New Delhi: The organized retail industry welcomed a ruling by the Delhi high court staying the levy of service tax on commercial rentals that was imposed in this year’s Budget by finance minister Pranab Mukherjee.
The Retailers Association of India estimated that its members may have had to pay a total of about Rs1,000 crore. Shopper’s Stop Ltd, the country’s largest department chain operator, said it would have to pay 0.6% (or Rs12 crore) of total revenue, going by the amendment.
“All retailers are relieved as it’s a step in the right direction,” said Govind Shrikhande, chief executive, Shopper’s Stop. “Rent is a cost to us and you cannot tax a cost. It was a wrong step.”
The “activity of renting itself is a taxable service,” Mukherjee had said while announcing the 10% tax, the second attempt to impose the levy. It had first been introduced by then finance minister P. Chidambaram in his 2007-08 budget proposals when he imposed a 12% service tax on commercial rentals.
A division bench of the high court stayed that proposal in 2009. “Service tax is a tax levied on value addition provided by the service provider and there must be a connection with the service and some value addition by the service,” the Delhi high court had said at the time. “If there is no value addition, then there is no service.”
The court order had further stated that the mere renting of commercial space cannot be regarded as a service.
Mukherjee had amended the section pertaining to the Finance Act of 1994 to circumvent the court’s ruling in the Budget announced in February. The Finance Bill 2010-11 also said the tax has to be paid with retrospective effect from 2007, when Chidambaram’s budget proposals would have taken effect.
The amendment was made even as a case was pending in the Supreme Court after the government appealed against the ruling by the Delhi high court.
Shubhranshu Pani, managing director for retail at real estate consultancy Jones Lang LaSalle Meghraj, said the stay was “good news” for the retailers. “Technically, rents on an average are between 10-11% of revenue for retailers in India, so it’s a big thing.”
Meanwhile, the 18 May order by Justice Badar Durrez Ahmed directed the respondents including the Union of India and the ministry of finance to file counter-affidavits within four weeks.