, the property market is still waiting for the final print top come. But it seems like there will be a negative impact on the real estate industry. Every retailer takes the rentals as overhead expenses and the extent largely depends on the value of tax, said Shoppers’ Stop CEO Govind Shrikhande.

Increasing the service tax to rental values earned from immovable property could be counter productive. There are large possibilities of the tenants refusing to pay the service tax at 12.5% of the rent and the owners may require absorbing the tax.

Availability of certain exemptions under the Income Tax Act has lowered the rate of taxation. The proposed tax scheme may further negate the tax benefits.

The commercial premises that had been leased out or leave or license will also be subjected to the levy with effect from the date to be specified hereafter.
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  • Service tax on commercial rental of property will stay

    Today finance ministry announce that service tax on renting of immovable property for commercial purposes will stay. The finance ministry is likely to stick to its decision to levy service tax on renting of immovable property for commercial purposes.

    North Block sources told FE that there would be no withdrawal of the tax as the ministry is of the view that property rentals were essentially services and so should be brought under the service tax net.

    A final decision will however be taken on the amendments to the Finance Bill, that is expected to be tabled in the Parliament after the recess.

    An official said, “Commercial rental of property will be treated as a service and a tax of about 12.36% will be levied on it. In the coming years, we may also expand the scope of service tax to property leased for residential purpose.” However, at present there is no such proposal, he added.

    Finance minister P Chidambaram has introduced service tax on rental of immovable property used for commercial purpose in Budget 2007-08. However the proposal does not extend to residential property, vacant land used for agriculture and similar purposes, land for sports, entertainment and parking purposes, and immovable property for educational or religious purposes.

    The move is expected to hit corporates, banks, multinationals, malls, restaurants, BPOs, IT companies and multiplexes the most. At present most of these organizations, especially BPOs only lease property to carry out their functions.

    Real estate agents too are feeling the heat of the proposed tax and have protested as they are of the view that it would only lead to higher rental prices.

    The reason for protest from all quarters is that the real estate boom, along with the lack of commercial space has already hiked rental rates further. Service tax will be an additional burden.
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