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Impact of service tax on real estate sector


Impact of service tax on real estate sector

Last updated: March 14 2007
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  • Impact of service tax on real estate sector

    THE FINANCE MINISTER, in the union budget for 2007-08, did not announce any hike in the service tax rate, but proposed to widen the tax net by bringing more services within the tax bracket.

    Many experts challenge the validity of this tax. They are of the opinion that it is the subject of the state, and the centre has no constitutional right to bring this particular service in the service tax net. Moreover, some feel that commercial leasing or letting of property does not constitute a service at all. It is just a reward for using a property by the tenant. Many proposed tax payers are planning to challenge this legally. And the finance minister may find it very hard to defend his stand in the days to come.

    Certain real estate industry estimates state that approximately 80 to 90 per cent of the BPO/IT companies in most of the cities have a policy of using only leased properties to carry out their functions. Many banks, MNCs, malls, restaurants and multiplexes are also likely to be caught in the crossfire. The bottom line of all these companies can be affected, which in turn will affect the stock prices of these companies.

    For instance, a company paying Rs 1 lakh as lease rental will now have to shell out approximately Rs 12,500 more as service tax. The bigger the premises on lease, the bigger the impact on the company. Lease rentals in many major cities are anywhere in the range of Rs 80 per sq ft to Rs 225 per sq ft. There are commercial premises in cities like Mumbai where the rent is in the range of Rs 350 to 400 per sq ft.

    Retailers will no doubt increase prices, as they have no option but to pass this additional tax on to the customer. While accommodation in hotels has been excluded, commercial renting in hotels will attract service tax. This means that hotels leasing out shops and business centres will have to pay service tax.

    Some experts warned that the payment of service tax might lead to disputes between the landlord and licensee/tenants, if the agreement already executed is not clear as to who will pay the tax. According to them, returns of mutual and real estate funds, which have been invested in leased commercial premises, may be affected if the licensees refuse to pay the 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.
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