New Delhi: India’s decision to impose a 12% service tax on commercial rentals as part of the 2007-08 Union budget in early 2007 has been caught up in multiple lawsuits, mostly by retailers.
At least 30 cases have been filed by retailers in various courts. Among them are leading retailers including Pantaloon Retail (India) Ltd, Shoppers Stop Ltd and Lifestyle International.
Taxing times: Shoppers at a Big Bazaar outlet. Retail companies say the service tax will hurt them as they are already reeling under soaring rentals charged by mall developers.
“It’s an unconstitutional tax,” says Rishi Agrawala, a lawyer representing several retailers in multiple cases.
In addition to individual suits, a case had been filed in the Bombay high court by the Retailers Association of India, the Confederation of Real Estate Developers Association of India (CREDAI) and Multiplexes Association of India, challenging the imposition of the tax.
While no hearing has taken place on this case, according to Gibson Vedamani, chief executive of the retailers association, the government has asked for transferring the cases to the Supreme Court.
The budget proposal didn’t clarify whether the tax was to be paid by the retailers or the developers. And, even as cases against the tax itself are under way, both retailers and property owners are also trying to make sure that in case the government ends up prevailing, they don’t have to foot the bill.
As per lease agreements with developers, “the liability is that of the owner to pay the service tax,” argued Fun Multiplexes Pvt. Ltd, an Essel Group company, in a petition filed in Delhi high court earlier this month.
Retail companies such as Fun Multiplex say the tax will hurt them as they are already reeling under soaring rentals charged by mall developers.
Some analysts agree.
“The service tax will put pressure on retailers who are already reeling under high costs. It will have an implication of 1-1.25% on the retailer’s overall cost. For the average retailer, rentals constitute approximately 10% of their sales,” says Pinakiranjan Mishra, who heads the retail and consumer products practice at consultant and auditor Ernst and Young.
Shoppers Stop, which has filed several such cases in the cities it has its stores in, says if it ends up losing, it will have to pay around Rs14 crore for the fiscal ended March 2008. The company operates two dozen department stores and the lease agreements for all the outlets, according to chief financial officer C.B. Navalkar, were signed prior to the imposition of the service tax on rents.
The developers’ argument, however, is the onus to pay the tax is on the tenants because it is a service tax and retailers are the service providers.
“Whenever a service tax is levied, whoever is receiving the service is liable to pay the tax and the person who is giving the service is supposed to collect it and deposit the tax with the government,” said G.P. Savlani, resident director, CREDAI. “This is the legal position.”
Ajit Krishnan, a partner for tax practice with Ernst and Young, echoes Savlani’s arguments. “As a service provider, there is nothing in the law that says the customer should pay, but it is generally understood that a service provider does not have to pay the service tax until the customer pays,” says Krishnan.
A Mumbai-based analyst tracking the retail sector said that in all probability the retailers will end up paying the tax. “The law is law,” said Anirudha Dutta, analyst working with Mumbai-based brokerage firm CLSA. According to him, the court injunctions being obtained by the retailers currently will provide a temporary reprieve but, eventually, they will have to shell out the tax to the government. Dutta said retailers will have to take a “substantial hit” whenever they pay the tax as rentals accounts for 6-7% of the retailers’ total cost. “It will definitely be a big hit for them as they already operate on wafer-thin margins,” he said.
Retailers are holding out hope. “We have a fair chance of winning,” said Navalkar of Shoppers Stop.