Mumbai: The Supreme Court on Friday ruled that service tax on commercial rentals for retailers would be applicable with retrospective effect from April 2007, and they would have to pay half of their liabilities in the next six months in three instalments.
The top court will take a decision on the remaining 50% after a final hearing on the matter.
The court ruled on a petition filed on 28 September by the Retailers Association of India (RAI) and Multiplex Association of India challenging the Bombay high court’s 4 August judgement that made the tax applicable with retrospective effect from 2007 in Maharashtra.
“This is a big blow to the industry. It will definitely hamper the cash flow in an industry that is already bleeding. Retailers will have no choice but to consider passing it on to the consumers,” said Kumar Rajagopalan, chief executive of RAI. “This will further add to the already inflationary environment.”
The government had levied a service tax on commercial rentals in the 2007-08 budget. However, retailers had argued that renting of immovable property was not a service under the existing guidelines and should not be taxed. The retailers plea was subsequently upheld in the Delhi High Court in 2009.
However, in the 2010 budget, the definition of the taxable services was amended to neutralize the finding of the judgment. Subsequently, the high courts of Bombay, Gujarat, Karnataka, Orissa, Punjab and Haryana upheld the levy of service tax with retrospective effect.
Lease and rentals form the single-biggest cost for retailers, estimated at 7-10% of their total operating cost. The total amount payable with retrospective effect is upwards of Rs1,000 crore for the organized retailers, according to RAI. “Retailers will have to pay 50% or over Rs500 crore now,” said Rajagopalan.
The impact of the service tax on rentals will be to the tune of 1-1.5% of revenue, while the net profit margin of even the best retailers in the country is about 2%, say industry executives. Retailers, including the big chains such as Shoppers Stop Ltd and Tata group’s retail arm Trent Ltd, have made provisions for the tax since fiscal 2010-11. However, if the tax comes into effect retrospectively, it will hurt profits, said retailers.
“The service tax department is likely to aggressively pursue the collection of service tax along with interest,” said Sachin Menon, executive director and national head, indirect tax, at KPMG Advisory Services Pvt. Ltd.
Organized retail is a $28 billion industry, accounting for 6-7% of the overall retail trade in India. By 2020, the industry may double or treble, depending on the economic environment in the country, according to a February report by Boston Consulting Group and the Confederation of Indian Industry.
However, many large retailers, including Reliance Retail Ltd, Aditya Birla Retail Ltd, and HyperCity, the hyper market chain of Shoppers Stop, are not yet profitable.