The cost of commercial space is set to increase by more than 12 percent across the country once the service tax levied on rent for commercial space takes effect, say real estate consultants and developers.

The Finance Minister, P. Chidambaram, in his Budget speech introduced service tax on renting immovable property for use in commerce or business.

According to Ramesh Nair, Local Director & South India Head of Markets, Jones Lang LaSalle India, international property consultants, the service tax adds to the increasing costs for the `corporate occupier.' Over the last two years, cost of commercial space has been on the increase and now they are faced with an additional 12 percent.

With more than 80 percent of space in the hands of the IT and BPO companies, that sector will face most of the increase, he said.

Those familiar with the real estate business say the announcement will drive up costs for all businesses, including retailers, manufacturers or information technology companies. This in a place where office space is among the most expensive in the world, they say.

According to international property consultants, Cushman and Wakefield, introduction of service tax for commercial rent will increase the pressure on developer and the tenants. The proposed tax will be a pass-through cost by a hike in rental space and add to the property prices, as the end-user demand remains strong.
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  • PC's Budget, heavy for Indian Rental Sector

    Lessors of commercial property should now exclude utilities from their rent to save money as the Budget has proposed levy of service tax on services relating to renting of immovable property, other than residential and vacant land, for business or commerce.

    “Net lease does not include utilities like electricity and water. To avoid paying service tax on all that, it is better to pay directly to the utility boards,” said Satya Poddar, partner, Ernst & Young.

    The move will affect traders, retailers and export-oriented offices like BPOs the most. “As they have no other service tax liabilities, it is not possible for them to offset the 12.36 per cent service tax (including the education cess) that will be levied on the rent,” said Poddar.

    Retailers will increase prices as they have no option but to pass on this additional tax to the customer. “While accommodation in hotels has been excluded, commercial renting in hotels will attract service tax,” said R Sekar, joint secretary, Ministry of Finance. This means that hotels leasing out shops and business centres will have to pay service tax.

    Property experts say this could not have come at a worse time. Commercial property prices peaked last year on account of high demand and inadequate supply. The sealing drive undertaken by the Municipal Corporation of Delhi led to further escalation of rentals in and around the capital.

    The finance minister has also decided to levy service tax on works contract as an additional service category with an optional composition scheme under which service tax will be levied at 2 per cent of the total value of the works contract. “We will come out with guidelines to determine the service value in of particular transactions,” said Sekar.

    “According to the central composition scheme for service tax, the Centre levies tax on labour, which is taken as one-third of the total cost. Yesterday’s announcement on works contract tax effectively brings down the rate by 2 per cent. But there is no clarity on which of the two rates will be applicable,” said Poddar.

    The good news for the real estate sector comes in the form of reverse mortgage scheme for senior citizens. This allows senior citizens to mortgage the house they are living in to a bank and earn cash in the form of equated monthly instalments (EMIs). Industry experts have also welcomed the scheme for mortgage guarantees. While the exact policy for this is still to be framed, this is how it might work: A person can pay a fee to a guarantor, who in turn guarantees the mortgage to the bank.

    Wat will be the Consequenses of this levy of service tax ?
    Any affect on Rental Market?
    Up or Down?
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  • Effects on the Rental Market :

    First and foremost, all deals that have been negotiated and not yet signed, would now be renegotiated.
    Company would want the landlord to absorb this new levy and landlord will want it to be paid by the company.

    Companies will now rework their budgets when sourcing for commercial space. In the short run, it may affect the procurement process, but overall we dont see the demand offtake coming down. Some space rationalisation may follow though.

    As for the Commecial investors, he will have to factor in a IRR of 0.3 - 0.7% lower returns while working on back to back realty deals.

    Any more thoughts on this ?
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  • service tax on commerical rentals is a state matter only

    central govt casnnot levi service tax on commerical renting,should be collectively agressively dealt with.thanks
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