New Delhi: Niranjan Hiranandani isn’t pleased he’ll have to pay the government about 12% more in service tax on space he lets out.
“The imposition of service tax is a dangerous thing to do,” said Hiranandani, who is the managing director of the Bombay-based Hiranandani Group, which develops offices and homes. “It is going to cause an inflation in commercial property which is unprecedented. Already, the prices of real estate has gone up very high. Isn’t it crazy?”
Developers typically have in-built clauses in their lease agreement, which allow them to pass on any additional hikes to the customers so the leasee may end up paying more, says R. Vasudevan, chairman of Pune-based Vascon Engineers, which has two million square feet of commercial property.
Still, “companies also have a threshold on how much they can pay,” says Vasudevan, and devlopers may not be able to pass on the enitre cost to them, or they risk losing some tenants. “Our lease income is going to be hit as yields from lease income will come down.”
In central Mumbai, prime annual rents for office space more than doubled in December 2006 from a year ago, to about $120 (Rs5,280) per square foot, making it the third-most expensive market in Asia, behind Tokyo and Hong Kong, according to Cushman & Wakefield.
In Delhi’s Khan Market, India’s most expensive shopping street, annual rents rose 75% to $180 per square foot in June, compared to a year ago. It was also the 24th most expensive shopping street in the world. And a recent drive by Delhi’s municipal authorities to seal office spaces in residential areas has made space in Delhi’s suburbs dearer, if space is at all available.
Worst hit will be the retailers, at time when organized retail is taking-off because it can’t offset a part of the tax liability by using breaks provided to other businesses subject to service tax, because it is largely a primary service provider, and does not pay procurers a service tax.
Rental costs in India are already as much as 10%, which is double the global levels, said Govind Shrikhande, chief executive officer of Shopper’s Stop Ltd said. The new service tax will add another 1% to the cost of running a retail business in India.
“I am wondering, how could you do that?” Shrikhande said. “Especially when land prices are shooting and rentals are shooting, this has a negative impact on retailers.”
Information technology, which uses large swathes of commercial space will also feel the pinch. “It is absurd to penalize the IT and retail segments,” says Atul Chordia, managing director of the Panchshil group, which builds commercial space in Pune. “These are the two segments driving the economy and the government should put in place policies which will promote the leasing market instead of punishing them”.
P. Manoj in Mumbai, Sanjiv Shankaran contributed to this story.