New Delhi: The Indian retail industry fears it will be set back by nearly Rs1,000 crore in backlog payments if the government does not reconsider the service tax on rentals it has announced in the Union Budget for 2010-11.

“It will have a huge impact on the retail industry if it goes through," said Kumar Rajgopalan, chief executive of Retailers Association of India, which represents the industry.

He said the association would request the government to reconsider the proposal.

The sting: The move could potentially affect not just retailers but also firms across sectors that rent out space. Ramesh Pathania/Mint

But the Retailers Association went to the Delhi high court against it in 2008. Last year, the court ruled that renting of commercial space does not constitute a service.

To circumvent the ruling, the government has declared in the 2010-11 Budget that the “activity of renting itself is a taxable service", and levied a 10% duty on it. It has also said the tax has to be paid with retrospective effect from June 2007.

Indeed, as “renting" itself has been made taxable, this could potentially affect not just retailers but firms across sectors that rent out space.

“It’s going to be a significant one as we have to pay quite a lot of money," said C.B. Navalkar, chief financial officer at the country’s second largest listed retailer Shopper’s Stop Ltd.

Navalkar said the tax would account for about 0.8% of the company’s total revenue. “The onus is on the landlords, but obviously they will recover the tax from us to pay money to the government," he added.

But India’s biggest retailer, Pantaloon Retail (India) Ltd, said barring five cases, all the property lease agreements the company has signed specifically mention that the landlords would bear the tax if it is applicable.

“Wherever the agreement says the lessee has to pay, we have to provide for it," said Kishore Biyani, managing director of Pantaloon. “It doesn’t impact us much, but it creates disputes (with landlords) and issues."