With the imposition of service tax on commercial rentals by the government, your hopes of opening up a new commercial project on rent will surely burn a finger in the pocket. The additional burden would certainly be passed to tenants as the landlord will not be ready to absorb it. Small traders, businessmen and professionals will feel the pinch as their expenditure will increase thereby decreasing the margins.

Budget 2007 seeks to levy service tax (@ 12.36%) on renting of immovable property for business and commerce. Residential properties including hotels, hostels, boarding houses, vacant land, and land used for educational, sports, entertainment and parking purposes have been excluded.   Similarly, service tax is not applicable on renting to or by religious body and to educational body, other than commercial training and coaching centres. Also, where the rent contract is partly used for commercial and partly for residential purpose, the service tax would be levied on the total value of the contract.

With the real estate sector expected to witness a massive 30% growth in terms of office and retail space, the service tax could act as a major deterrant in its take off. Moreover, the increasing rentals could lead to inflationary trends thereby spoiling the best efforts of government to curb inflation.

There is also a set of opinion on the justification of the imosition of service tax on commercial rentals as they think that renting of property does not constitute an element of service. Moreover, it is still doubtful that how the tax would be recovered from the existing contracts as lease deeds are usually entered on a long term basis.

It might bring more revenue to the government but it will surely dampen the spirits of the service providers, and hamper in the retail sector growth of the country.

The above clause is applicable w.e.f. June 1, 2007 though property owners have been given a marginal relief as property tax would be deductible for the purpose of service tax on commercial rentals though any penalty paid under the property tax cannot be deducted.